New Bookmarks
Year 2012 Quarter 3:  July 1 - September 30 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

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

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

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

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

 

Choose a Date Below for Additions to the Bookmarks File

2012

September 30

August 31

July 31      

 

 


 September 30, 2012

Bob Jensen's New Bookmarks September 30, 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 
 

2012 AAA Meeting Plenary Speakers and Response Panel Videos ---
http://commons.aaahq.org/hives/20a292d7e9/summary
I think you have to be a an AAA member and log into the AAA Commons to view these videos.
Bob Jensen is an obscure speaker following Rob Bloomfield
in the 1.02 Deirdre McCloskey Follow-up Panel—Video ---
http://commons.aaahq.org/posts/a0be33f7fc

Links to IFRS Resources (including IFRS Cases) for Educators ---
http://www.iasplus.com/en/binary/resource/0808aaaifrsresources.pdf
Prepared by Paul Pacter: ppacter@iasb.org

Message from Barry Rice on July 17, 2012
There are some great flash mob videos of accounting practitioners (including the Maryland Association of CPAs) and accounting students at https://www.google.com/search?sourceid=navclient&aq=f&oq=%22flash+mob%22+accountants&ie=UTF-8&rlz=1T4LENP_en___US481&q=%22flash+mob%22+accountants&gs_upl=0l0l0l27342lllllllllll0#q=%22flash+mob%22+accountants&hl=en&safe=off&rlz=1T4LENP_en___US481&prmd=imvns&source=univ&tbm=vid&tbo=u&sa=X&ei=rZgFUKLFCY-KrQGt_4jICA&ved=0CGAQqwQ&bav=on.2,or.r_gc.r_pw.r_qf.,cf.osb&fp=960fd2c1c95a1532&biw=1013&bih=459. I Goggled “’flash mob’ accountants” to find them. If practicing accountants can have a “flash mob,” surely ACADEMIC accountants can do so.

IFRS in Your Pocket (contact a Deloitte Office for a Copy) 
IAS Plus, August 22, 2012
http://www.iasplus.com/en/news/2012/august/ifrss-in-your-pocket-2012

We have published the eleventh edition of our popular guide to IFRSs — 'IFRSs In Your Pocket 2012'. This publication provides an update of developments in IFRSs through the second quarter of 2012.

This 136-page guide includes information about:

Please contact your local Deloitte practice office to request a printed copy.

Jensen Comment
I don't know of any FASB ACS in Your Pocket counterpart for domestic standards.

It would be great if Wild West Accountants of 2012 could have a two-holster belt for fast drawing each In-Your-Pocket Guide.

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

American Accounting Association  Past Presidents are listed at
http://www.cs.trinity.edu/~rjensen/temp/PastPresidentsAAA.htm 

"2012 tax software survey:  Which products and features yielded frustration or bliss?" by Paul Bonner, Journal of Accountancy, September 2012 ---
http://www.journalofaccountancy.com/Issues/2012/Sep/20125667.htm

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

 




Epistemologists present several challenges to Popper's arguments
"Separating the Pseudo From Science," by Michael D. Gordon, Chronicle of Higher Education, September 17, 2012 ---
http://chronicle.com/article/Separating-the-Pseudo-From/134412/

Bob Jensen's threads on how accountics scientists shield their findings from validation ---
http://www.trinity.edu/rjensen/TheoryTAR.htm


September 25, 2012 message from Barry Rice

The clip is 1 minute, 45 seconds long and is a great promotion for E&Y and our profession.

http://www.youtube.com/watch?v=yXaVOkv_tyA&feature=share 

This reminds me of when I was moving to Baltimore in 1967 and had job offers from all 6 of the Big 8 CPA firms that had Baltimore offices. I did a meticulous spreadsheet comparing the firms’ attributes such as starting salary, clients, professional development opportunities, etc. Price Waterhouse came out on top and I joined them. However, I have always wondered if the REAL reason I chose that firm was the fact that it was the only one my parents in rural southwestern Virginia knew about. They knew the firm name because of the Academy Awards shows on TV.

Barry Rice
AECM Founder


CGMA Videos --- http://www.cgma.org/Resources/Videos/Pages/videos-list.aspx


Links to Ethics Games and Software for Making Ethics Games

Hi Marc,

I've not had first-hand experience with ethics games. But here are a few ideas (not all are accounting games):.

Ethics Games and Puzzles (and other ethics learning resources) --- http://www.ethics.org/resource/ethics-games-and-puzzles

Putting Yourself in Somebody Else's Shoes --- http://thinkingethics.typepad.com/thinking_ethics/games/

Situation Ethics Games --- http://www.rsrevision.com/games/alevel/situationethics.htm

Scruples Game --- http://en.wikipedia.org/wiki/Scruples_%28game%29

Ethics Training Games --- http://www.ehow.com/info_8028940_ethics-training-games-ideas.html
This has a "brainstorming category."
Concept Mapping is a type of brainstorming --- http://www.trinity.edu/rjensen/000aaa/thetools.htm#ConceptMaps
There's a good brainstorming accountics science paper in
"Auditors’ Use of Brainstorming in the Consideration of Fraud: Reports from the Field," The Accounting Review, 2010, Vol 85, No. 4

John A. Schatzel at Stonehill College does research on simulation games for teaching auditing, some of which entail ethics ---
You must have access to the AAA Commons for the above link.
John posts to the AECM on occasion. Maybe he will read this and help us out.

You might consider easy-to-use software for making your own games
http://commons.aaahq.org/posts/41dab78f88
 

"Games in the Classroom (part 3)," by Anastasia Salter, Chronicle of Higher Education, September 30, 2011 ---
http://chronicle.com/blogs/profhacker/games-in-the-classroom-part-3/36217?sid=wc&utm_source=wc&utm_medium=en

The challenge of finding a game for the classroom can be difficult, particularly when the games you’ve imagined doesn’t exist. And if you wait for a particular challenge or topic to make its way into game form, it might be a while. Educational games and “serious” games haven’t always kept up with the rest of video gaming, in part because there’s no high return. Modern game development tends towards large teams and impressive budgets, and these resources are rarely used on explicitly educational productions. While efforts like the STEM Video Game Challenge provide incentives for new learning games, and commercial titles can often be adapted for the classroom, there’s still more potential than games have yet reached.

But if you have a new concept for playful learning, you can still bring it to life for your classroom. There are two ways to start thinking about making games in the classroom: the first is to build a game yourself, and the second is to engage students in making games as a way to express their own understanding.

You’re probably not a game designer, although there’s a game for that: Gamestar Mechanic can help you “level up” from player to designer. But it’s also important to remember building games rarely happens alone: as with digital humanities projects, games lend themselves to collaboration. If you have a game design program (or even a single course) at your university or a neighboring school, there might be an opportunity to partner your students with them towards creating valuable content-based educational games. Similarly, there may be other faculty who are interested in collaborating on grant-funded projects to build new educational experiences, or collective and expanding projects like Reacting to the Past (which many readers cited as a classroom game system of choice). You might also find collaborators, inspiration and games in progress through communities such as Gameful, a “secret HQ for making world-changing games”–and community manager Nathan Maton has a few things to say about building serious games for education.

There’s also a difference between making a game or asking your students to make a game as an expression of content for pedagogical purposes and making a game in the industry. Even a flawed game can provide an opportunity for learning and discussion. And your students will often bring a wealth of their own experiences with games to the process, offering them a chance to make new connections with your course material.

Ready to try making games? Here are a few tools for getting started.

"Games in the Classroom (part 4)," by Anastasia Salter, Chronicle of Higher Education, October 6, 2011 ---
http://chronicle.com/blogs/profhacker/games-in-the-classroom-part-4/36294?sid=wc&utm_source=wc&utm_medium=en

Throughout this series, we’ve talked about why you might want to use games in the classroom, how you can find them, and how to start making your own. But games can also inspire us to rethink our classrooms at a structural level, and particularly as sites for collaboration and playful learning that can extend long beyond a single lesson plan. Game designers are pointing out the similarities between games and the classroom. Extra Credits, a video series by game designers taking a deeper look at the form, recently did an episode on Gamifying Education that provides a great starting point for a conversation on game-inspired classroom design.

For ideas on getting started, I recently spoke with Lee Sheldon, author of the recently released The Multiplayer Classroom: Designing Coursework as a Game (Cengage Learning 2011), whose book chronicles both his own and others’ experiments with taking the structures, terminology, and concepts of a massive multiplayer role-playing game and applying them to the classroom. You can check out Lee Sheldon’s syllabus at his blog on Gaming the Classroom, along with more of his reflections on the experiment, which divided his students into guilds and encouraged them to “level up” through the semester. After using the course model in its latest iteration, he reported perfect attendance. He also notes the value in his system of “grading by attrition”—students are not being punished for failing, but instead rewarded for progressing and thus less likely to be defeated early.

As a professional game designer teaching courses on game design, Lee Sheldon has a natural environment for innovation–but his concepts open the door for a conversation across disciplines. Lee Sheldon describes his model as “designing the class as a game”—so not just focusing on extrinsic rewards (the typical focus of gamification), but instead trying to promote “opportunities for collaboration” and “intrinsic rewards from helping others.” As game designers, like teachers, are focused on creating an experience, many of the strategies for building a class as game are similar to more traditional preparation. And he advises that these ideas can work for anyone: “You don’t have to a be a game designer…you can prep like putting together a lesson plan, but learn the terminology.” Lee Sheldon explains that one of the benefits of using games as a model is that a game is abstracted—it has to “feel real”, but you get to “take out the stuff that isn’t fun.” He also notes that “You can do just about anything in a game that you can do in real life,” and the wealth of games today is a testament to that range of possibilities.

Lee Sheldon and his team at RPI are now working on an experiment with their new Emergent Reality Lab that offers a possible future for courses as games. He explained their current project, teaching Mandarin Chinese as an alternate reality game, as a “Maltese Falcon-esque mystery” narrative—the class will start out as usual, in a normal classroom, but it will be interrupted and move into the lab as the students take a virtual journey across China aided by motion-aware Kinect interfaces in an immersive environment. Lee Sheldon said that his ideal outcome would be for students to learn more Chinese than they would in a traditional class.

Continued in article


Edutainment Idea for Class
This might be a fun thing to try in class.

The instructor could identify three students in the class that have some cartoon drawing skills.

Then the three-column Jeopardy-like listing of choices could be presented to the class where the choices relate to accounting issues.
Students pick one issue from each column.

The cartoon-drawing students could then commence their cartoons.

While they're drawing, the instructor could show New Yorker's accounting cartoons to the class. At The New Yorker Website it is possible to drill down to accounting cartoons.

Video:  Improv With New Yorker Cartoonists --- Click Here
 http://www.openculture.com/2011/07/improv_with_new_yorker_cartoonists.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29
 You could have students draw accounting ethics cartoons similar to those wonderful cartoons that appear in the New Yorker.

Educational Comics Collection --- http://contentdm.unl.edu/cdm4/browse.php?CISOROOT=/edcomics


Hollywood's Accounting, Ethics, and Business Movies --- http://www.trinity.edu/rjensen/AccountingNovels.htm

Professor Roselyn Morris has a listing of ethics movies and some accounting movies---
http://ceae.aicpa.org/NR/rdonlyres/1E737CC7-562B-4660-936E-91A817EE669E/0/Morris_2006.pdf

"Perceptions of accountants' ethics: evidence from their portrayal in cinema.: by Felton, S., Dimnik, T. and Bay, D. (2008, December).  Journal of Business Ethics, 83(2), 217-232.

Abstract: "This article examines popular representations of accountants' ethics by studying their depiction in cinema. As a medium that both reflects and shapes public opinion, films provide a useful resource for exploring the portrayal of the profession's ethics. We employ a values theoretical framework to analyze 110 movie accountants on their basic ethical character, ethical behavior, and values."

Hollywood Accounting --- http://en.wikipedia.org/wiki/Hollywood_accounting

Spout's Movies Tagged for Accounting --- http://www.spout.com/members/0/tags/accounting/MemberTagFilms.aspx

Amazon's Wall Street Movies --- http://www.amazon.com/Wall-Street-Movies/lm/R2Q5QMM6BWWEAL

And here are some entrepreneur movies. Of course there are countless movies that feature business (usually in a bad light).

"Must-See Movies for Entrepreneurs," by Anthony Tjan, Harvard Business Review Blog, March 12, 2010 ---
http://blogs.hbr.org/tjan/2010/03/mustsee-movies-for-entrepreneu.html?cm_mmc=npv-_-DAILY_ALERT-_-AWEBER-_-DATE

After the Oscars last weekend, I started to think about which movies have really inspired me as an entrepreneur. Here are three films I believe that you should not only see, but also share with your teams. Each ties to an important entrepreneurial and leadership lesson.

Man on Wire
A story of the fanatical pursuit of a dream. Philippe Petit, a French tightrope walker, was consumed by the idea of walking a wire between New York's former World Trade twin towers. To do so, he would need years of planning and would have to do it as a covert mission. When I first watched this film, I did not know if it was based on a true story or not. The narrative and grainy black-and-white shots made me constantly question whether I was wishing for this to be true or if it was just brilliant story-telling. The fact that Petit is real and actually accomplished the feat in August of 1974 is beyond incredible. In an earlier post, I wrote about the thin line that great entrepreneurs balance between what Oscar Levant described as genius and insanity. You want someone like Petit to succeed because it seems so improbable and outlandish that it takes a creative visionary with some degree of craziness to pull it off. Seeing this movie is an inspiration for those who dare to think differently and push the boundaries.

More than a Game
This is the inspiring story of a high school basketball team and their quest for the national title. It is also happens to be the documentary of the high school basketball team on which superstar Lebron James played. I loved this movie for so many reasons, but the inspiration for entrepreneurs is in the unfolding of how Lebron and four of his closest friends from childhood pursued a dream, Starting as a team of fifth graders playing and growing up together in some of the poorest neighborhoods and practicing in a Salvation Army basketball court with linoleum floors. The movie highlights how the journey is always as important as the ultimate goal and inspires us to believe that almost anything is possible with the right people and right dedication.

Slumdog Millionaire
A hugely successful film about how you can create your own luck. So many successful entrepreneurs I have met talk about the role of luck in their careers, but it is equally true that they put themselves in the pathway of opportunity. In some ways this movie was like a modern day Bollywood version of Forrest Gump (we all need a little Bubba Gump shrimp luck in our lives). Both are believable tales because of the attitudes of the protagonists who, like great entrepreneurs, have a boundless optimism and openness that allow luck to come to them.

That's it for my Siskel and Ebert moment. I'll see you all at Netflix.

A lot of ethics cases are available ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Cases

Bob Jensen's threads on edutainment ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment


"SEC Comments and Trends An analysis of current Reporting Issues," Ernst & Young, October 2012 --- Click Here
http://www.ey.com/Publication/vwLUAssetsAL/SECCommentsTrends_CC0357_October2012/$FILE/SECCommentsTrends_CC0357_October2012.pdf

Every year, we track the Securities and Exchange Commission (SEC) staff’s comments on public company filings to provide you with insights on the SEC staff’s concerns and areas of focus. Although each registrant’s facts and circumstances are different, the economic conditions in which they operate and their financial reporting challenges are often similar. Understanding the comments and trends discussed in this publication can help as you head into the year-end reporting season.

In its comments, the SEC staff questions disclosures that may conflict with SEC rules or accounting principles, as well as disclosures the SEC staff believes could be enhanced or clarified. The resolutions vary. In some cases, registrants sufficiently support their existing accounting or disclosures, and in others they agree to expand disclosures in future filings or amend previous filings. Appendix C of this publication provides an overview of the SEC staff filing review process, as well as best practices for responding to staff comments. While the SEC staff continues to comment on familiar topics such as significant estimates, revenue recognition, impairment and financial instruments, it has increased its focus in other areas, including:

• Nonperformance covenants contained in lease agreements and how these contractual provisions affect the classification of leases

• Pro forma financial information disclosed in registration statements and Form 8-Ks reporting a significant acquisition, including how the requirements of Article 11 of Regulation S-X have been met for various pro forma adjustments

• The presentation of guarantor condensed consolidating information pursuant to the relief provided in Rule 3-10 of Regulation S-X

Segment reporting continues to be a common area of focus in SEC comment letters. The SEC staff often considers disaggregated information to be better for users of financial statements. As a result, the staff frequently questions registrants’ conclusions about operating segments being economically similar and their aggregation into a reportable segment. The SEC staff also requests that registrants provide more robust analysis of their segments in their MD&A.

The number of SEC staff comments on loss contingency disclosure requirements has stabilized over the past year. While the SEC staff has said that it has seen improvement in the disclosure of loss contingencies, it is expected to continue to focus on evaluating and enforcing compliance with ASC 450 in its filing reviews.

The SEC staff continues to focus on disclosures for registrants with foreign operations. In particular, the SEC staff has been questioning the tax effects of operating in foreign jurisdictions, including the effects on liquidity of indefinitely reinvesting foreign earnings. The SEC staff also has been asking registrants to provide more detailed disclosures about any exposure they may have to European debt. To help companies determine what to disclose about their exposures to countries experiencing significant economic, fiscal or political challenges, the SEC staff issued CF Disclosure Guidance: Topic No. 4: European Sovereign Debt Exposures in January 2012. CF disclosure guidance is a new type of interpretive guidance that the SEC staff has been using to provide observations and views about disclosures required by existing SEC rules and regulations.

Management’s discussion and analysis (MD&A) ....................................... 1

Critical accounting estimates .......................................................................... 1

Liquidity and capital resources ....................................................................... 3

Non-GAAP financial measures ........................................................................ 7

Results of operations ..................................................................................... 9

SEC reporting issues ............................................................................ 11

Board structure and nominee criteria ............................................................ 11

Emerging growth companies ........................................................................ 12

Executive compensation disclosures ............................................................. 14

Guarantor financial information .................................................................... 16

Internal control over financial reporting and disclosure controls and procedures .................................................................................. 19

Materiality ................................................................................................... 21

Pro forma adjustments ............................................................................... 22

Related-party transactions ........................................................................ 24

Risk factors ....................................................................................... .......... 25

State sponsors of terrorism ........................................................................ 27

XBRL exhibits ................................................................................... ........... 28

Other SEC reporting issues ......................................................................... 30

Financial statement presentation..................................................     ........ 31

Accounts receivable ..................................................................        ........... 34

Business combinations ..........................................................       ............... 36

Contingencies ....................................................................          .................. 38

Debt .....................................................................................             ................ 40

Fair value measurements .................................................        .................... 41

Financial instruments ...................................................       ........................ 44

Goodwill .......................................................................           ........................ 48

Impairment of long-lived assets ..............................      .............................. 51

Income taxes ............................................................................           ............ 53

Intangible assets ...................................................................          ............... 57

Investments in debt and equity securities .......................    ...................... 60

Leases ....................................................................................             ............. 64

Pension and other postretirement employee benefit plans .................... 65

Revenue recognition ..................................................................         .......... 68

Segment reporting .................................................................          .............. 73

Share-based payments ......................................................          ................... 77

Appendix A: Industry supplements ............    .................. 82

Automotive supplement ......................................................  ......................... 82    

Banking supplement ..........................................................   ........................... 84

Insurance supplement .................................................   ................................. 93

Life sciences supplement ........................................................  ...................... 95

Media and entertainment supplement ..................................... ................... 106

Mining and metals supplement .................................................................... 108

Oil and gas supplement ........................................................    ...................... 110   

Provider care supplement................................................    ........................... 115

Real estate supplement ...............................................................     ............... 117   

Retail and consumer products supplement .................................................. 120

Technology supplement .............................................................    ................ 123

Telecommunications supplement ..........................................................  ...... 127

Appendix B: Foreign Private Issuers supplement ........... 128

Appendix C: SEC review process and best practices ...... 135

Appendix D: Abbreviations ................................................ 140

 

Other 2012 Issues ---
http://www.ey.com/UL/en/AccountingLink/Current-topics-SEC-Other-regulators

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


AccountingWeb's 50-State Report on College and Career Readiness ---
http://www.accountingweb.com/article/50-state-report-college-and-career-readiness/219874?source=education

With all fifty states and the District of Columbia (DC) having adopted college- and career-ready standards in English and mathematics, Achieve's seventh annual Closing the Expectations Gap report (released September 13) shows how all states are aligning those standards with policies to send clear signals to students about what it means to be academically prepared for college and careers after high school graduation.

For the first time, the report also details not only states' policy progress on the college- and career-ready agenda, but also their efforts to implement those policies, since only faithful implementation can improve student achievement. The report was released during the opening session of Achieve's eighth annual American Diploma Project Leadership Team Meeting in Alexandria, Virgina, which brought together nearly 300 education leaders in cross-sector teams from thirty-four states.
 
"With all states adopting college- and career-ready standards, they have now taken the first step toward reorienting the mission of their K-12 systems to reflect the demands of the twenty-first century," said Mike Cohen, Achieve's president, to a crowd of education leaders from across the country. "As this report shows, various states are making some movement toward fulfilling the college- and career-ready agenda by putting new policies in place to support this new mission, but there is still much room for progress to be made."
 
Achieve conducts an annual policy survey that asks all fifty states and DC whether they have adopted standards, graduation requirements, assessments, and accountability systems aligned to the expectations of two- and four-year colleges and employers. The national survey of state education leaders has measured the same areas of reform each year since the National Governors Association and Achieve cosponsored the National Education Summit in 2005. This year's survey reveals the following results:
 
Standards:
 
Graduation Requirements:
 
Assessments:
 
Accountability:
 
"States and the larger education community must make sure educators have access to resources like quality instructional materials and effective professional development," Cohen urged. "Success is going to take the combined effort of all education stakeholders - students, teachers, principals, K-12 leaders, school board members, superintendents, administrators, policymakers, postsecondary education leaders, the business community, and parents."

Continued in article

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


CFO = Chief Finalizing Officer

"CFO Accused of Murder-for-Hire on His Employer's Dime," by Teresa Ambord, AccountingWeb, September 18, 2012 ---
http://www.accountingweb.com/article/cfo-accused-murder-hire-his-employers-dime/219868?source=education


A Slide Show from the Tax Foundation (Click the arrows on the right side of the screen)
"Putting a Face on America's Tax Returns: A Chartbook September 24, 2012," by Scott A. Hodge William McBride, Tax Foundation, September 24, 2012
http://taxfoundation.org/slideshow/putting-face-americas-tax-returns
Thank you Caleb Newquist for the heads up.

You can get the above content in PDF format at
http://taxfoundation.org/sites/taxfoundation.org/files/docs/putting_a_face_on_americas_tax_returns_a_chartbook.pdf

Jensen Comment
This slide show focuses heavily on inequality.

Case Studies in Gaming the Income Tax Laws ---
http://www.cs.trinity.edu/~rjensen/temp/TaxNoTax.htm


Ask your grocer when he will have a special on black swans:  Tax consequences of the widespread drought

How Do Market Failures Justify Interventions in Rural Credit Markets?
Author: Timothy Besley
Source: The World Bank Research Observer, Vol. 9, No. 1 (Jan., 1994), pp. 27-47
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/39865

Jensen Comment
This article discusses how failures of credit markets in the 1990s led to branch banking in small farm towns in order to make farm lending more effective and efficient, where bankers could become closer with both the needs of their farm customers and the risks of lending to farmers for their crops and livestock feeding operations.

One of the problems is the inefficiency of national and world credit markets for local lending to farmers. Whereas there are vast markets for collateralized loans in such things as home mortgages, there is almost no market for the loans made to farmers for crops, livestock, and farm equipment. Banks that lend to these farmers carry the loans on their own books unless the banks themselves go under, in which case the FDIC has to move in, manage the bank through a crisis, and in some cases pick up the bank receivables that cannot be sold in credit markets ---
http://seekingalpha.com/instablog/388783-christopher-menkin/857961-oldest-bank-fails-in-missouri

In the U.S. many of these "branch banks" were former locally-owned banks that were gobbled up by banking chains that now operate them as branch banks. In other parts of the world, the larger banks had to establish new branch banks to make farm lending more effective and efficient.


Implications of the S&L banking crisis in the 1980s on rural banks
"Deteriorating Farm Finances Affect Rural Banks and Communities," by Daniel L. Milkove, Patrick J. Sullivan, and James J. Mikeseil,
http://naldc.nal.usda.gov/download/IND87013364/PDF

Financial problems in the agricultural sector are eventually transmitted to farm lenders. As cash flow problems cause farmers and farm-related businesses to fall behind on loan payments, the quality of lenders' loan portfolios deteriorates. Lenders must set aside reserves to cover actual and anticipated loan losses. These and other adjustments by agricultural lenders to cope with their problem loans can affect credit availability for the community at large.

Bank financial problems caused 69 agricultural banks to fail last year, and some predict even more agricultural bank failures this year. While bank failures dramatically portray the problems of farm lenders, the failures generally are not as devastating to local banking services as many fear. In the past, most failed rural banks reopened almost immediately under new ownership.

A more widespread problem for rural areas may be the growing number of agricultural banks with serious financial problems. As banks adjust their lending decisions to deal with weaknesses identified by bank regulators, "marginally qualified" borrowers are likely to be denied credit. This may force some farmers into bankruptcy, but it will also reduce credit to nonfarm businesses, putting rural communities in agricultural areas of the country at a disadvantage in attracting new businesses and holding existing firms. Depending on the size and structure of the local banking system, less credit availability could dampen the growth potential of the local nonfarm economy, just when off-farm employment is needed by members of foundering family farms and by people displaced from agriculture.

Agricultural communities in unit-banking and limited-branching States have local banking systems heavily involved in agricultural loans. Furthermore, since small agricultural banks depend on local borrowers, these banks will likely make every effort to service the credit needs of farmers despite their cash flow problems. This may help some farmers who would otherwise be denied credit, but could depress the community's economy if local banks support agriculture at the expense of the nonfarm sector.

Continued in article

But most rural banks weathered the S&L crisis because there were no weather-related black swans.

A leading cause of the Great Depression of the 1930s was weather related, but the combination of causes was far more complicated.


Black Swan --- http://en.wikipedia.org/wiki/Black_swan_theory 

The widespread 2012 drought in the Midwest could well become the Black Swan of rural banks that are mostly dependent upon farm lending.
"Drought brings local farmers on the brink," by Jacob Barker, The Columbia Daily Tribune, July 14, 2012 ---
http://www.columbiatribune.com/news/2012/jul/14/drought-brings-local-farmers-brink/?business

Also see http://droughtresources.unl.edu/

Tax Consequences of Drought --- http://droughtresources.unl.edu/web/cattleproduction/taxconsequences-drought

It’s been a few years since we’ve had to deal with the drought related tax laws, but with the recent drought conditions across the Midwest, it’s a good time to review them.

Jensen Comment
It's too soon to know whether climate changes will be black swan events in the banking industry. There will be some rural bank failures due to the 2012 drought in the Midwest, South, and West. However, the real danger of a black swan event lurks if there is a 2013 drought as large or larger than the 2012 drought.

In 2012 farmers will dig deep into savings to keep going and be forced to borrow more for their 2013 crop hopes.

But for livestock farmers (ranch, feeder lots, and containment feeding operations) the widespread drought of 2012 is leading to the slaughtering of herds and shutting down of feeding businesses. The reason is that demand for meat is highly price elastic. Livestock farmers cannot simply save themselves by passing along feed price increases to their customers. Compounding this is the rising price of fuel that affects distribution costs to supermarkets and restaurants.

Ask your grocer when he will have a special on black swans.

 


A Billion Here, A Billion There:  Sometimes it's not real money
"Harvard Endowment Lost Money in Last Fiscal Year," Inside Higher Ed,  September 27, 2012 ---
http://www.insidehighered.com/quicktakes/2012/09/27/harvard-endowment-lost-money-last-fiscal-year 

Harvard University's endowment lost about $1 billion in the 12 months through June, Bloomberg reported. The fund, still the largest university endowment in the world, ended up at $30.7 billion, down about 0.05 percent. Harvard, like many other universities, saw major losses the year that the recession started, but many other universities have been posting gains more recently. Harvard officials said that their losses were due to investments in publicly traded non-U.S. companies and in "emerging market" shares.

Things are worse for most other universities
"One-Third of Colleges Are on Financially 'Unsustainable' Path, Bain Study Finds," by Goldie Blumenstyk, The Chronicle of Higher Education, July 23, 2012 ---
http://chronicle.com/article/One-Third-of-Colleges-Are-on/133095/

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


Gee:  Living High on the Buckeye at Ohio State University
"Gordon Gee, the Teflon President, Weathers Another Storm Over Expenses," by Jack Stripling, Chronicle of Higher Education, September 26, 2012 ---
http://chronicle.com/article/Gordon-Gee-the-Teflon/134694/

It has been said that the only survivors of a nuclear holocaust will be cockroaches and Cher. At this point, it might seem reasonable to add E. Gordon Gee to that list.

At a time when college leaders are being tossed out at the very first whiff of a scandal, the Ohio State University president appears impervious to controversy.

Over the course of his decades-long career in higher education, Mr. Gee has weathered athletics scandal, spending probes, and even jokes about his ex-wife's smoking pot in the president's residence at Vanderbilt University.

Through it all, the unflappable Mr. Gee, 68, has never seemed to stop smiling.

Continued in article

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


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

"Washington's Knack for Picking Losers," by Michael J. Boskin, The Wall Street Journal, February 15, 2012 ---
http://online.wsj.com/article/SB10001424052970204883304577221630318169656.html?mod=djemEditorialPage_t

"Solyndra factory to be auctioned off; debt holders (including US gov.) are not expected to recover much," Sober Look, September 27, 2012 ---
http://soberlook.com/2012/09/solyndra-factory-to-be-auctioned-off.html


Yet another reason the CPA profession differs from the law profession
"CPA Mobility Becomes Law in California," by Anne Rosivach, AccountingWeb, September 26, 2012 ---
http://www.accountingweb.com/article/cpa-mobility-becomes-law-california/219922?source=aa

Certified public accountants from outside California will now be able to serve clients in the state without obtaining a license or paying a fee to the California Board of Accountancy (CBA) under a new law signed on September 20 by Governor Jerry Brown. Changes in the law governing the accounting profession will bring California into conformance with CPA mobility legislation in forty-eight other states and the District of Columbia. It takes effect on July 1, 2013.

Under current law, CPAs from other states need permission from the CBA to practice in the state. Mobility laws already in place in other states have allowed California CPAs to provide most services to their clients without registering with the appropriate board of accountancy.

"The change in the law makes the playing field even for California CPAs and eliminates the possibility of retaliatory action by other states that could reduce opportunities outside our state for California CPAs," said Johanna Sweaney Salt, chair of the 40,000-member California Society of CPAs (CalCPA).

The new law protects consumers. Out-of-state CPAs practicing in California will be subject to the jurisdiction of the CBA. Out-of-state CPA firms still must register with the CBA before they may audit firms based in California. Such firms also will need to register with the CBA to provide compilations and reviews of entities headquartered in California.

Consumers will be able to access licensing information for out-of-state CPAs through the CBA.

The movement to CPA mobility gained momentum in 1997 when the AICPA and National Association of State Boards of Accountancy (NASBA) amended the Uniform Accountancy Act (UAA) which has been used as the basis for most state statutes, including the new California law, that allow interstate mobility. The amendment to the UAA states that a CPA with a valid license from a state with CPA licensing criteria "substantially equivalent" to those outlined in the UAA could practice in another state without obtaining another license. Substantial equivalency in licensure and certification criteria outlined in the UAA is understood to mean 150 hours of education, a passing grade on the CPA exam, and at least one year of experience.

Following the change to the UAA, most states adopted CPA mobility provisions relatively quickly, but as in California, legislation in New York and Massachusetts was stalled in part because these states first needed to change their licensing requirements. The governor of New York signed that state's legislation in November 2011; Massachusetts approved a mobility statute in July 2011.

"This legislation has been a long-term goal of CalCPA," noted Salt. "Nowadays even relatively small businesses may have offices or representatives in other states, let alone in other nations. With passage of this law, California CPAs will be better able to serve clients with multistate locations."

Hawaii is the only state that has not passed legislation that provides similar privileges to out-of-state CPAs.

 


Teaching Case on XBRL
"XBRL Tagging of Financial Statement Data Using XMLSpy:The Small Company Case," by  Rick Elam, Mitchell R. Wenger and Kelly L. Williams, Issues in Accounting Education, Vol. 27, No. 3, August 2012, pp. 76-782 ---
http://aaajournals.org/doi/abs/10.2308/iace-50162
This is not a free article.

Publicly traded companies in the U.S. are required by the Securities and Exchange Commission (SEC) to file their financial statement data using XBRL tags. Other countries using international accounting standards have adopted similar XBRL filing requirements. This case provides a brief introduction to XBRL for business or accounting majors, and uses freely available software products (Altova XMLSpy) and training tools that help learners quickly progress through a basic introduction to XML (the foundation for XBRL), the XBRL taxonomy schema, and actual tagging of financial statement numbers. The basic skills learned in this case give accountants and other business professionals a working knowledge of how XBRL and other XML-based business documents are and can be used in practice. The case also raises awareness of the XBRL taxonomy development bodies, filing repositories, and development tools available in this domain for those interested in pursuing this technology in more detail.

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


Zoom.us -- An Amazing Cloud-based, Video-Conferencing Posting the AAA Commons by Rick Lillie

Zoom.us -- An Amazing Cloud-based, Video-Conferencing...
blog entry posted September 1, 2012 by Rick Lillie, last edited Yesterday , tagged research, teaching, technology, technology tools
103 Views, 3 Comments
title:
Zoom.us -- An Amazing Cloud-based, Video-Conferencing Service (It's free!)
intro text:
Recently, I read about Zoom.us a new free, cloud-based, video-conferencing service.  Yesterday, three of us used zoom.us to work on a research project.  We are located throughout the U.S.  We logged into the video conference call and worked for more than an hour.  The audio and video were crystal clear.  We shared desktops to work on documents together.  Wow!  The virtual work session was very productive and enjoyable.

I use Skype to work with colleagues and to offer virtual office hours for my students.  Skype offers a free 1:1 video-conference call with desktop sharing.  To include more than two people in a Skype video call, you need to subscribe to Skype's premium service.  Skype's fee is very reasonable; however, it's difficult to beat "free."

Both Zoom.us and Skype have features that meet specific needs.  Therefore, both services are valuable to the teaching-learning experience.  The quality of the zoom.us video-conference call was exceptional.  Zoom.us versus Skype is not an either/or situation.  Using one service or the other is a judgment call regarding features that best fit the need as hand.

Getting started with zoom.us is quick and easy to do.  Their support page explanations are easy to follow.  The service works with Google and Facebook, iPad, iPhone, Windows and Mac.  When I set up zoom.us, I had to download a small file to my computer that includes the zoom.us interface.  The download was quick.  No problem.

Below is a screenshot from the support page indicating key features of the zoom.us interface screen.  Individual members participating in a video call are shown at the top of the screen.  When a member speaks, the border of the member's screen turns "green."  The speaker's screen displays in the "big screen" section of the interface window.  This process works as the conversation switches among participants.  Wow!  This is amazing and allows each speaker to be the center of attention.

Check out zoom.us.  I think you'll like this new video-conference service.

Best wishes,

Rick Lillie (
CSU San Bernardino)

 

Bob Jensen's threads on Tools and Tricks of the Trade ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm


2012 AAA Meeting Plenary Speakers and Response Panel Videos ---
http://commons.aaahq.org/hives/20a292d7e9/summary
I think you have to be a an AAA member and log into the AAA Commons to view these videos.
Bob Jensen is an obscure speaker following the handsome Rob Bloomfield
in the 1.02 Deirdre McCloskey Follow-up Panel—Video ---
http://commons.aaahq.org/posts/a0be33f7fc


"Deriving the True Size of U.S. Megabanks Is Far From Simple," David Reily, The Wall Street Journal, September 23, 2012 ---
http://professional.wsj.com/article/SB10000872396390443890304578010573777776536.html?mod=dist_smartbrief&mg=reno64-wsj

Does J.P. Morgan Chase have $2.3 trillion in assets, $4 trillion or perhaps somewhere in between?

Just how big the biggest U.S. bank is depends on your view of how derivatives should be accounted for on banks' books. And the potentially huge difference in size shows why simplifying bank regulation is anything but easy.

In recent weeks, Thomas Hoenig, a director at the Federal Deposit Insurance Corp., and Andrew Haldane, executive director for financial stability at the Bank of England, have decried the additional complexity of postcrisis regulations. Both urged more reliance on simpler measures that avoid distortions caused by risk-weighting assets as called for under new iterations of Basel capital rules.

Mr. Hoenig, a former Kansas City Fed president, said regulation should focus more on measures of tangible equity. Mr. Haldane called for greater emphasis on measures of overall leverage—basically assets to equity. Excess on that front was a big contributor to the financial crisis.

Risk-weighting of assets is indeed a problem. Banks will base some weightings, which influence capital needs, on complex, internal models. Such weightings also incent banks to hold supposedly risk-free debt, such as government bonds, which the European crisis has shown can actually be quite risky.

The trouble is, even clearer-cut measures of tangible equity and leverage aren't always straightforward. While both depend on measures of assets that aren't affected by risk weighting, the size of those assets can vary greatly due to the treatment of derivatives.

Under U.S. accounting rules, banks offset many derivative holdings against others to come up with a net asset number. So while J.P. Morgan reports $1.7 trillion in gross derivative assets in notes to its financial statements, it includes just $85.5 billion on its balance sheet.

International rules require banks to show gross derivative values on their balance sheet with less netting allowed. That makes European banks appear larger than they would under U.S. rules.

This all makes it tough for investors to compare the leverage employed by different international banks. It may also mask the dangers posed by derivatives to individual firms or the wider financial system.

Deutsche Bank's DBK.XE +0.03% balance sheet, for example, shows assets that are 40 times equity. But under an approach more like that of the U.S., the bank says it would fall to 22 times.

At $2.3 trillion, J.P. Morgan's assets as shown on its balance sheet are 12 times its equity. But if all its derivative assets are included, the bank's assets would swell to about $4 trillion and its leverage rises to about 18 times.

Granted, even on that measure, U.S. banks tend to be less levered than European peers.

Continued in article

Jensen Comment
This is one time where I'm on the side of the accounting standard setters, especially with respect to notionals in derivative financial instruments contracts.

For example, compare the financial instrument of a semi-annual 4% coupon bond for n=10 years and a $10,000 face for an investment portfolio of 100 such bonds. The interest payments become $20,000 every six months with a $1 million cash flow bond receivable in10 years. The notional of $1 million is a cash flow obligation that will be received on the maturity date. If there's no default risk, there also is no cash flow risk in these financial instrument bonds. There is fair value risk, however, based upon changes in market rates of interest. However, the value of the bonds converges on $1 million from above or below at the maturity date. If held-to-maturity the bond investor receives $1 million in cash.

Next consider a speculation in an interest rate swap that changes this $1 million investment from a fixed rate to a floating rate semi-annual payments that can now vary from $20,000 payments depending upon the current market rate of interest. The speculation now has cash flow risk, but if there's no default risk the fair value risk has been eliminated. The value of the bonds still converges on $1 million after 10 years, but the fair value of the interest rate swap with a notional of $1 million converges on $0.

Even though both the bond portfolio and the swap have separate notionals of $1 million, the $1 million notional on the swap was never is a $1 million cash flow obligation. This swap notional, and most notionals on derivative financial instruments, are merely artifacts (parameters) used in computing the net-settled interim swap payments for interest due on the notional.

Similarly, if an investor buys a call option on the CBOT exchange to buy $2 million worth of corn in six months, the $2 million notional never changes hands. Whenever an option in-the-money is settled, the only cash flow is difference between the spot value minus the strike value (the contracted forward price) is net settled.

Hence, it would be very misleading to book notional values of net-settled derivative financial instruments on financial statements. These notionals re merely artifacts (parameters) used in computing the net-settled interim swap payments for interest due on the notional.  On the other hand the owner of the bonds should book the fair value of the $1 bond notional should book the full fair value of the bond since this is a cash flow obligation. Those are more than artifacts (parameters) for interest calculations. Those are full cash flow obligations.

What is confusing on top of all this are derivative contracts that are not net settled. For example, if a livestock farmer buys a call option to have physical delivery of $2 million (strike price) of corn trucked to his farm in six months this is a cash flow obligation that is in substance a purchase contract at a contracted strike price. This contract has fair value risk but no cash flow risk.

And all of this blows my mind when comparing FAS 133 (where bifurcation of embedded derivatives may be required) with the new IFRS 9 (that no longer requires bifurcation). For example, I understand the FASB's DIG B38 solution, but I don't have a clue about how to account for this embedded derivative under IFRS 9. Makes me glad that I'm retired ---
http://www.fasb.org/derivatives/issueb38.shtml
 

Those naive readers who think that the FASB has simplified accounting for derivative financial instruments by ignoring embedded derivatives have, in some instances, another think coming. Makes me glad that I'm retired and not trying to consult on the ambiguous IFRS 9.

Bob Jensen's tutorials for FAS 133 (but not updated for IFRS 9) ---
http://www.trinity.edu/rjensen/caseans/000index.htm


"The Real Cost of Default:  New research indicates it is even higher than you might think," Stanford Graduate School of Business, September 2012 --- Click Here
http://www.gsb.stanford.edu/news/research/real-cost-of-default.html?utm_campaign=September 2012 Knowledgebase&utm_medium=email&utm_source=newsletter&utm_content=The Real Cost of Default

Six of the ten biggest corporate bankruptcies in history have occurred since late 2008 — and all ten of the top ten, if you include companies that escaped bankruptcy by being bailed out. The names are etched in our memories: Lehman Brothers, General Motors, Chrysler, A.I.G., Fannie Mae, and Freddie Mac.

However, for all that, the actual costs of corporate defaults and bankruptcy remain murky and mysterious. Calculations about default risk loom behind almost every decision by investors and corporate strategists. They affect how much it costs a company to borrow, how it structures its finances, and what it does if it edges near the abyss.

It’s obvious that filing for bankruptcy takes a huge toll, on top of the costs that stem from a company’s underlying problems with sales and profits. Whatever else may be happening, defaults bring a slew of costs on their own: customers and major suppliers often flee; brands can be permanently damaged; assets may have to be sold at fire-sale prices. All that is quickly reflected in a stricken company’s stock and bond prices.

But it’s hard to untangle the cost of a default from the cost of everything else going on with stock and bond valuations. Cash problems and operating losses often overlap and reinforce each other, but they have different causes and consequences. If the costs of a default are lower than the players assume, investors and corporate architects risk making miscalculations that will haunt them for years in the future.

Ilya A. Strebulaev, associate professor of finance at Stanford’s Graduate School of Business, says those costs are higher than assumed. In a new paper, coauthored with Sergei A. Davydenko and Xiaofei Zhao of the University of Toronto, Strebulaev combined historical data on corporate defaults with a new analytical model to tease out investor reactions to a default both before and after it happens.

Their conclusion: default causes a much bigger decline in a company’s total market value than is generally assumed. They estimate that defaults, which can range from missed bond payments to outright bankruptcy filings, will, on average, reduce a corporation’s total market value by 21.7%. For “fallen angels” — companies that started out with investment-grade ratings — default will destroy about 30% of the total asset value.

That is an eye-opener. Until now, the best estimate had been that corporate defaults cost companies about 20% of their value. But that estimate was based only on defaults at 30 companies that had originally been financed with high-yield junk bonds. Strebulaev analyzed 175 corporations, including many fallen angels that defaulted between 1997 and 2010.

The real breakthrough, however, was to come up with a way to distinguish the cost of default from the cost of economic deterioration. In the real world, a troubled company’s stock price usually plunges for a host of different reasons at the same time. A company with falling sales and mounting losses will lose value and edge closer to bankruptcy. But the prospect of bankruptcy itself usually adds many other costs.

That was the case with United Airlines, which filed for bankruptcy in 2002 after being battered by brutal cost competition and slumping traffic volumes. Once it filed for bankruptcy, it lost additional value as suppliers and industry partners, such as regional airlines, backed away.

How to unravel the mess? Strebulaev has been working for years to tease out the causes and consequences of corporate defaults. In a series of papers, he and his colleagues have analyzed defaults going back as far as 150 years. Along the way, he has turned up a number of unexpected discoveries. One surprise: cash-heavy companies are actually more likely to default over the long-term than companies with smaller reserves. Why? Because executives often shore up cash when they are worried. The seemingly rich coffers can be a sign of trouble, rather than a sign of health. Another surprise: many companies wait to liquidate unsuccessful projects until a broader industrial downturn, so their failures will “blend into the crowd” and won’t be as embarrassing. When the downturn comes, though, the accumulation of living-dead zombie ventures can aggravate an industry-wide investment bust.

For Strebulaev, the patterns and practices of companies in financial distress constitute a rich new opportunity. The goal isn’t simply to provide a new tool for corporate strategists. The real purpose is to illuminate why corporations and investors make the choices they do, and to understand the consequences. Corporate defaults are costly — their losses extend well beyond the ones caused by a company’s underlying business problems.

But how big are those costs? Strebulaev and his colleagues measured the total cost by looking at the drop in market value of a company’s equity and debt. The first step was measuring the drop in stock and bond prices right after a company announced a default.

In most cases, though, investors anticipate a default weeks or months in advance and begin to discount a company’s valuation long before it defaults. The full cost of a default needs to include the anticipatory drop in value, but it needs to exclude the losses tied to the company’s economic deterioration.

It sounds impossible, which is why there had only been one other major empirical study of the subject. But Strebulaev and his colleagues came up with a novel approach. They built a sophisticated, yet intuitive, model of how investors typically anticipate a corporate default, and applied this model to historical data stretching back two decades. The crux of the new approach is that investors only partially predict a corporate default, and that there is always an element of surprise when it occurs. This surprise causes a reaction in stock and bond prices at default. The approach uses historical default patterns to mathematically model investors’ typical anticipation of default.

Continued in article


A Debate by Experts About Teaching Evaluations
"Professors and the Students Who Grade Them," The New York Times, September 17, 2012 ---
http://www.nytimes.com/roomfordebate/2012/09/17/professors-and-the-students-who-grade-them?hp

Jensen Comment
One of the experts is a man after my own heart:
Stuart Rojstaczer, a former professor of geology and civil engineering at Duke University, is the creator of of the Grade Inflation Web site. He is writing a book about undergraduate education in the U.S.

Grade inflation is, in my opinion, the Number One disgrace in higher education, and the major cause of grade inflation is the teaching evaluation process where students impact the promotion, tenure, and salary outcomes of their teachers ---
http://www.trinity.edu/rjensen/Assess.htm#RateMyProfessor


"The Future of Public Sector Accounting Standards," by Ken Warren, Deloitte, September 13, 2012 ---
http://www.iasplus.com/en/news/2012/september/the-future-for-ipsas

Ken Warren, a board member of the International Public Sector Accounting Standards Board (IPSASB) and the New Zealand External Reporting Board (XRB), has written an article providing some insights into the future direction of International Public Sector Accounting Standards (IPSAS). The article, entitled 'IPSASs through the looking glass' and recently published on the website of the New Zealand Institute of Chartered Accountants (NZICA), discusses conceptual differences between IFRS and IPSAS and likely developments in public sector accounting.

The sad state of governmental accounting: It's all done with smoke and mirrors ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting


September 3, 2012 message from Mark Nigrini <mark_nigrini@msn.com>

Hello Bob,

I hope that you are doing well. I remember that we've spoken with each other, but the details are hazy now. We wpoke about your home in NEw Hampshire and so it was around the time of you moving up north.

Your website is one where I can start reading and an hour later feel that I've just scratched the surface and need to come back for more.

You mention Benford's Law on your site (see attached) and I was hoping that you could reference my new book (especially since it's been 13 years since my JOA 1999 article).

In "Benford's Law: Applications for forensic accounting, auditing, and fraud detection" (Wiley, 2012) author Mark Nigrini, a pioneer in forensic accounting, describes the mathematical foundations of Benford’s Law in a way that is easily understood by accounting and other business-related professionals. He then shows many examples of authentic and accurate data that conformed to Benford’s Law—and the fraudulent and invented numbers that did not. Nigrini goes way beyond the first digits test and outlines a series of digit- and number-based tests called the Nigrini Cycle. These tests are based on the state-of-the-art with respect to the mathematics underlying Benford’s Law. The companion website http://www.nigrini.com/benfordslaw.htm  has free Excel templates, data sets, photos, and other interesting items.

Thanks, Mark


"Audit Firms' Work Deemed Deficient," by Michael Rapoport, The Wall Street Journal, September 16, 2012 ---
http://professional.wsj.com/article/SB10000872396390443720204578000132856766230.html?mg=reno64-wsj

Regulators still are finding a high level of serious deficiencies in the work of major audit firms, continuing a trend begun last year, a member of the U.S.'s audit-industry oversight panel said.

Most of the Public Company Accounting Oversight Board's 2011 inspection reports of the biggest firms have yet to be issued, but they will show a continued "spike" in audits found to have serious problems, PCAOB member Jeanette Franzel said in a speech in Chicago on Thursday.

In some cases, Ms. Franzel said, the board's inspectors found that auditors gave their clients a clean bill of health even though the audit work wasn't completely or properly conducted, or the company's financial statements were contradicted by other evidence.

Last year, in reports issued on 2010 inspections, "we saw a high level of serious inspection findings, an increase over previous years," and that trend remains in the 2011 reports, Ms. Franzel said. In the reports issued last year, the board found deficiencies in nearly a third of the audits they examined at the Big Four accounting firms—PricewaterhouseCoopers LLP, Deloitte & Touche LLP, Ernst & Young LLP and KPMG LLP.

The PCAOB conducts annual inspections of the biggest firms, scrutinizing a sample of their audits. The inspections focus on audits that the board believes are at highest risk for problems, so the PCAOB says the results may not reflect how frequently a firm's overall audit work is deficient. The inspections are intended only to evaluate a firm's performance and point out areas for improvement, so offending firms aren't subject to penalties.

PCAOB findings of problems are "to be taken seriously and firms will continue to work on areas that need to be improved," said Cindy Fornelli, executive director of the accounting industry's Center for Audit Quality.

The only Big Four firm with a 2011 report issued thus far is KPMG, in which the PCAOB found deficiencies in 12 out of the 52 audits they examined.

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


Jensen Comment
If there ever was BS about a BS or a PhD this has to be the site ---

http://www.collegemeasures.org/

One thing I always warned my students about is that education is much more than a ticket to a job. Education is part and parcel to almost everything in life.

And when looking at career alternatives, I always warned my students to pretty much ignore starting salaries when choosing a career or choosing from first-time job alternatives. Reasons are as follows:

Lastly, when reading the charts and tables in the site below consider the aggregation and other weaknesses of the data. For example, accounting is mixed in with business studies. But the advantages and disadvantages of an accounting career are much, much different than those of marketing, management, finance, and other types of business careers. For example, I looked up the PhD starting salary for a "business" major in one major university. It was stated as $90,000. However, accounting PhD graduates at that particular university are more apt to be $150,000 or more. Plus there are summer stipends that add up to 20% more to starting salaries.

And while we're at it, consider the starting salary of an accounting PhD. The highest salary offer may come from Harvard or Stanford, but the living costs in Cambridge or Palo Alto are possibly twice as much or more than the living costs in Ames, Iowa --- perhaps ten times as much in terms of house purchase and rental prices. And the odds of getting tenure are low at Harvard or Stanford such that considerations such as research opportunities should outweigh starting salary considerations.

And now for the BS about a BS --- http://www.collegemeasures.org/

"All About the Money:  What if lawmakers and students used starting salaries to evaluate colleges and their programs?" by Dan Berrett, Chronicle of Higher Education, September 18, 2012 ---
http://chronicle.com/article/All-About-the-Money/134422/?cid=at&utm_source=at&utm_medium=en

What is your college degree truly worth?

That is the question that a new report seeks to answer. And it does so by distilling college into a number, expressed in dollars.

"The Earning Power of Graduates From Tennessee's Colleges and Universities" is the latest effort to precisely quantify the value of a degree. It identifies the payoff that individual programs at specific colleges yield the first year after graduation. While limited to Tennessee, it will be followed by similar analyses in other states, and it marks the arrival of a new way of evaluating higher education that brings conversations about college productivity and performance to the program level.

Due out this week, the report—by College Measures, a partnership of the American Institutes for Research and Matrix Knowledge, a consulting firm—is bound to spark debate about what it counts and omits, and to raise fears over how its findings will be used.

The report has been praised by some analysts for merging data on education and employment in valuable ways and for producing revealing insights. For instance, in Tennessee, attending the flagship, in Knoxville, might not lead to a higher paycheck for new graduates than completing a community-college program, depending on the major a student chooses.

The report also exposes simmering arguments in higher education: whether college is chiefly for personal economic gain or for serving the public good, whether teaching potential students about the costs and benefits of their college choices will further cement an already widespread consumerist ethos, and whether data on disparate outcomes by discipline will fuel more attacks on liberal-arts programs, whose graduates may not earn large salaries right after college but fare better later.

Produced in collaboration with the Tennessee Higher Education Commission, the report was preceded by a Web site, which became public last month, with data for institutions in Arkansas. College Measures is also producing analyses for Colorado, Nevada, Texas, and Virginia.

More states may follow suit. About half the states have the ability to link postsecondary academic records with labor data, according to a 2010 report by the State Higher Education Executive Officers. Few states have done so, says Travis J. Reindl, a program director for the National Governors Association, but interest is growing in the types of analyses that College Measures performs.

"Governors care very much about job creation, and they care very much about meeting work-force needs. Both of these things rely on good information," says Mr. Reindl. "This is an issue that's clearly starting to percolate because it all goes back to jobs, job, jobs."

Salary Matters

Previous studies by the Georgetown University Center on Education and the Workforce, among others, have analyzed wage differences by major. The Tennessee report breaks new ground, says Jeff Strohl, director of research at the Georgetown center, by marshaling data from disparate state agencies to identify the average first-year wages of the state's college graduates between 2006 and 2010, and linking those data to the majors they pursued and institutions they attended.

Continued in article

From the Chronicle of Higher Education
Look up salary data for your university ---
http://chronicle.com/article/faculty-salaries-data-2012/131431#id=144050

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


2012 Working Mother:  100 Best Companies --- http://www.workingmother.com/best-company-list/129110

BDO Jumps Ahead
E&Y in Top 10 Once Again

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


Question
Is this PhD Guide explicitly sexist?
Just kidding of course.

"The Illustrated Guide to a Ph.D.," Open Culture, September 26th, 2012 ---
http://www.openculture.com/2012/09/the_illustrated_guide_to_a_phd-redux.html

More serious question
How does this guide apply or not apply to alternatives for an accounting Ph.D.?

Hint
Note that the question focuses on alternatives rather than the bounds of accountics science?

My answer is that most academic disciplines have doctoral programs covering nearly all areas of that discipline. For example, in psychology a student can get an experimental science Ph.D. in psychology. But another student can get a Ph.D. in the various branches of clinical psychology.

There are no branches of clinical accountancy (professional practice issues) where a student can get a Ph.D. in a North American university ---
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms


"Fraud Reports Climb Still Higher: Employee reports of fraud are steadily increasing, both as a percentage of all compliance-reporting activity and in raw numbers," by Caroline McDonald, CFO.com, September 26, 2012 ---
http://www3.cfo.com/article/2012/9/regulation_fraud-whistleblower-sec-jimmy-lin-jonny-frank

Reports of fraud by corporate employees have continued their ceaseless rise so far this year, according to the Quarterly Corporate Fraud Index. The current drivers are increasing awareness of fraud, mandated whistle-blower protections, and changing company cultures.

The index measures reported frauds as a percentage of all compliance-related reports. Most recently, for the second quarter of 2012, that ratio climbed to 22.9%, up from 21.7% for the same quarter in 2011.

“This index essentially has been going up since the day we started tracking it [in 2005],” says Jimmy Lin, vice president of product strategy and corporate development at The Network, a provider of governance, risk, and compliance solutions that conducts the quarterly analysis in conjunction with BDO Consulting. The index looks at compliance-reporting activity at more than 1,400 clients of The Network worldwide, including nearly half of the Fortune 500.

Corporate employees are simply becoming more aware of organizational issues and more willing to report compliance errors, especially fraud, Lin says. Fraud is more often covered in the news media these days, he notes. Also, he claims, the client companies have become more sophisticated in educating employees on what fraud looks like (which is a service The Network provides). “We see the index going up and up as a positive. Companies are getting more interested in a holistic approach than a check-box approach to compliance.”

Employers are highly motivated to hear about alleged internal fraud before an employee instead makes an initial report to the Securities and Exchange Commission. “Even if it doesn’t turn into anything significant, they want to catch wind of it first,” notes Lin. Companies know that “even a hint of potential fraud issues in their organization, whether true or not,” puts their reputation at risk, not only with the public but also internally: “Employees may begin to wonder about the company’s ethics.”

The whistle-blower protections under the Dodd-Frank Act, such as prohibiting retaliation against whistle-blowers, also may be having an impact. Companies are “couching it as building a better culture,” says Lin.

Jonny Frank, a partner at forensic-accounting firm StoneTurn Group, points out that the SEC has offered incentives to encourage employees to use company-compliance hotlines. But another reason for the upward trend may be that the government expects companies to make the hotlines accessible to such third parties as customers and suppliers, as well as to employees.

And a growing number of companies annually require employees to certify as to their knowledge of wrongdoing. “It’s one thing to put the burden on employees to come forward; it’s another to ask them to confirm they don’t know of any wrongdoing,” Frank says. That trend “suggests a culture where employees see that the company is serious and not just giving lip service to fraud.”

Frank says compliance officers generally are doing a good job of pushing that message. Unfortunately, he adds, some companies’ finance teams are getting less involved as ethics and compliance controls mature. “It becomes easier for the CFO to just hand off that responsibility to compliance.”

Lin observes that organizations are vulnerable if compliance enforcement is not a pervasive theme throughout the company. If functional areas, departments, and divisions aren’t working together to make sure fraud is addressed, “then everybody is going to lose,” he says.

Continued in article

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

 


"The Bailout of AIG: Mission Accomplished?" by Francine McKenna, re:TheAuditors, September 17, 2012 ---
http://retheauditors.com/2012/09/17/the-bailout-of-aig-mission-accomplished/

On Friday September 14, the US government announced the completion of the sale of AIG stock taxpayers bought during the financial crisis bailout of the insurer. The government took in $20.7 billion for the sale and is no longer the majority owner of the company. At the peak of the crisis, taxpayers owned almost 80% of AIG.

Andrew Ross Sorkin, New York Times reporter, CNBC host, and author of “Too Big To Fail” used his DealBook column to ask former Special Inspector General of TARP Neil Barofsky if he was satisfied, finally. Sorkin says the US Treasury made a profit on the AIG transaction.

As we approach the four-year anniversary of the collapse of Lehman Brothers and the rescue of A.I.G. next week, sadly, much of the public — and people like Mr. Barofsky, as well-intentioned as he is — are still criticizing and debating the merits of the bailout. It’s almost become a cottage industry.

In his book, Mr. Barofsky wrote, “Treasury’s desperate attempt to bail out Wall Street was setting the country up for potentially catastrophic losses.”

As distasteful as the rescue effort was, it should be clear by now that without it, we faced an economic Armageddon. And the results thus far of bailing out the big banks, and A.I.G., indicate a profit.

Treasury never uses the term “profit” to describe what taxpayers would receive. The GAO did in a report in May when it estimated the proceeds that could be realized at various sale prices.

I wrote in American Banker about Sorkin’s claim that the bank bailouts prevented “financial system Armageddon” and his debate with Barofsky. I think “profit” is not only the wrong term but an answer to the wrong question.

It can never be proven that the crisis bailouts saved us from financial Armageddon. That’s the logical fallacy of asserting a claim with no way to disprove the opposite, so saying we made a profit on the deal is the next best thing. The New York Times’ Andrew Ross Sorkin claims, if you combine Treasury actions and “positive returns” on Federal Reserve activities, the Treasury is now “on a path to actually turn a profit.” That’s where the debate starts.

Former Special Inspector General for the Troubled Asset Relief Program Neil Barofsky says, “Not so fast.” I agree. If your intention is to try to prove or disprove the government PR claims that the taxpayer has made an accounting profit on any of the bailouts, or even broken even, you must remember this: That’s not why the government supposedly did what they did. And on the two counts of failing to unfreeze credit and failing to help homeowners – how the bailouts were justified to Congress – the government is guilty.

Treasury never uses the term “profit,” even in press releases. The term it does use, “positive return,” is a non-Generally Accepted Accounting Principles metric. Treasury has sunk to the level of a social commerce IPO like Groupon, whose infamous Consolidated Segment Operating Income (CSOI)which was slammed by the Securities and Exchange Commission glossed over losses to convince investors there was a gain instead.

“Yves Smith” at Naked Capitalism also points out that AIG enjoyed a tax benefit that negates Treasury”s claim. Who reported that deal? Andrew Ross Sorkin in February.

In a February article, Bending the Tax Code, and Lifting A.I.G.’s Profit,” Sorkin described how AIG was allowed to retain $26.2 billion of net operating losses that should have been wiped out as a part of the rescue of the company as well as an additional $9 billion of “unrealized loss on investments.” That increased AIG’s fourth quarter and hence fiscal year earnings by a remarkable $17.7 billion, which dwarfs the mere $1.6 billion its operations produced that quarter. And the article includes this juicy bit:

Analysts at Bank of America and JPMorgan Chase last year estimated that the tax benefits from the losses propped up A.I.G. stock by $5 to $6 a share. Its shares closed at $28.66 on Monday, just shy of the $29 mark that the government says it needs to sell its shares to break even.

General Motors, another bailout “success story” – because saving GM supposedly averted jobs and economic disaster in Detroit – also benefited from the IRS rule change regarding retention of net operating loss carry forwards and “fresh start” accounting.  I wrote about that in Forbes in November of 2010.

Reporting profits means new GM doesn’t lose the valuable deferred tax assets they carried over from old GM, thanks to a last minute fix from the US Treasury in September.  The accountants can pull dollars from a cookie jar valuation allowance to prop up earnings when needed.

The IPO would probably have never passed even a minimal “smell test” by the SEC’s Division of Corporate Finance if  ”fresh start accounting” hadn’t put millions in goodwill on their balance sheetThat gave GM a positive balance in shareholder’s equity.  In a perverse example of accounting chicanery, the better GM does the less valuable that asset is.

Read the rest of my column about the AIG share sale at American Banker.

Iowa Sen. Charles Grassley suggested that AIG executives should accept responsibility for the collapse of the insurance giant by resigning or killing themselves. The Republican lawmaker's harsh comments came during an interview Monday with Cedar Rapids, Iowa, radio station WMT . . . Sen. Charles Grassley wants AIG executives to apologize for the collapse of the insurance giant — but said Tuesday that "obviously" he didn't really mean that they should kill themselves. The Iowa Republican raised eyebrows with his comments Monday that the executives — under fire for passing out big bonuses even as they were taking a taxpayer bailout — perhaps should "resign or go commit suicide." But he backtracked Tuesday morning in a conference call with reporters. He said he would like executives of failed businesses to make a more formal public apology, as business leaders have done in Japan.
Noel Duara, "Grassley: AIG execs should repent, not kill selves," Yahoo News, March 17, 2009 --- http://news.yahoo.com/s/ap/20090317/ap_on_re_us/grassley_aig

"AIG, Surprise:  Moneymaker Its profits for taxpayers cast doubt on the notion that it behaved recklessly before the panic struck," by Holman W. Jenkins, Jr., The Wall Street Journal, August 31, 2012 ---
http://professional.wsj.com/article/SB10000872396390443618604577623373568029572.html?mg=reno64-wsj#mod=djemEditorialPage_t

AIG's bailout is getting the revisionist treatment. The rescue hasn't been the dismal federal experience that, say, GM's has been. Taxpayers are showing a $5 billion profit on their 53% stake in the insurer, as of yesterday's closing price.

What's more, in the last few days, the New York Fed liquidated the last of the complex mortgage derivatives it acquired from AIG's counterparties as part of the bailout. Such transactions and related fees have netted the government about $18 billion.

This is good news but requires some revising of theories of the crisis itself. The "toxic" and "shaky" housing derivatives that got AIG in trouble turn out, even amid the worst housing slump in 70 years, not to have been the crud many assumed they were.

A lot of renditions skip over this part, dismissing AIG's pre-crash mortgage activities as "reckless," thereby making a mystery of how the refinancing of AIG could be paying off so handsomely for taxpayers. Taxpayers are making out because they bought valuable assets on the cheap.

This is as it should be. But let's remember how AIG got in trouble. It wrote insurance to guarantee the very senior portions of securities derived from underlying mortgages—that is, the portions already designed to withstand a sizeable increase in defaults.

AIG failed not because of the failure of these securities to keep paying as expected, but because of its own promise to fork up cash collateral if the market price of these securities fell or if the rating agencies downgraded what they had previously rated Triple-A.

In the systemic panic that climaxed with the Lehman failure, both things happened in spades, even as AIG itself no longer could raise the cash to make good on its commitments. Some now claim AIG could have waved off the collateral calls, citing exceptional circumstances. But even that wouldn't have changed the fact that, because of the panic, AIG itself was no longer trusted despite being chock-full of good assets.

We'll never know if the company might have finessed its way out of its jam (quite possibly its counterparties, including Goldman Sachs, would have acted to keep AIG afloat if the alternative of a government bailout weren't available). Instead AIG turned to taxpayers to finance the collateral calls it couldn't finance itself, and taxpayers took advantage.

For all the desire to name villains and blame bad incentives for the financial crisis, notice that panic itself was the key player. Panic is a variable about which it's disconcertingly hard for government to do anything useful in advance.

Panic is systemic—an uncertainty or loss of trust in how the system will behave. Here's a simple but relevant example: What happens to the market value of mortgages if investors lose confidence in the legal system to permit them to foreclose on borrowers who stop paying?

We don't need to retread the history. Letting Lehman fail was a disaster because the rescue of Bear Stearns had conditioned the market to believe Washington wouldn't permit major institutional failures. The mixed signals sent about Fannie and Freddie only undermined the effort to recruit fresh capital to other financial institutions distressed by uncertainty over the value of mortgage securities.

AIG is the most dramatic example of the general case. A lot of things become good or bad collateral depending on what the government is expected to do. It's not too strong to say Washington had to bail out AIG because the market was uncertain whether Washington would bail out AIG. (An additional complexity we won't go into is how the Fed's QE exercises subsequently boosted the bailout's profits.)

Let us be careful here: A host of private and public behaviors contributed to the housing bubble and meltdown, whose losses were destined to be felt widely. Our system has no problem accommodating the failure of individual institutions, even very big ones. But systemic panic always comes to the door of government. It can't be otherwise.

Governments can try to duck this burden, as European governments have done, only by renouncing the ability to print money and so soiling their own credit that substituting their own credit for the financial system's is no longer an option. Make no mistake: This would be a real cure for too-big-to-fail if the Europeans were inclined to let the chips fall. They're not. Instead the self-disabling governments want Germany to supply the bailout.

Continued in article

 

Outrageous Bonus Frenzy

AIG now says it paid out more than $454 million in bonuses to its employees for work performed in 2008. That is nearly four times more than the company revealed in late March when asked by POLITICO to detail its total bonus payments. At that time, AIG spokesman Nick Ashooh said the firm paid about $120 million in 2008 bonuses to a pool of more than 6,000 employees. The figure Ashooh offered was, in turn, substantially higher than company CEO Edward Liddy claimed days earlier in testimony before a House Financial Services Subcommittee. Asked how much AIG had paid in 2008 bonuses, Liddy responded: “I think it might have been in the range of $9 million.”
Emon Javers, "AIG bonuses four times higher than reported," Politico, May 5, 2009 --- http://www.politico.com/news/stories/0509/22134.html

 

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

Search for the term "AIG"


"The Most Outrageous Tax of the Year," by Adam Levin, Huffington Post, September 9, 2012 ---
http://www.huffingtonpost.com/adam-levin/the-most-outrageous-tax-o_b_1877166.html

. . .

It just may become the latest outrage during a year of outrages. At the precise moment when the federal government finally delivers a modicum of justice and some economic relief to millions of homeowners victimized by the nation's largest banks, the government threatens to beat those victims over the head with a punitive old favorite revenue raiser -- a tax on forgiven debt.

Here's the backstory: After years of standing on the sidelines and ignoring evidence that major banks were using their mortgage servicing arms to steal money from innocent consumers and illegally evict homeowners, the federal government finally joined with 49 states to prosecute the banks. It was a frustrating, agonizingly slow and painful process that led to an even more frustrating, agonizingly slow and painful negotiation.

The result was the National Mortgage Settlement, in which the five largest loan servicers must pay $21.5 billion in reparations and restitution to consumers victimized by their inappropriate conduct. Specifically, many homeowners whose mortgages were serviced by the Big Five -- Citi, JPMorgan Chase, Wells Fargo, Bank of America and Ally Financial -- may qualify for significant reductions in their mortgage principal and interest rates. And 1.5 million people who lost their homes due to questionable foreclosure practices can apply for a one-time payment of $2,000 (an insultingly low figure considering how much pain is involved in losing one's house).

Altogether, that's not an inconsequential number even in an imperfect world. More importantly, it's desperately needed right now by millions of underwater homeowners, who just might be able to hang onto their homes if they can receive the lower payments that come from interest and principal reductions. That helps individual homeowners, and it also helps everyone else, since our economy needs more foreclosures and more empty houses like it needs another global stock market crash.

But a grid-locked, polarized Congress is about to screw it up (again). You see, unless Congress acts with uncharacteristic speed and bipartisanship, anyone who might receive a principal reduction from the mortgage settlement could face a hefty tax bill.

That's not supposed to be the way this all goes down. In 2007, Congress enacted the Mortgage Forgiveness Debt Relief Act, which prevents homeowners from paying taxes when their mortgage debt is forgiven due to a decline in the owner's financial life or a drop in the home's value. (We first covered the debt cancellation tax, known as the 1099-C, early last year, and gave tips on what to do if the IRS taxes you on cancelled debt.)

The law applies to homeowners who participate in the National Mortgage Settlement who receive up to $2 million in reduced principal and interest charges. It is scheduled to expire at the end of 2012 along with all the other tax cuts we have heard about for years.

Whoops.

So, instead of getting the relief they need to save their houses, victimized homeowners will be forced to pay a significant portion of that savings to Uncle Sam. Since the average homeowner will receive about $19,000 in settlement relief, and the average middle class family pays about 25 percent in taxes, approximately one quarter of the forgiven debt -- some $4,750 -- will have to be paid to the IRS and by those who can least afford to pay it. For some families, that could be enough to tip the scales, pushing them back to the brink of foreclosure and eviction.

This is fiscal insanity. And Congress knows it.

"Suddenly, just when they throw you a life ring, they jerk it back," Rep. Jim McDermott (D-Wash.), told the Washington Post. "We cannot let this happen. It's going to be a disaster."

Continued in article

Jensen Comment
Perhaps Adam Levin overstated the case a bit by not considering the high proportion of low and middle class taxpayers who pay no income tax and, therefore, are less adversely affected by the tax on forgiven debt:
Case Studies in Gaming the Income Tax Laws ---
http://www.cs.trinity.edu/~rjensen/temp/TaxNoTax.htm

See the chart at http://blog.heritage.org/2012/02/19/chart-of-the-week-nearly-half-of-all-americans-dont-pay-income-taxes/


Note the short paragraph on "Subjective Probability"
"A CFO’s Guide to Scenario-based Planning Using Econometrics." CFO Journal,  September 4, 2012 ---
http://deloitte.wsj.com/cfo/2012/09/04/a-cfos-guide-to-scenario-based-planning-using-econometrics/

Handling unexpected events, ranging from sudden competitive shifts within an industry to economic and political volatility, is never easy. But some companies seem better equipped to meet such challenges than others. As CFOs have pushed deeper into broader strategic roles for their organizations over the last decade, scenario-based planning has become an important tool that can help organizations adapt quickly to new threats and opportunities.

Going further than traditional forecasting, scenario-based planning is not meant to predict the future, but to make decisions today that take into account alternative ways the future could turn out. At its best, scenario-based planning is a flexible tool that can assist in the development of strategies for operating in any of several contrasting business and economic environments that could lie ahead. Scenarios can be used to develop a wide range of plans, from fundamental changes in strategy caused by global paradigm shifts to tactical contingency planning focused on possible near-term developments.

Business Uncertainties

The starting point is the premise that business uncertainties should be highlighted rather than minimized when a company is defining strategy. “At the corporate level, scenarios can help a company establish an overall frame of reference for its strategic planning processes,” says Dwight Allen, director, Strategy Development, Deloitte LLP. “At the business-unit level, managers can use these scenarios to test and refine their existing strategies. The corporate development group can use the scenarios as input to make limited, expandable investments in assets that would facilitate adaptation to developments that are different from what business units are planning for but which are sufficiently plausible to justify some advance preparation.”

. . .

Distinguishing between Shorter- and Longer-term Initiatives

It can be helpful to group the different applications of scenario-based planning into three tiers:

First Tier: Longer-term macro-scenarios—These high level scenarios are developed to provide context for corporate-level strategic planning. They are “broad brush” and overarching scenarios. While these scenarios are at a higher level, they may be the most important as their input sets the direction and tone for the analysis and planning performed at the business-unit level. They also offer guidance as to what developments the business units may be discounting as they make their decisions on what market conditions to assume as they review and refine their strategies.

Second Tier: Impact of macro-scenarios on business units—After the longer-term scenarios have been developed, the next step is to understand how each would impact the various business segments (units/markets/industries/etc). Competitive strategy will vary and should be tailored based on the intricacies of each business unit and its market. Once the potential impacts of each scenario have been identified and the appropriate strategic responses are defined, each business unit determines what future market conditions it will assume and what strategy it will adopt. In a company with many lines of business, the array of strategies will be correspondingly diverse.

Third Tier: Ongoing, lower-level analyses—Once business units have implemented their strategies, additional, more tactical scenarios and analyses can be developed periodically as new uncertainties emerge. These scenarios help to analyze the significance of the new uncertainties and to experiment with different theories as to what additional developments might be on the way. The idea is not to develop a new strategy but to aid the business unit as it executes the strategy it has adopted.

Leveraging Econometric Models Within Scenario-based Planning

Econometric models can be used to flesh out scenarios with financial data that make the descriptions of future worlds less like science fiction and more grounded in the type of facts and figures executives use when making business decisions. Rather than communicating the characteristics of a scenario only through narrative descriptions, econometric models make it possible to define the specifics of the business environment—for example, stipulating GDP, inflation, IT investment, oil prices and corporate profits. And there is the option of taking the next step and modeling the impact of the scenario on a particular business, showing how it would affect metrics such as revenues, expenses, pricing and capital expenditures. For some management teams a scenario-based planning exercise gains credibility only when the scenarios have been given this quantitative dimension.

Econometric models can be used in a variety of forward-thinking situations. “Models can be developed to illustrate how the conditions prevailing within the longer-term, macro-scenarios used in developing strategic plans would affect selected key market and business indicators,” says Carl Steidtmann, chief economist at Deloitte Research and a director with Deloitte Services LP. “This provides a more detailed, quantitative understanding of a scenario’s impacts than is typically possible when relying solely on a qualitative, narrative description,” he adds. Models can also be developed for shorter-term scenarios when executing the strategy a business has adopted.

Common Challenges When Using Econometric Models

Statistical analysis is not immune to human psychology. As with any process, there are places where error can be introduced when creating and using econometric models using multiple regression. While econometric modeling incorporates more quantitative analysis into scenario-based planning, it is important that the underlying risks being examined in a scenario-based planning model be both accurate and relevant to the organization.

1.  Misinterpreting Correlation

Multiple regression analysis is the cornerstone of econometric modeling. One obstacle to using this technique is that it can be difficult to interpret the relationship between each variable and the resulting behavior. In a linear regression, the output is directly correlated to a single input, but in a multiple regression, the correlation of one input is dependent on all other inputs. For example, it would be relatively easy to assess the direct relationship between, say, investment in information technology (IT) services and a technology company’s revenue. However, most real world econometric models and scenarios encompass multiple leading economic and business indicators. In this more complex model, the impact of IT investment may be very different depending upon the behavior of the other variables, such as GDP or corporate profits. It is important to assess the viability of each indicator within each modeling scenario.

2.  Subjective Probability          

When beginning the process of building a new model, numerous variables should be considered to reach a best-fit design. The challenge can lie in distinguishing between a model that looks sound statistically, and a model that looks sound from a logical business perspective. It helps to have a hypothesis about the variables in question. Regardless of how strong the model appears to be using a given variable, the model will not be reliable if there is not a strong business correlation.

Continuous Monitoring for Changes in the Environment

Once an econometric model is built and the financial impact of each scenario has been established, the business can assess the strategic actions that can be taken. A robust scenario-based planning effort using econometric analysis can enhance the competitive advantage of a business by positioning it to be more nimble and able to adapt to an ever-changing global environment.

Related Resource

Econometric Analysis for Scenario-based Planning

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


Some of the Worst Internal Controls in History
"Fraud Case Spurs Show-Horse Sale," by Mark Peters, The Wall Street Journal, September 10, 2012 ---
http://professional.wsj.com/article/SB10000872396390444772804577623731324455136.html?mod=WSJ_hps_sections_news&mg=reno64-wsj

The show-horse set will descend on this small city this month to bid on the crown jewel of what federal authorities allege to be a massive fraud: Hundreds of top-ranked quarter horses amassed by the former city comptroller accused of stealing tens of millions of dollars from public coffers.

Rita Crundwell, 59 years old, was arrested by federal authorities in April and accused of stealing more than $53 million from this city of 15,700 whose finances she ran since the 1980s.

Federal authorities said the alleged theft took place starting in 1990, and say that Ms. Crundwell, whose salary was around $80,000, also used the allegedly pilfered funds to buy sports cars, a boat, a home in Florida and a $2 million motor home.

Ms. Crundwell has pleaded not guilty to one charge of wire fraud. After her arrest, she was released from federal custody and is scheduled to appear in U.S. District Court in Rockford, Ill., in October. She declined to comment through her lawyers.

Authorities say that Ms. Crundwell used the allegedly stolen funds to furnish a horse ranch that housed nearly 400 quarter horses with names like Have Faith in Money, Jewels by Tiffany, and Secure with Cash.

Ms. Crundwell worked for the city nearly all her life, becoming comptroller in 1983. Over the years, she also became known as a renowned breeder of horses that she bought and sold and showed. The government also is auctioning other of her assets, including the motor home and horse equipment.

Authorities say Ms. Crundwell no longer can afford the $200,000 a month required to care for all the horses.

Ms. Crundwell agreed to the sale, authorities say, which was ordered through a court process. Federal authorities believe that horses were purchased and possibly maintained with funds from the alleged fraud. Money from the auction eventually could go to Dixon as partial restitution, but proceeds will be held in escrow until the case concludes.

Auctioneers said the size of the horse sale by a single owner is rare. A spokesman for the American Quarter Horse Association said the high caliber of the horses also makes it extraordinary.

"In all my years in the business, we've never done anything quite like this," said Mike Jennings, a four-decade veteran of the horse-auction business who the government hired to oversee the Crundwell sale, scheduled to take place on Sept. 23 and 24, and online starting last Friday, though no sales will take place until this week.

More than a thousand bidders, bargain hunters and onlookers are expected to attend the auction. Hotels in Dixon are sold out for the auction weekend, and city officials plan to run buses between downtown and the Crundwell ranch about four miles away.

Ms. Crundwell built her empire on a horse farm here known as the RC Ranch. Her initials are on the peak of the main barn and in mosaic on the tile floor of her trophy room, where hundreds of ribbons and horse statuettes are displayed.

On the walls are poster-size photographs of Ms. Crundwell, often in a white cowboy hat, showing her horses. She excelled in the beauty event known as halter, and holds more world championships than any other amateur owner. Eight years in a row, she was crowned top owner at the world championship show in Oklahoma City.

Ms. Crundwell also was popular with some on the circuit. She sponsored events, rented stalls at shows, and hired trainers and other staff. "For years, people felt they weren't able to compete against Rita and stopped trying," said Amy Gumz, owner of Gumz Farms in western Kentucky.

Ms. Crundwell's exit appears to be sparking new interest in the events she once dominated. That could help fuel demand at the upcoming auction where Mr. Jennings, the auctioneer, said the top horses could fetch hundreds of thousands of dollars.

The quarter horse is the U.S.'s most popular breed, used widely for trail riding, ranching and equestrian events. The breed is also trained to race short distances—its name comes from the quarter-mile that quarter horses typically run. The competitive show world ranges from cowboys riding them to rope cattle, to muscular horses being paraded in a ring and judged on their beauty.

In Dixon, Ms. Crundwell's hometown, many residents remain baffled by her arrest, which came after a colleague filling in while she was on vacation spotted alleged irregularities in the accounts. Dixon Mayor Jim Burke said because of the size and success of her horse operations Dixonites believed Ms. Crundwell's booming horse business financed her lifestyle.

"She carefully cultivated this image of having a successful horse operation," Mr. Burke said.

Dixon officials expect the auction to net several million dollars, which they hope will eventually end up with the city. Mr. Burke would like to use auction proceeds to pay off municipal debt and possibly to give residents rebates on water or other municipal bills.

Continued in article

How true can you get?
As (Commissioner) Bridgeman left office last year, he praised (Controller) Rita Crundwell for being an asset to the city and said she "
looks after every tax dollar as if it were her own," according to meeting minutes.

As quoted by Caleb Newquest on April 27, 2012 ---
http://goingconcern.com/post/heres-ominous-statement-former-dixon-city-finance-commissioner-made-about-accused-embezzler

She was mostly just horsing around
"Somehow the City of Dixon, Illinois Just Noticed (after six years) That $30 Million Was Missing," Going Concern, April 19, 2012 ---
http://goingconcern.com/post/somehow-city-dixon-illinois-just-noticed-30-million-was-missing

Rita Crundwell has been the CFO/comptroller of Dixon, Illinois since the 1980s; a typical tenure for even an unelected Illinois official. In those 30-ish years, it appears that she performed her duties adequately enough, but she was just put on unpaid leave. You see, at some point in 2006, it is alleged that Ms. Crundwell started helping herself to money that belonged to the citizens of Ronald Reagan's boyhood home. Prosecutors allege that this went for the last six years and that Crundwell made off with $30,236,503 (and 51¢). 

Federal agents served warrants and seized contents of her bank accounts, seven trucks and trailers, a $2 million motor home  and a Ford Thunderbird—all of which prosecutors allege were paid for with money taken from city bank accounts by Crundwell. [...] Bank records obtained by the FBI allegedly show Crundwell illegally withdrew $30,236,503 from Dixon accounts since July 2006 , money she used, among other things, to buy a 2009 Liberty Coach Motor home for $2.1 million; a tractor truck for $147,000; a horse trailer for $260,000; and $2.5 million in credit card payments for items that included $340,000 in jewelry.

So a decent haul, but a Ford Thunderbird? Good Christ, spring a bit for the Lincoln Continental at least. Questionable taste in automobiles aside, one can't help but wonder how Dixon - a city with a population of just ~15,000 - could not notice millions of dollars missing. But they did! It's strange because in a city of that size, people gossip about one another's $35 overdraft fees, never mind millions of dollars being spent on multi-million dollar motorhomes. Anyway, Crundwell (who has a thing for horses apparently) had a good thing going, but then made the mistake of taking a little extra vacation: 

[L]ast year she took an additional 12 weeks of unpaid vacation. A city employee substituting for Crundwell examined bank statements and notified the mayor of activity in an account that, according to the complaint, he didn't know existed. Bank records list the primary account holder as the City of Dixon. An entity named RSCDA also is named on the account, with checks written on the account more expansively identifying that second account holder as "R.S.C.D.A., C/O Rita Crundwell."

So basically the city discovere the missing cash by the virtue of dumb luck, which sometimes is what it takes for these things to get uncovered. Better late than, oh whatever... seriously, a Thunderbird?

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

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


More Clever than the Thumb of a Butcher
September 21, 2012 message from Dan Stone

One semester, I used the news story at the end of this post in an accounting systems class. I thought it was a clever, funny example of a failure of accounting controls. As was evident from my student evaluations, many students were not amused. I have since learned that, at least in Kentucky, anything related to sex or body functions -- even if relevant to the class -- must not be spoken about.

Dan Stone

Title: Co-op apologises after shopper is overcharged because store assistant's breasts were resting on the scales

A supermarket customer was over-charged by around £5 while buying fruit and vegetables because the cashier's breasts were resting on the weighing scales.

Bosses at a Jersey branch of Co-operative explained that the mistake occurred because the shop assistant's seat had been too low, causing her to lean on the counter.

Jim Hopley, chief executive of Channel Islands Co-operative, said the money has now been refunded and admitted that he has never seen anything like it in his 40 years of retail experience.

"Bank worker, 24, who stole £46,000 to fund boob job and party lifestyle told police she earned the money working as an escort," by Emma Clark, Daily Mail, September 21, 2012 --- Click Here
http://www.dailymail.co.uk/news/article-2206764/Bank-worker-24-stole-46-000-fund-boob-job-party-lifestyle-told-police-earned-money-working-escort.html?ITO=socialnet-twitter-mailonline

Rachael Martin, who has an eight-year-old son, told police she could afford her lifestyle by working as a 'common prostitute' but later admitted to thefts Underwent complete body overhaul in just weeks, including £4,000 on breast surgery, £1,700 on dental surgery, and liposuction She also spent £670 at exclusive jewellers Tiffany, and £506 on a pair of Jimmy Choo shoes The law graduate was jailed for 52 weeks

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


"Detecting price artificiality and manipulation in futures markets: An application to Amaranth," by Atanu Saha and Hans-Jürgen Petersen, Journal of Derivatives & Hedge Funds (2012) 18, 254–271 ---
http://www.palgrave-journals.com/jdhf/journal/v18/n3/full/jdhf20127a.html

In this article we propose a general method to test whether economic data support the claim of futures market manipulation. We examine the question of whether or not Amaranth manipulated the market for natural gas futures using three alternative methods. The first is our contribution to the existing body of literature on the analysis of manipulation claims. The subsequent two have previously been discussed in the literature. All three methods yield the same result: economic data on futures prices and Amaranth's trades do not support the claim that Amaranth manipulated the natural gas futures market in 2006.

Continued in article

Bob Jensen's threads on how to value interest rate swaps ---
http://www.trinity.edu/rjensen/acct5341/speakers/133swapvalue.htm

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

Especially note the FAS 133 and IAS 39 Glossary at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm
This is more than a glossary.


A Science/English/Logic Lesson for Caleb Newquist
"Anecdotal, Unverifiable Evidence Confirms That Broker-Dealer Audits Are as Bad as You Thought They Were," by Caleb Newquist, Going Concern, September 14, 2012 ---
 http://goingconcern.com/post/anecdotal-unverifiable-evidence-confirms-broker-dealer-audits-are-bad-you-thought-they-were ,

Jensen Comment
Anecdotal, unverifiable evidence never confirms or proves anything. All it takes is a simple wording change to "anecdotal, unverifiable evidence indicates a possibility that . . . "

However, in the above illustration with respect to broker dealer audits we cannot even "suggest that" for all broker-dealer audits.

A better title might read:
"Anecdotal, Unverifiable Evidence Indicates a Possibility That One Broker-Dealer Audit Might Be as Bad as You Thought It Was,"

And even this headline is questionable since the incompetent auditor that sent Caleb the message was only one auditor in a team of auditors where his colleagues may have been much more competent that he was at auditing broker dealers.

Anecdotal evidence at its best refutes absolutes. For example, suppose a CPA review course made a claim that everybody who passes this course will also pass the CPA exam. This absolute statement is open to anecdotal refutation of having just one graduate of the course fail the CPA examination. That would be confirming/refuting anecdotal evidence.

However, the criterion "as bad as you thought they were" is not an absolute statement. Anecdotal evidence cannot confirm this statement.

By the way, absolutes can impossible to refute. For example, if nobody ever passes the CPA review course mentioned above, this absolute becomes impossible to refute.


"Detroit ex-mayor Kwame Kilpatrick turned City Hall into a den of bribes, prosecutor says," by Ed White, Mercury News, September 21, 2012 ---
http://www.mercurynews.com/nation-world/ci_21601773/detroit-ex-mayor-kwame-kilpatrick-turned-city-hall

Former Detroit Mayor Kwame Kilpatrick conspired with his father and best friend to turn City Hall into a den of bribes and kickbacks, a prosecutor said Friday as jurors heard opening statements in Kilpatrick's corruption trial.

Assistant U.S. Attorney Mark Chutkow gave jurors a 40-minute overview of what they'll see and hear in the months ahead. He said Kilpatrick was an enthusiastic rising star in Michigan politics who moved from the state Legislature, then enriched himself with hundreds of thousands of dollars by muscling contractors, fooling political supporters and rigging city business.

"This was not politics as usual," Chutkow said. "This was extortion, bribery, fraud. ... They broke their oath to serve this city. It was the citizens of the city of Detroit who were left holding the short end of the stick."

Kilpatrick -- who quit office in 2008 in an unrelated scandal and eventually served more than a year in prison for a probation violation -- is charged with racketeering conspiracy, extortion, bribery, fraud, false tax returns and tax evasion. His father, Bernard, also is on trial, along with the ex-mayor's best friend, Bobby Ferguson, and former Detroit water boss Victor Mercado.

Chutkow described how Kilpatrick deposited more than $200,000 in cash in his bank account and paid his credit card bills with another $280,000 in cash.

"He no longer lived like the citizens he governed," the prosecutor said, Advertisement noting luxurious travel and custom-made suits.

Continued in article

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


"Emory University to eliminate programs," by Laura Diamond, The Atlanta Journal-Constitution, September 14, 2012 ---
http://www.ajc.com/news/news/local/emory-university-to-eliminate-programs/nSByn/

. . .

Emory will phase out the journalism program, department of visual arts, division of educational studies and department of physical education. Students enrolled in these programs will be able to complete their degrees and tenured faculty will move to other departments.

The university will suspend admissions to Spanish and economics graduate programs so leaders there can redefine the missions, Forman said. Emory also will suspend admissions to the Institute for Liberal Arts so it can be restructured.

The changes will begin at the end of this academic year and finish by the end of the 2016-17 academic year. About 20 staff positions will be cut over the next five years, officials said.

Savings from the changes will be re-invested into existing programs and growing areas, such as neurosciences, contemporary China studies and digital and new media studies, Emory officials said.

Leaders of affected departments sent letters and emails to students.

“These changes represent very difficult choices but I am confident it will lead to a more exciting future for Emory College,” Forman said. “These were fundamental decisions about the size and scope of our mission and how we use our resources to realize our mission of providing a world-class education for our students.”

President Jim Wagner endorsed the plan, saying Forman and others had the “willingness to go back to first principles, look at each department and program afresh, and begin the process of reallocating resources for emerging needs and opportunities.”

The college has shuttered programs before. Emory decided to close the dental school in 1990 and shut down the geology department in 1986.

 

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


Free Book Online --- http://www.nap.edu/openbook.php?record_id=13396&page=1
Research Universities and the Future of America: Ten Breakthrough Actions Vital to Our Nation's Prosperity and Security
---
http://www.nap.edu/catalog.php?record_id=13396

Summary from the Scout Report on September 7, 2012

What is the state of America's universities? That is a vast question, and it was posed to the National Academies by the U.S. Congress. Specifically, Congress asked the National Academies to assess the competitive position of America's research universities over the coming decades. The results of the Academies' findings are in this 227-page report issued in 2012. Visitors to the site can download the entire report, although those looking for something a bit more brief may wish to download the 24-page executive summary. The summary offers some terse advice in the "Ten Strategic Actions" area, including the suggestion that states may wish to provide greater autonomy for public research universities so that these institutions may "leverage local and regional strengths to compete strategically and respond with agility to new opportunities." Some of the other suggestions include improving university productivity and reducing regulatory burdens. [KMG]

To find more high-quality online resources in math and science, visit Scout's sister site: AMSER, the Applied Math and Science Educational Repository at http://amser.org

The National Academies Press
PAPERBACK  $49
ISBN-10: 0-309-25639-9
ISBN-13: 978-0-309-25639-1

Bob Jensen's threads on higher education controversies ---
http://www.nap.edu/catalog.php?record_id=13396

 

Rebooting the Academy (not a free book)
Chronicle of Higher Education
2012
https://www.chronicle-store.com/ProductDetails.aspx?ID=79485&WG=350&cid=rebootWC

Rebooting the Academy: 12 Tech Innovators Who Are Transforming Campuses, tells the stories of a dozen key figures who are changing research, teaching, and the management of colleges in this time of technological change. The e-book features essays by each of the 12 innovators, explaining their visions in their own words and providing more details on their projects, plus The Chronicle’s profiles of them.

Among the highlights: Salman Khan, founder of Khan Academy, riffs on how video lectures can improve teaching; Dan Cohen, of George Mason University’s Center for History and New Media, asks whether Google is good for the study of history; and Jim Groom, an instructional-technology specialist at the University of Mary Washington, argues against the very premise of the collection, noting that the best innovations come from groups, not individual leaders.

You will receive a confirmation email immediately after your Digital Edition order is placed allowing you to download the e-book to any of your preferred reading devices (includes formats for the Kindle, Nook, and iPad).

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


Teaching Case on Dividend Yield, Dividends, Financial Statement Analysis

From The Wall Street Journal Accounting Weekly Review on September 28, 2012

Payout Appreciation
by: Matt Jarzemsky
Sep 18, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Dividend Yield, Dividends, Financial Statement Analysis

SUMMARY: "Since 2006, Hasbro, maker of the Monopoly board game, has tripled its dividend, increasing it annually except in 2009." Investors like Mark Freeman, "chief investment officer of Westwood Holdings Group in Dallas, are seeking companies that typically have rising earnings, relatively low debt levels and large piles of cash. Mr. Freeman also looks for companies whose dividends are low relative to their earnings, a sign there is room for growth [at more than the rate of inflation]."

CLASSROOM APPLICATION: The article is useful to introduce the financial ratios of dividend payout, dividend yield and free cash flow.

QUESTIONS: 
1. (Introductory) Define dividend payout ratio and dividend yield.

2. (Advanced) Do these two ratios measure different things? Explain.

3. (Advanced) According to Paul Stocking, co-manager of Columbia Management's Dividend Opportunity fund, "we have seen the marketplace chasing these high-dividend payers." What will that do to the dividend yield and the dividend payout ratio? Explain your answer.

4. (Advanced) "Cisco Chief Financial Officer Frank Calderoni said last month that the company will return more than half its annual free cash flow to shareholders through dividends and share buybacks." Is the company's dividend payout ratio therefore 50%? Explain your answer and include a definition of free cash flow.
 

Reviewed By: Judy Beckman, University of Rhode Island

"Payout Appreciation," by Matt Jarzemsky, The Wall Street Journal, September 18, 2012 ---
http://professional.wsj.com/article/SB10000872396390443720204578002381992037280.html?mod=djem_jiewr_AC_domainid&mg=reno-wsj

Call them the new growth stocks.

After rushing into dividend stocks of all stripes this year, some investors are homing in on a more select group: stocks of companies that are likely to keep raising their dividends at a fast clip.

It is all part of the chase for better returns on the heels of the Federal Reserve's announcement last week of another round of bond buying aimed to keep interest rates at rock-bottom levels until the economy improves. As yields on the 10-year Treasury wallow at near-record lows and "junk"-bond yields also are sinking, investors are seeking anything that offers some extra income. For months, that meant investors bought shares of nearly any high-dividend-paying company, be it telecommunications companies such as Verizon Communications Inc. VZ +0.37% and AT&T Inc., T -0.24% energy producers such as Sempra Energy and tobacco company Altria Group Inc.  But now that has made many stocks too expensive, some investors said.

Investors like Mark Freeman, chief investment officer of Westwood Holdings Group in Dallas, are seeking companies that typically have rising earnings, relatively low debt levels and large piles of cash. Mr. Freeman also looks for companies whose dividends are low relative to their earnings, a sign there is room for growth. Moreover, many also said they target companies that appear to have a board that has shown a willingness to keep increasing dividend payments.

"All I'm looking for is high-quality companies that have some dividend yield and also the ability to grow that dividend at more than the rate of inflation," said Mr. Freeman, who helps oversee $14 billion across stocks and bonds. Mr. Freeman said he bought shares of PepsiCo Inc., which increased its payout 4.4% in May and 7.3% a year earlier, compared with consumer-price inflation of about 1.7% annually.

A dividend yield measures how much cash an investor gets for each dollar invested and is calculated by dividing the annual dividend by the stock price. The higher the yield, the bigger the payout.

The lure of dividend-appreciation stocks is reflected in indexes and exchange-traded funds. The Vanguard Dividend Appreciation ETF is up 11% this year, compared with a gain of 8.5% for the S&P High-Yield Dividend Aristocrats index.

"In the dividend-yield area, we're seeing valuations that are looking pretty full to us," said Paul Stocking, who co-manages Columbia Management's $4.5 billion Dividend Opportunity fund. "We have been looking for more dividend growth, relative to stable, high-dividend payouts, partly because of this move that we have seen in the marketplace chasing these high-dividend payers."

To be sure, some strategists are cautioning clients that focusing too much on dividends could mean missing out on larger returns, said J.P. Morgan Funds global market strategist Joseph Tanious. That is especially true if the Fed's bond-buying measures help drive up prices of riskier assets such as growth stocks, some of which don't offer dividends, he said.

Mr. Tanious is telling clients to balance their portfolios with stocks tied to global growth.

Other investors keep piling into dividend-appreciation stocks. Capital Advisors, a money-management firm in Tulsa, Okla., with $1.1 billion under management, recently sold shares of Verizon, which has a dividend yield of 4.6%. Instead, the firm bought shares of Hasbro Inc. after the toy maker boosted its payout 20% this year. Hasbro, which offers a 3.7% yield, has increased its dividend at a compound annual rate of 15% for the past five years. Capital Advisors also added shares of Gannett Co. in August after the newspaper publisher doubled its payout.

"It has become more of a stock picker's game, with respect to finding good dividend plays," said Channing Smith, managing director at Capital Advisors. He said opportunities to buy blue-chip stocks with high dividends "have disappeared" over the past year as the valuation of those shares has risen.

Through July, U.S. mutual funds focused on dividend-paying stocks had drawn in $18.63 billion in net cash, while U.S. stock funds have seen a net $29.42 billion in withdrawals, according to data provider EPFR.

PNC Financial Services Group Inc.'s asset-management group bought shares in Cisco Systems Inc.  last year partly because of the potential they saw for the company to raise its dividend, said Bill Stone, chief investment strategist for the group, which oversees $109 billion in assets.

The move paid off when the telecommunications-equipment maker more than doubled the quarterly payout last month, sparking a 9.6% jump in the company's stock price, the biggest daily increase in a year.

Bob Jensen's threads on investment ratios ---
http://www.trinity.edu/rjensen/roi.htm


Teaching Case from The Wall Street Journal Accounting Weekly Review on September 20, 2012

Trial Puts UBS in Spotlight
by: Dana Cimilluca
Sep 15, 2012
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com WSJ Video
 

TOPICS: Internal Controls, Management Controls

SUMMARY: The trial against former UBS trader Kweku Adoboli began on Monday. "The U.K. prosecutors opened their case...by casting the 32-year-old as the lone perpetrator of an illegal scheme that shook the Swiss bank last year." The related video comments on the reputational impact of the $2.3 billion trading loss generated by one "desk" being indicative of insufficient internal controls. "Mr. Adoboli sat on a desk trading exchange traded funds...his fraudulent activity began in 2008 when he suffered a $400,000 loss on a legitimate trade and subsequently booked a false trade to hide it."

CLASSROOM APPLICATION: The article may be used to discuss internal control and material weaknesses, fraudulent accounting and reporting, and ethics.

QUESTIONS: 
1. (Introductory) For how long did Mr. Kweku Adoboli book false trades to cover losses he did not want exposed? What was his apparent reason for these actions?

2. (Introductory) How was Mr. Adoboli able to avoid detection of his false accounting? In your answer, define the term "umbrella" account.

3. (Advanced) Identify one internal control that should catch false entries such as those made by Mr. Adoboli.

4. (Advanced) What was the impact on the UBS AG stock price when the scandal about Mr. Adoboli broke in 2011? Does this reaction merely reflect the losses incurred by Mr. Adoboli or something more? Explain.
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
UBS: Rogue Trader Hit Firm
by Deborah Ball, Paul Sonne and Carrick Mollenkamp
Sep 16, 2011
Page: A1

"Trial Puts UBS in Spotlight," by Dana Cimilluca, The Wall Street Journal, September 15, 2012 ---
http://professional.wsj.com/article/SB10000872396390444023704577651410986775918.html?mod=djem_jiewr_AC_domainid&mg=reno-wsj

U.K. prosecutors opened their case in the trial of Kweku Adoboli, the former UBS AG trader accused of a $2.3 billion fraud, by casting the 32-year-old as the lone perpetrator of an illegal scheme that shook the Swiss bank last year.

One year to the day after the scandal began to erupt, Mr. Adoboli sat in a packed London courtroom as Sasha Wass of the Crown Prosecution Service depicted him as a reckless and greedy fraudster bent on boosting "his bonus, his status, his job prospects and his ego."

The defense didn't provide any indication of its arguments in court, but Ms. Wass said Mr. Adoboli will claim that three of his colleagues on his trading desk were aware of his illegal activity before it surfaced.

Mr. Adoboli, who faces two counts each of false accounting and fraud, has pleaded not guilty. If convicted, he faces up to 10 years in jail on each fraud charge and seven years on each accounting charge. He is currently free on bail.

For UBS, the trial could shed an uncomfortable light on how a relatively junior trader could have caused the largest unauthorized trading loss in U.K. history, despite the giant bank's sophisticated risk controls.

The case comes on the heels of a series of scandals across the financial sector that have inflamed public opinion, particularly in Europe.

Beginning in 2006, Mr. Adoboli sat on a desk at UBS focused on trading exchange-traded funds, which are mutual-fund-like investments, often tied to well-known indexes like the Standard & Poor's 500-share index, but which trade on exchanges throughout the day. According to prosecutors, Mr. Adoboli's fraudulent activity began in 2008, when he suffered a $400,000 loss on a legitimate trade, and subsequently booked a false trade to hide it.

He was able to hide his unauthorized trades for years, using hundreds or thousands of fake accounting entries and so-called "umbrella" accounts where he stowed funds, until market turmoil last summer caused his losses to balloon and ultimately tripped internal compliance alarms, according to the picture painted by the prosecution.

The unauthorized trades eventually cost the bank $2.3 billion.

The contours of the positions that the prosecution and defense will likely stake out in the eight-week trial began to come into focus on the first day of the proceedings. The prosecution will begin calling witnesses on Monday, starting with an expert on bank trading.

Ms. Wass, the prosecutor, argued that Mr. Adoboli acted alone, apparently trying to pre-empt an argument that others knew of his illegal actions.

She repeatedly read from a lengthy email Mr. Adoboli allegedly sent to colleagues on Sept. 14, 2011, the day before UBS disclosed the unauthorized trading loss. In that email, he allegedly said: "It is with great stress that I write this mail. First of all the ETF trades that you see on the ledger are not trades that I have done with a counterparty as I previously described."

The prosecution played recordings of conversations between Mr. Adoboli and colleagues who quizzed him on his trades in August and September of last year, in which the former trader attempts to explain them.

Mr. Adoboli, dressed in a grey suit, white shirt and maroon patterned tie, sat impassively as Ms. Wass laid out the prosecution's case, at times playing with a pen and at others conferring with his lawyer.

The prosecution depicted an ambitious young banker who started out in UBS's so-called "back office" processing trades, and later moved to the more lucrative and prestigious trading floor, using knowledge he gained from his prior job to obfuscate his alleged illegal activity. He went from earning £40,500 ($65,788) in salary and bonus in 2005 to £360,000 in 2010, which included a £250,000 bonus that prosecutors said was boosted by his illegally inflated results.

"Like most gamblers, he believed he had the magic touch. Like most gamblers, when he lost, he caused chaos and disaster to himself and all of those around him," Ms. Wass said.

The trading loss proved devastating for UBS. The bank was already under pressure because of a massive credit loss it suffered at the height of the financial crisis that resulted in the need for government aid as well as from persistently weak business conditions in the securities industry since then.

The scandal initially knocked 10% off the bank's already beleaguered stock, ate into its bonus pool and forced the resignation of its chief executive, Oswald Grübel.

Continued in article

 

"Ex-UBS Trader Kweku Adoboli’s E-Mail to Accountant: Full Text," by Edward Robinson, Bloomberg, September 14, 2012 ---
http://www.bloomberg.com/news/2012-09-14/ex-ubs-trader-kweku-adoboli-s-e-mail-to-accountant-full-text.html

Below is the text of an e-mail former UBS AG (UBSN) trader Kweku Adoboli sent to bank accountant William Steward on Sept. 14, 2011, describing how he accrued trading losses.

The e-mail was read out by prosecutor Sasha Wass at Adoboli’s fraud trial in London today.

The subject line for the e-mail, sent from Adoboli’s home e-mail account, was: “An explanation of my trades.”

Dear Will,

It is with great stress that I write this mail. First of all the ETF (Exchange Traded Funds) trades that you see on the ledger are not trades that I have done with a counterparty as I previously described.

I used the bookings as a way to suppress the PnL losses that I have accrued through off-book trades that I made. Those trades were previously profit making, became loss making as the market sold off aggressively though the aggressive sell-off days of July and early August.

Initially, I had been short futures through June and those lost money when the first Greek confidence vote went through in mid-June. In order to try and make the money back I flipped the trade long through the rally.

Although I had a couple of opportunities to unwind the long trade for a negligible loss, I did not move quickly enough for the market weakness on the back of the first back macro data and then an escalation Eurozone crisis cost me the losses you will see when the ETF bookings are cancelled. The aim had been to try and make the money back before the September expiry date came through but I clearly failed.

These are still live trades on the book that will need to be unwound. Namely a short position in DAX futures [which had been rolled to December expiry] and a short position in S and P 500 futures that are due to expire on Friday.

I have now left the office for the sake of discretion. I will need to come back in to discuss the positions and explain face to face, but for reasons that are obvious, I did not think it wise to stay on the desk this afternoon.

I will expect that questions will be asked as to why nobody else was aware of these trades. The reality is that I have always maintained that these were EFP trades to the member of my team, BUC, trade support and John Di Bacco (Adoboli’s manager).

I take full responsibility for my actions and the stilt storm that will now ensue. I am deeply sorry to have left this mess for everyone and to have put my bank and my colleagues at risk.

Thanks,
Kweku.

Jensen Comment
Derivatives trading is not a St. Petersburg Paradox Game ---
http://en.wikipedia.org/wiki/St._Petersburg_paradox

Bob Jensen's Timeline on Derivative Financial Instruments Scandals ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds


Teaching Case on Lean Accounting (accounting for lean manufacturing)
The only things fat on a new Harley are the riders

From The Wall Street Journal Accounting Weekly Review on September 28, 2012

Harley Goes Lean to Build Hogs
by: James R. Hagerty
Sep 22, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Cost Management, Cost-Volume-Profit Analysis, Fixed Costs, Variable Costs

SUMMARY: Harley-Davidson Inc. has implemented lean and flexible manufacturing procedures. According to the related video, the company can now produce as many vehicles as it always has with half the workforce it once employed. Manufacturing improvements came from automation but also from better organization and improved flexibility of worker abilities.

CLASSROOM APPLICATION: The article is useful in a managerial or cost accounting course to cover lean manufacturing, fixed and variable costs, C-V-P or breakeven analysis, and operating leverage.

QUESTIONS: 
1. (Advanced) Define the terms lean manufacturing, fixed costs, variable costs, cost-volume-profit analysis, break-even analysis and operating leverage.

2. (Advanced) By better organizing the Harley-Davidson operations out of 41 buildings and into one location, do you think the company reduced fixed costs, variable costs, or both? Explain.

3. (Introductory) Traditionally, companies requiring significant investment in production costs, such as automobile and motorcycle manufacturers, face deep plunges in profits when demand falls off, such as it did during the 2009 recession. Why does this profit plunge occur? Identify how the related graphic entitled "Higher on the Hog" shows this phenomenon.

4. (Introductory) How have the improvements in production at Harley made it more likely for the company "...to perform... and remain... profitable no matter what the business environment is"?

5. (Advanced) Refer to your definitions in answer to question one. How did the changes at Harley affect operating leverage and the company's break-even point? Explain how operating leverage and cost-volume-profit analysis can be used to assess the answers you gave to questions three and four.

6. (Introductory) What is operating profit margin? How have the company's improvements affected this measure?
 

Reviewed By: Judy Beckman, University of Rhode Island

"Harley Goes Lean to Build Hogs," by James R. Hagerty, The Wall Street Journal, September 22, 2012 ---
http://professional.wsj.com/article/SB10000872396390443720204578004164199848452.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

If the global economy slips into a deep slump, American manufacturers including motorcycle maker Harley-Davidson Inc. that have embraced flexible production face less risk of veering into a ditch.

Until recently, the company's sprawling factory here had a lack of automation that made it an industrial museum. Now, production that once was scattered among 41 buildings is consolidated into one brightly lighted facility where robots do more heavy lifting. The number of hourly workers, about 1,000, is half the level of three years ago and more than 100 of those workers are "casual" employees who come and go as needed.

This revamping has allowed Harley to quickly increase or cut production in response to shifting demand. "This is a big bang transformation," said Ed Magee, a Louisiana-born ex-Marine officer who runs the York plant, one of the Milwaukee-based company's three big U.S. production facilities.

The efficiency gains mean Harley should be able to raise its operating profit margin for the motorcycle business [excluding financing operations] to nearly 16% this year from 12.5% in 2009, said Craig Kennison, an analyst at Robert W. Baird & Co. in Chicago. Harley no longer needs peak production levels to achieve strong profits, he said.

Overall, U.S. manufacturers generally are in better shape after slimming down and rethinking sloppy practices during the brutal 2008-09 recession. Total profits at domestic manufacturing companies, which were running at an annual rate of $363 billion in this year's first quarter, are up from $290 billion, five years ago, before the recession, according to government data.

Companies often say they learned the lessons of the past, only to get blindsided by some unexpected twist in the economic cycle. But companies generally are in much stronger financial shape than they were a few years ago. "There is a focus on performance and remaining profitable no matter what the business environment is," said Daniel Meckstroth, chief economist at the Manufacturers Alliance for Productivity and Innovation, an economic research group in Arlington, Va.

Like Harley and others, Caterpillar Inc., a maker of construction machinery, now relies more on "flexible" workers, including part-timers and people working for outside contractors. Caterpillar generally doesn't have to pay severance costs when it lets such workers go during slow periods. Flexible workers accounted for about 16% of its global workforce as of June 30, up from 11% at the end of 2009, when many of those workers were cut because of slumping orders.

Harley got more serious about cutting costs when Keith Wandell became chief executive in 2009 amid a severe slump in motorcycle sales. On his first visit to the York plant, Mr. Magee recalled, Mr. Wandell declared the layout and working methods unsustainable. Harley began scouting sites for new plant to replace York and settled on Shelbyville, Ky. The company notified the International Association of Machinists and Aerospace Workers, or IAM, which represents York workers, that the plant would close and move to Kentucky unless they approved a new contract giving Harley more control over costs. Union members voted overwhelmingly to make concessions, and Harley stayed in York.

Instead of 62 job classifications, the plant now has five, meaning workers have a wider variety of skills and can go where needed. A 136-page labor contract has been replaced by a 58-page document.

Kim Avila, 49 years old, who has worked here for more than 17 years, said she saw the concessions as the only chance to preserve jobs. The pace of work is faster now, but she said managers and workers have more mutual respect and work together more smoothly. In the paint department, where she works, people used to do the same chore all day but now rotate through several tasks to avoid body strain and boredom. They are encouraged to fix some minor flaws in the finish themselves rather than kicking them to another department.

Some items formerly made in York, such as brackets and screws, come from outside suppliers. Production fluctuates depending on day-to-day sales, so the company doesn't have to stock up well ahead of the spring peak-selling period and guess which models and colors will be popular.

Similar changes are in the works at Harley plants in Kansas City, Mo., and near Milwaukee, Wis. In all, the restructuring will cut costs of doing business this year by at least $275 million, Harley estimates. "They've done a phenomenal job in reducing costs," said James Hardiman, an analyst at Longbow Research in Cleveland, who nonetheless has a neutral rating on the stock, due partly to uncertain demand.

The transformation has been trying at times. Harley's Mr. Magee likened it to having "open-heart surgery as we were running the marathon" in that Harley had to maintain production in York as it rebuilt the plant. New software installed recently to guide production temporarily left the plant "constipated," one manager confided.

Continued in article

Jensen Comment
I think many managerial accounting instructors have been too slow in upgrading their syllabi to include lean accounting beyond just JIT modules. A good reference for lean accounting is provided by our AECM friend Jim Martin ---
http://maaw.info/JITMain.htm

Teaching Case
From The Wall Street Journal Accounting Weekly Review on September 16, 2011

With New Technology, Start-Ups Go Lean
by: Angus Loten
Sep 15, 2011
Click here to view the full article on WSJ.com
 

TOPICS: Accounting, Public Accounting

SUMMARY: So often it is said that, regardless of economic cycles, accounting services are always needed. This article makes it clear that the nature of those services may be changing: one small start up firm's founder, Sam Rogoway of Near Networks, argues that "tasks that used to require extra workers can now be done online. 'You don't need an IT person or an accountant,' Mr. Rogoway says."

CLASSROOM APPLICATION: The questions focus students' thoughts on the implications of the article for their professional development as accountants if they want to work with small businesses or build a private accounting practice.

QUESTIONS: 
1. (Introductory) What proportion of new job creation comes from start-up firms in the U.S. economy? What has happened to the number of those new jobs since 2008?

2. (Introductory) According to the author and sources for this article, what types of jobs do small businesses now do without?

3. (Advanced) What are the implications of this article for the services you can provide if you are an accountant wanting to work with small businesses or to build a private accounting practice?

4. (Advanced) What are the implications of this article for the skills you must develop and continually improve as a professional accountant?
 

Reviewed By: Judy Beckman, University of Rhode Island

"With New Technology, Start-Ups Go Lean," by: Angus Loten, The Wall Street Journal, September 15, 2011 ---
http://online.wsj.com/article/SB10001424053111903927204576570622331620408.html?KEYWORDS=With+New+Technology+Start-Ups+Go+Lean

New businesses are getting off the ground with nearly half as many workers as they did a decade ago, as the spread of online tools and other resources enables start-ups to do more with less.
The change, which began before the recession, may be permanent, according to some analysts. 

"There's something long-term at work here," says Dane Stangler, research director at Ewing Marion Kauffman Foundation, a Kansas City, Mo., research group.

Start-ups are now being launched with an average of 4.9 employees, down from 7.5 in the 1990s, according to a recent Kauffman Foundation study. In 2009, new independent businesses created a total of 2.3 million jobs, more than 700,000 fewer jobs than the annual average through 2008, the study found.

Meanwhile, the overall number of start-ups has "held steady or even edged up since the recession," according to the study.

Led by start-ups, small employers have generated 65% of net new jobs over the past 17 years, says the Small Business Administration. As such, steady declines in start-up size, which stretch back more than a decade, could explain the slow labor market recovery following the previous recession in 2001, as well as today, according to Brian Headd, an economist at the SBA's Office of Advocacy.

"This is a significant change and not necessarily tied to business cycles," says Mr. Headd.

Rather than purchasing the tools and manpower needed to run their companies, more small firms are renting, sharing or outsourcing resources, typically through online services, according to Steve King, a partner at Emergent Research, a research and consulting firm for small businesses.

By tapping into Web-based business tools, Sam Rogoway earlier this month launched Near Networks, a nationwide video production firm, with only four employees. An entrepreneur based in Santa Monica, Calif., Mr. Rogoway says tasks that used to require extra workers can now be done online.

"You don't need an IT person or an accountant. It's become so streamlined and user-friendly," Mr. Rogoway says. "We all wore different hats and collaborated on everything."

Last year, Gil Harel launched BiteHunter, a search engine for restaurant discounts, with just three employees. Based in New York, the site used shared screens and other communications tools to work with developers in Russia, Uruguay and Israel.

"Just to build the infrastructure to get a business off the ground used to take a lot of money and people. But things that you couldn't do in the past, you can no w do on your own," Mr. Harel says.

Most small companies now buy supplies, pay bills and manage payroll on Web-based services, according to the National Small Business Association, a Washington, D.C.-based lobbying group.

A recent survey of more than 500 small firms by Zoomerang, an online polling firm based in San Francisco, found a small but growing number are using shared, network-based applications—or so-called cloud computing—for everything from data storage and email, to customer service, mobile commerce, and finance and administration.

Evan Saks, the founder of online mattress maker Create-a-Mattress, says manufacturing technology that ties orders to production—known as just-in-time manufacturing—and Web-based tools have done away with the need for inventory managers or warehouse staff, among other workers.

Continued in article

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


Short-Term Memory (including chunking) --- http://en.wikipedia.org/wiki/Short-term_memory

"The Science of “Chunking:  Working Memory, and How Pattern Recognition Fuels Creativity," by Maria Popova, Brain Pickings, September 4, 2012 ---
Click Here
http://www.brainpickings.org/index.php/2012/09/04/the-ravenous-brain-daniel-bor/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+brainpickings%2Frss+%28Brain+Pickings%29&utm_content=Google+Reader

It seems to be the season for fascinating meditations on consciousness, exploring such questions as what happens while we sleep, how complex cognition evolved, and why the world exists. Joining them and prior explorations of what it means to be human is The Ravenous Brain: How the New Science of Consciousness Explains Our Insatiable Search for Meaning (public library) by Cambridge neuroscientist Daniel Bor in which, among other things, he sheds light on how our species’ penchant for pattern-recognition is essential to consciousness and our entire experience of life.

The process of combining more primitive pieces of information to create something more meaningful is a crucial aspect both of learning and of consciousness and is one of the defining features of human experience. Once we have reached adulthood, we have decades of intensive learning behind us, where the discovery of thousands of useful combinations of features, as well as combinations of combinations and so on, has collectively generated an amazingly rich, hierarchical model of the world. Inside us is also written a multitude of mini strategies about how to direct our attention in order to maximize further learning. We can allow our attention to roam anywhere around us and glean interesting new clues about any facet of our local environment, to compare and potentially add to our extensive internal model.

Much of this capacity relies on our working memory — the temporary storage that holds these primitive pieces of information in order to make them available for further processing — and yet what’s most striking about our ability to build such an “amazingly rich” model of the world is that the limit of our working memory is hardly different from that of a monkey, even though the monkey’s brain is roughly one-fifteenth the size of ours: Experiment after experiment has shown that, on average, the human brain can hold 4 different items in its working memory, compared to 3 or 4 for the monkey.

What makes the difference, Bor argues, is a concept called chunking, which allows us to hack the limits of our working memory — a kind of cognitive compression mechanism wherein we parse information into chunks that are more memorable and easier to process than the seemingly random bits of which they’re composed. Bor explains:

In terms of grand purpose, chunking can be seen as a similar mechanism to attention: Both processes are concerned with compressing an unwieldy dataset into those small nuggets of meaning that are particularly salient. But while chunking is a marvelous complement to attention, chunking diverges from its counterpart in focusing on the compression of conscious data according to its inherent structure or the way it relates to our preexisting memories.

To illustrate the power of chunking, Bor gives an astounding example of how one man was able to use this mental mechanism in greatly expanding the capacity of his working memory. The man, an undergraduate volunteer in a psychology experiment with an average IQ and memory capacity, took part in a simple experiment, in which the researchers read to him a sequence of random digits and asked him to say the digits back in the order he’d heard them. If he was correct, the next trial sequence would be one digit longer; if incorrect, one digit shorter. This standard test for verbal working memory had one twist — it took place over two years, where the young man did this task for an hour a day four days a week.

Continued in article

Bob Jensen's threads on metacognition are at
http://www.trinity.edu/rjensen/265wp.htm


Metacognition in Learning

To my knowledge, Bob Jensen is the first author to discuss the importance of metacognition in learning.
That paper focuses on the metacognitive advantages of self-learning (with blood, sweat, and tears) over memorizing answers given out by teachers.
"Metacognitive Concerns in Designs and Evaluations of Computer Aided Education and Training: Are We Misleading Ourselves About Measures of Success?"
http://www.trinity.edu/rjensen/265wp.htm

 

Now we have a second paper on he importance of metacognition in learning
The paper below focuses on the metacognitive mindset
"Accounting Students' Metacognition: The Association of Performance, Calibration Error, and Mindset," by Susan P. Ravenscroft, Tammy R. Waymire, and Timothy D. West, Issues in Accounting Education, Vol. 27, No. 3, August 2012, pp. 707-732 (not free) ---
http://aaajournals.org/doi/full/10.2308/iace-50148

In recognition of the evolving body of knowledge in the accounting profession, the American Institute of Certified Public Accountants (AICPA 2010) highlights the importance of viewing learning as a lifelong process that requires self-awareness and extends beyond the academic setting. Metacognition, the assessment and regulation of one's own learning, is a crucial element in lifelong learning. We draw upon judgment of learning research and introduce mindset theory to explore the relationship among (1) exam performance, (2) calibration error, measured as expected minus actual exam scores, and (3) mindset, a person's basic beliefs about learning and ability (Dweck 2000, 2006) in the accounting classroom. We find strong evidence that exam performance is inversely related to calibration error (Kruger and Dunning 1999). We also find modest evidence that a growth mindset is associated with improved performance and decreased calibration error. While the mindset results were not entirely consistent with prior research in educational psychology, we explore possible reasons and future directions for accounting education research.

. . .

DISCUSSION Limitations

Our sample consisted of students taught by a single instructor at a single institution who took an elective governmental and nonprofit accounting course during one of three semesters. This course is typically viewed as difficult and as needed for the CPA examination. While this could restrict the generalizability of the results, we do not believe that it does so seriously. We are aware of no research findings indicating that judgments of learning or mindsets differ across social demographics. Instead, the findings on which we relied are found across broad categories of groups. However, to establish generalizability, we hope to use multiple institutions, instructors, and courses in future research.

Another limitation is the restriction of range that we found in the independent variable of mindset. Dweck and Molden (2005) note that when they assess children or adults, they find that about 40 percent endorse the fixed view of mindset, another 40 percent endorse the growth view, and about 20 percent are undecided. Given that a majority of the subjects were categorized as having a growth mindset, the likelihood of seeing a significant relationship was decreased. Because we did not manipulate this variable, we could not create a full range of mindsets for our analysis. Moreover, we have a restricted range of performance. Students taking the governmental and nonprofit accounting course have all succeeded in a competitive accounting program, with average GPAs above that required for remaining the program. Both of these restrictions bias against finding statistically significant relationships, and we believe that the results can, therefore, still be of benefit to a broad range of accounting educators. Discussion of Results

The initial goal of this study was to better understand why accounting students sometimes lack self-awareness about their own abilities and skills, and to explore factors that may assist accounting educators. The study's results point to three implications for accounting educators. First, consistent with Kruger and Dunning (1999), we found that students who overestimate their abilities likely do so because they lack the technical knowledge to evaluate their own performance, as evidenced by lower performance. We also found, in the first two exams, evidence of a magnitude effect that suggests that high-performing students calibrate more accurately than low-performing students do, expressed in absolute terms. This may affirm observations by accounting faculty and help them in assisting students with their self-regulated learning and self-insight.

Second, in exploring the average calibration errors of high- and low-performing students, we found that low-performing students tend to improve their calibration accuracy, while high-performing students tend to become increasingly underconfident relative to their performance. These results demonstrate the concerns that accounting educators may have for both low performers and high performers. Low performers' lack the self-awareness of their technical skills to accurately calibrate their own performance, and this may cause them to continue to underperform. High performers fail to recognize their strong technical skills and may become overly critical of their own performance.

Third, in exploring the role of mindset regarding an individual's approach to learning and response to failure, we predicted that students with a growth mindset (i.e., those who were motivated by learning, resilient, and focused on learning from feedback) would demonstrate higher exam performance, improvement in performance, lower calibration error, and improvement in their calibration. We find modest evidence supporting these predictions. Mindset was significantly associated with performance on only one of three exams, and improvement from Exam 1 to Exam 2. Mindset was not associated with level of calibration error, but was associated with improvement in calibration from Exam 1 to Exam 2 and from Exam 1 to Exam 3. We expected growth mindset to be more consistently associated with the level of, and improvements in, calibration error; however, we believe that the short, one-semester timeline may make it more difficult to capture the impact of mindset. Furthermore, we present evidence that the final exam (Exam 3) may reflect unique resource allocation decisions on the part of students that may affect both the performance and calibration error results. Although inconsistent, the results provide some modest evidence that encouraging a growth mindset may offer benefits to students in improving their performance and calibration accuracy.

Mindset theory originated as a way to explain why students have differing goals and reactions to failure (Dweck and Leggett 1988), but as the research in this area has continued, the significance and implications of mindset have grown. For instance, more recent work implies that mindsets—although malleable experimentally—represent a fundamental view of the world, quoting Piaget to the effect that worldviews of children “can be as important to their functioning as the logical reasoning he studied for much of his career,” (Molden and Dweck 2006, 200). Molden and Dweck (2006) survey research showing that mindset plays a role in many behaviors, including goal setting, attributions, strategies, grades, perceptions of others, responses to stereotypes, self-esteem, and self-regulatory strategies.

In our setting, senior-level and graduate accounting students who have met stringent admissions criteria and who are very grade-conscious may hold strong achievement goals. The connection between mindset and performance may be altered in the presence of strongly held achievement goals (grade-based as opposed to learning-based). Dweck and other researchers (e.g., Dweck and Leggett 1988; Shunk 1995) observe that the positive effect of mindset on achievement can be overridden by the effect of goals. Shunk (1995, 317) discusses the interaction of goals and mindset, and notes that sometimes “success-oriented persons who perform poorly on one occasion will work harder and improve their performance on another.” The integration of the goals literature may, therefore, be helpful in future exploration of the role of mindset in the accounting education setting and extending the results presented in this study. Furthermore, because research suggests that business students generally approach studying in a more superficial way than non-business students (Arum and Roska 2011), future research studies could be conducted across academic disciplines, preferably including students in and outside the college of business to make comparisons among groups.

In sum, our study presents evidence of an inverse relationship between performance and calibration error in an accounting education setting, and offers an initial step in understanding the role mindset plays in metacognitive self-awareness of accounting students. Although this research represents an early effort to introduce mindset concepts within the accounting education literature, our results and the underlying research suggest that faculty could introduce the concept of mindset to students, which could be particularly useful for those students with fixed mindsets. Introducing the concept of a growth mindset leads naturally into a discussion of the effort that is necessary for deep learning, and could motivate a discussion with student involvement about the students' study approaches and preparation for tests. Finally, recent research (Anseel et al. 2009) suggests that the beneficial effects of faculty feedback to students can be amplified if students are appropriately guided to reflect on their performance. Mindset, in conjunction with feedback, offers promise as a way to encourage learning and self-awareness.

Bob Jensen's threads on asynchronous versus synchronous learning ---
http://www.trinity.edu/rjensen/255wp.htm


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

History of Money and Debt --- http://en.wikipedia.org/wiki/History_of_money

Debt (booked by accountants) versus Entitlements (promises made that are not yet booked) ---
http://en.wikipedia.org/wiki/Entitlement

"We've Always Been Deadbeats:  Debt is not a new American way," by Scott Reynolds Nelson, Chronicle of Higher Education, September 10, 2012 ---
http://chronicle.com/article/Borrowed-Dreams/134146/

My father was a repo man. He did not look the part, which made him all the more effective. He alternately wore a long mustache or a shaggy beard and owned bell-bottoms in black, blue, and cherry red. His imitation-silk shirts were festooned with city maps, cartoon characters, or sailing ships. Dad sang in the car, at the top of his lungs, mostly obscure show tunes. His white Dodge Dart had Mach 1 racing stripes that he had lifted from a souped-up Ford Mustang. The "deadbeats" saw him coming, that's for sure, but they did not understand his profession until he walked into their homes and took away their televisions.

Dad worked for Woolco, a company that lent appliances on an installment plan. When borrowers failed to pay, ignored the letters and phone calls, my father would come by. He often posed as a meter reader or someone with a broken-down car. If he saw a random object lying abandoned in the yard, he would pick it up and bring it to the door as if he were returning it. He was warm and funny, charming, but pushy. He did not carry a gun, but he was fearless under pressure and impervious to verbal abuse. If the door opened, he was inside; if he was inside, he shortly had his hands on the appliance; the rest was bookkeeping.

. . .

In each case, lenders had created complex financial instruments to protect themselves from defaulters like the ones I watched from the car. And in each case, the very complexity of the chain of institutions linking borrowers and lenders made it impossible for those lenders to distinguish good loans from bad.

In 1837, for example, banks in the north of England discovered that the unpaid "cotton bills of exchange" in their vaults made them the indirect owners of slaves in Mississippi. In 2007, shareholders in DBS, the largest bank in Singapore, found themselves part owners of homes facing foreclosure in California, Florida, and Nevada. In both cases, efficient foreclosure proved impossible.

In those crashes in America's past, perhaps a repo man in a Dodge Dart with a million gallons of gas could have visited every debtor, edged his way in, and decided who was good for it. (My dad did accept cash or money orders for Woolco's goods.) But big lenders have neither the time nor the capacity to act with the diligence of a repo man. Instead, such lenders (let's agree to call them all banks) try to unload debts, hide from their own creditors, go into bankruptcy, and call on state and federal institutions for relief. Banks have also routinely overestimated the collateral—the underlying asset—for the loans they hold. When those debts go unpaid or appear unpayable, banks quickly withdraw lending; the teller's window slams shut. A crisis on Wall Street becomes a crisis on Main Street. Money is tight. Loans are impossible: Crash.

***

Scholarship on these financial downturns has its own long and checkered past.

From the 1880s to the 1950s, scholars told the history of the nation's economic downturns as the history of banks. Such an approach was not entirely wrong, but it tended to focus on big personalities like J.P. Morgan or New York institutions; it tended to ignore the farmers, artisans, slaveholders, and shopkeepers whose borrowing had fed the booms and busts.

Then, in the 1960s and 1970s, the so-called new economic historians (or cliometricians) came along with a different story. Using state and federal data, they tried to build mathematical models of the nation's financial health. Moving beyond banks, they emphasized what they termed the "real economy," by which they meant measurable indices of growth and profit. Taking the nation's health like a simple temperature reading, they used gross domestic product, gross income, or collective return on investment. Of course, none of those figures had been measured directly before the 1930s, and so the prognoses tended to vary widely.

Such economic models of financial health, however scientific they looked, tended to be abstract representations of an economy that was, in fact, more complex and more interconnected than they pictured. The models, for example, often assumed that old banks were like modern banks, sharing common accounting principles, or that because banks first issued credit cards in the 1960s, they offered no consumer credit before then. Drilling into historical documents for seemingly relevant numbers, then plugging those numbers into a model of a world they understood rather than the economy they sought to describe, the cliometricians often produced ahistorical work. Hence, one economic historian assumed that American barrels of flour sent to New Orleans were consumed in the South, though most were bound for re-export to the Caribbean. Another calculated that railroads played little role in America's economic booms by modeling a scenario in which canals could have (somehow) crossed the arid plains into the Sierra Nevada mountains.

Bear in mind, that same kind of intellectual hubris about models of economic behavior had awful effects in the recent past. Around 2000, Barclays Bank borrowed a simple diffusion model from physics (called the "Gaussian copula function") to suggest that foreclosures would have a relatively small effect on nearby property values. Economists tested it with two years of foreclosure and price data and agreed. Billions of investment in real-estate followed, often in indirect markets like real-estate derivatives and collateralized debt obligations. By 2008 the model proved shockingly inaccurate.

If some historians focused on the temperature of the "real economy," economists were becoming obsessed with the money supply as the single factor explaining most American panics. Again, a certain kind of blindness to the history of debt and deadbeats ensued. The most important book here was Milton Friedman and Anna Jacobson Schwartz's seminal A Monetary History of the United States, 1867-1960 (1963). It urged economists to steer away from stories of speculation spun out by Keynesians like John Kenneth Galbraith.

How, according to Friedman and Schwartz, can we separate speculation and investment? All loans are risky. The riskier they are, the higher the return. Some investments will fail. Markets need to clear, and those buyers who come along to sweep up bargains are not ruthless profiteers but simply maximizers who make markets work. Thus, the pair steered economists away from problems of risk and toward the problems of state intervention. They were the prophets of financial deregulation.

Their story about past financial panics had the advantage of suggesting simple solutions: Use the Federal Reserve to inflate or deflate the currency. For them, financial crises were mostly monetary. Thus, the 1929 downturn started with a financial shock and then was prolonged by an overly tight monetary policy. After A Monetary History became gospel, economics textbooks dropped their numerous chapters on financial panics because the policy solution became so clear; economists trained after 1965 know little about financial downturns before the Great Depression.

Yet a tripling of the money supply has still not fully pulled the United States and the rest of the world out of our current financial crisis—suggesting that our problems, and all the previous ones, were not just monetary. My dad would have pointed out that economists have misunderstood the problem. Crises are mostly about productive assets—the promises in his trunk.

Social historians (and I count myself among them) tell a very different story about financial panics, but we have our own blind spots. Since the late 1960s, we have often discussed the American economy as if farmers were coherent families of self-sufficient yeomen surprised by the market economy. That story of a sudden revolution misses the early and intimate relationship between Americans and credit. It overlooks how American stores provided consumer credit to farmers, plantations owners, and renters who settled the West.

Thus, American social historians have used the term "market revolution" to describe the period after the 1819 panic. Accordingly market forces rushed in as repo men like my dad became vanguards of a new capitalist order. The financial jeremiads of Jacksonian Democrats of the 1820s and 30s against bankers and paper money became the natural outgrowth of frontier farmers' anger at a capitalism they had never seen before. But the store system of Andrew Jackson's day borrowed practices from the colonial store system that goes back to the 17th century, if not earlier. It was how the fur-trading and East and West India companies prospered. John Jacob Astor and Andrew Jackson were cut from the same cloth. They made their fortunes from their stores, and their store system made settlement possible.

Part of the reason we overlook the importance of credit in American history is our continued attachment to Marx's divide between precapitalist and capitalist forms of agriculture. That misses the relationship between farming and credit for most of the people who settled America. The more I study panics, the more I am persuaded that the pioneer American institution of the 18th and early 19th centuries was not the homestead or the trapper's shack but the store, an institution that sold foreign goods to farmers on credit, taking payment in easily movable settler products like furs, potash, barrel hoops, and butter.

Rather than imagining some golden age of subsistence, scholars in the Marxist tradition should look more closely at anticapitalist movements in the wake of panics. I include here not just the utopian and religious communities like Quakers, Shakers, and Oneidans but also the early Mormons, the Grangers, and the Populists. Those people understood what it meant for banks, and then railroads, to extend credit through stores. Often regarding capital as a collective inheritance, they built their own associations to replace such institutions of credit (and the railroad was an institution of credit) with locally managed cooperatives that distributed agricultural benefits in a way that served the broader community. The temple, the elevator, and the cooperative were attempts to break the chain of debt without demonizing capital.

From the perspective of business history, Joseph A. Schumpeter argued that business-cycle downturns came from periods of "creative destruction" in which new technologies undermined old ones. Outdated technologies, with millions invested in them, became instantly obsolete, leading to financial failures that cascaded to other industries. While Schumpeter, who died in 1950, once persuaded me, I think there is a mechanistic fallacy in the argument. Railroads, for example, have taken the blame for the 1857, 1873 and 1893 downturns. While there may be something there, the whole account seems reductive and technologically determinist. For example, canals, the Bessemer process, fractional distillation of oil, and washing machines are all revolutionary technologies that flourished during the American panics, not before them. They did sweep away older technologies, but rather than causing panics those technologies benefited by the uncertainty that panic created.

In a very different camp, neo-Marxists like Giovanni Arrighi and David Harvey betray a similar kind of reductive history, a latter-day Schumpeterianism. Their work posits a "spatial fix," a center of capitalism that then organizes and draws tribute from the rest of the world. For the late Arrighi, it was a kind of pump that sucked assets from elsewhere as states were forming throughout the sweep of centuries. For Harvey it is an investment in a capital city (Amsterdam, London, New York) and a new communication technology (telegraph, telephone, the Internet) that drew higher profits from everywhere else. Dutch and British hegemony became American hegemony after World War II. That suggests that these scholars have not really considered the tremendous influence of the U.S. Federal Reserve in reorienting international trade between 1913 and the 1920s. Their story seems more or less political to me: American empire comes when Americans claim victory in World War II. The economic material seems to be used in the service of a story about the rise and decline of empires.

If we follow the money, the American empire emerged during World War I, when the international flow of debt changed drastically. For Arrighi and Harvey, the International Monetary Fund and the World Bank are the pathbreakers of financial empire. But it is worth remembering that those institutions were explicitly designed to restrain the dirty tricks of financial empires of the 1920s and 1930s: No more American banks using gunboat diplomacy in Peru; no more Germans sending tanks into Poland to collect unpaid debts.

***

As a historian, I have learned the most about financial disasters from long-dead historians whose work blended primary, secondary, and quantitative material. Rosa Luxemburg, William Graham Sumner, Frank W. Taussig, and Charles Kindleberger would never have agreed about anything. Luxemburg, a renegade Marxist who read in five languages, described how the dangerous mix of a hierarchical production process with the anarchy of international trade could lead manufacturers to block free trade and embrace higher prices for their raw materials in the wake of a panic. Sumner, a laissez-faire Social Darwinist who argued that income inequality benefited society, carefully explained how drastic economic changes could follow from tiny changes in international trade deals. Put in a room together, each would have retreated to a corner to begin throwing furniture. But they and the others were storytellers who used a mixture of sources. Telling a story by looking through the trunk of assets and watching the damage afterward makes more sense to me than simple models of financial contagion, money supply, technological watersheds, or global fixes.

My father died before I started writing about financial panics, but my thoughts have grown out of our 30-year-long argument about financial downturns. Not surprisingly, he disliked "deadbeats," seeing them as the people whose false promises weakened our country. He probably had a point, and no doubt the executives of Woolco would agree. But I find much in them to admire, for defaulters are often dreamers. Viewing America's financial panics through the lens of numerous unfulfilled and forgotten debts that even the oldest banker cannot possibly remember can afford a perspective my dad would have appreciated: with my view from the Dodge Dart, the minute he rang the doorbell, when both debtor and creditor prepared their stories.

Scott Reynolds Nelson is a professor of history at the College of William and Mary. His book A Nation of Deadbeats: An Uncommon History of America's Financial Disasters has just been published by Alfred A. Knopf.

Video
"Debt: The First 5,000 Years," by Paul Kedrosky , Kedrosky.com, September 10, 2011 --- Click Here
http://paul.kedrosky.com/archives/2011/09/debt-the-first-5000-years.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+InfectiousGreed+%28Paul+Kedrosky%27s+Infectious+Greed%29

Debt versus Equity --- http://www.trinity.edu/rjensen/Theory02.htm#FAS150

The booked National Debt in August 2012 went over $16 trillion ---
U.S. National Debt Clock --- http://www.usdebtclock.org/
Also see http://www.brillig.com/debt_clock/
The unbooked entitlements have a present value between $80 and $100 trillion. But who's counting?

Pending Collapse of the United States --- http://www.trinity.edu/rjensen/Entitlements.htm

Should we never pay down  (even partly) the U.S. National Debt or Spending Deficit? ---
http://www.cs.trinity.edu/~rjensen/temp/NationalDeficit-Debt.htm

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


Remember The New Yorker Cartoon with the CEO saying to the Chief Accounting Officer:
"The only thing that can save us now Digby is an accounting miracle."

"CAN A NEW ACCOUNTING CHIEF SAVE GROUPON’S ACCOUNTING," by Anthony H. Catanach and J. Edward Ketz, Grumpy Old Accountants Blog, September 11, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/769

Monday September 10 Groupon named a new Chief Accounting Officer, Brian Stevens, formerly a partner with KPMG.  The question, of course, is whether this move is enough to save face with the investment community, after the many fiascos we have discussed, such as our “Still Accounting Challenged andFirst 10-K.”

So, in a move to provide some constructive advice, we offer Mr. Stevens a few simple suggestions.  First, do not merely mouth “transparency” as some sort of mantra, but embrace financial reporting transparency, believe it, live it, and report transactions and events as if your economic life depended on it.  That means no more gross/net revenue games, no more peculiar or low quality gains, as investment gains can be, and no more disclosures about inventory management systems when there is no inventory account on the balance sheet.

Continued in article

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


"DELOITTE’S INTANGIBLE ASSET CLIENTS REVISITED," by Anthony H. Catanach and J. Edward Ketz, Grumpy Old Accountants Blog, September 24, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/763

Recently, we enjoyed a wonderful article titled “Buyers Beware: The Goodwill Games,” by Scott Thurm who discussed an interesting rubric by which to evaluate goodwill’s value: the ratio of a company’s goodwill to the total entity’s market value. Thurm seems to suggest that companies whose goodwill exceeds market capitalization may be prime candidates for future write-downs. Very interesting indeed, especially as goodwill is such a queer asset (see Goodwill Games).

Thurm’s article reminded us that it was time to revisit the list of companies that we provided to Deloitte back in November of 2011 to help them with their audits of intangible assets (in “Are Fourth Quarter Write-Offs Looming for Deloitte’s Clients?” We wanted to know how many firms in our suggested list of write-off candidates actually recorded goodwill impairment.

As you may recall, we applied simple intuition and financial analysis to create a list of 24 companies, based on their relative level of intangible assets and anemic returns on equity (ROE), that we asserted were at significant risk for some type of impairment charge in 2011. We found that, of the 24 companies we enumerated, 9 (37.5 percent) reported some type of earnings charge for impairment of goodwill or other intangibles during 2011. So, it appears that common sense and fundamental financial statement analysis may have won out over auditing, yet again! Maybe the FASB should add these two traits to their “qualitative criteria” for evaluating goodwill impairment—and Thurm’s as well.

To assess impairment charges for our 24 company listing, we again turned to the Wharton Research Data Services COMPUSTAT North America (WRDS) data set to search for P&L charges for the following variables: pre-tax goodwill impairments (GDWLIP) , pre-tax restructuring costs (RCP), and pre-tax write-downs (WDP). And we were not disappointed! The following nine companies reported intangible related earnings charges (in millions of dollars).

Continued in article

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


"LSAT Scores at Top Schools Are Dropping Like Flies," by Vivia Chen, The Careerist.com, September 7, 2012 ---
http://thecareerist.typepad.com/thecareerist/2012/09/law-school-applicants-dumbing-down.html 

If you think you're a pretty smart cookie—but not spectacularly so—this might be the year that you can squeeze into a better law school than you thought possible.

The reason is simple: There are fewer applicants, which results in more opportunities at more prestigious law schools. You've probably heard about that 25 percent drop in law school applications in the past three years or so, but did you know that the top 14 law schools will be forced to accept students who are below the top 2 percent of their LSATs? (Sobs, please.)

Here's the nitty gritty from Blueprint, an LSAT tutoring company, based on statistics from the Law School Admissions Council, Inc.:

We see that in 2010/2011, there were 3,430 students in the top 2 percent on the LSAT (171+), which is at or near the median LSAT score for most elite (top 14 or T14 as determined by U.S. News & World Report rankings) law schools. That number drops to 2,600 in 2011/2012, resulting in nearly 1,000 fewer top percentile scores from which law schools can recruit.

So what does this all mean? Naturally, Blueprint is telling people to go for it—since it's in the LSAT tutoring biz. Here's how it explains the trickle-down effect of lowered law school admissions standards:

With fewer applicants at the top for the same number of slots, the entire admissions game is going to undergo a large shift. Students traditionally just outside the T14 based on their numbers will find themselves admitted, or on waitlists. As they jump at the opportunity to mortgage their future for a top school . . . their slots in T20 schools will open up for those below them, and so on.

LSAT scores more than any other aspect of the application determines acceptance, notes Blueprint: "LSAT accounts for up to 60 percent of the admission decision."

Blueprint also says that applicants are too pessimistic about the cost of law school tuition and their prospects for getting into law schools. It conducted a poll of of nearly 600 prospective law students, in conjunction with Above the Law. Their finding: "The majority of prelaw students are actually overestimating the cost of attending law school." It also finds that more than a quarter of the students (27 percent) think it's harder to gain admission than it actually is.

So is law school easier to get into now? Perhaps. But is that a good enough reason to dedicate yourself to three years of schooling for a profession you might not like (assuming you can get a job that requires a legal degree)?

Uh, I don't think so.

Jensen Question
So where are those top prospects going who decide not to go to law school?

Answer
I really don't know, but if they were thinking about law school as undergraduates not many of them probably did not earn enough undergraduate credits for  accounting, architecture, engineering, medical school, vet school, and science. Some may be applying for government work. Others may be applying for doctoral programs in humanities. Who knows?

A goodly number of them may instead be applying to MBA programs in prestigious universities. I'll bet that's it!

"Why an MBA Is Not Always the Right Choice," by Rose Martinelli , Bloomberg Business Week, April 4, 2012 ---
http://www.businessweek.com/articles/2012-04-04/why-an-mba-is-not-always-the-right-choice

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

 


Audit Firm Rotation Every 25 Years?
Just about long enough to pay off the house mortgages and raise a couple kids before starting over in a new town.
Should we do the same thing for tenured professors?

"EU lawmaker proposes ditching core parts of auditing shake up," by Huw Jones, Reuters, September 6, 2012 ---
http://www.reuters.com/article/2012/09/06/us-eu-auditors-idUSBRE88512J20120906

Core elements of a proposed European Union shake up of rules governing company auditors should be ditched, an influential member of the bloc's parliament suggested, in a move that is likely to delight the "Big Four" auditors and Britain.

The EU's executive, the European Commission, authored the draft law to inject more competition into a market where Deloitte, KPMG, PricewaterhouseCoopers and Ernst & Young check the books of most top companies in the world.

It proposed requiring the EU's 8,000 listed companies to switch auditor every six years and introduce caps on market share that would force the Big Four to split up into separate "pure audit" and advisory companies in some EU states.

Sajjad Karim, the British centre-right lawmaker who is steering the reform through the parliament, said in his report published on the assembly's website on Thursday that a company should be allowed to keep the same auditor for up to 25 years.

Market share caps that would trigger splitting up the big auditors should be scrapped outright, he said.

He proposes that auditors should be banned from offering a much narrower range of services to a client being audited so that, for example, tax consulting would be allowed.

Karim wants to scrap the proposal for the European Securities and Markets Authority (ESMA) to develop a "Quality Certificate" for auditors so that companies have fewer worries about using less known auditors.

He will present his report to parliament's legal affairs committee on September 18 and is likely to face stiff opposition from Liberals and socialists.

The European Parliament and EU countries have the final say and changes are expected as the approval process continues.

Some suspect Karim has taken an extreme stance to open the door to a final deal that would probably still be a dilution compared with the original text.

The reform has pitched smaller audit firms like Grant Thornton, Mazars, RSM and BDO International against the Big Four, who have campaigned hard to water down the measure.

The Big Four question why smaller firms should be given a regulatory leg-up to build up market share. Smaller auditors say it will not be worth investing in expanding networks unless there is a realistic prospect of more work for them.

"The draft does not address investor concerns in non audit services, long auditor tenure and the market structure," said Nick Jeffrey, a director at Grant Thornton.

Separately, the EU is also waiting to see what changes, if any, Britain's Competition Commission will make in its probe of the UK audit market where the Big Four dominate.

The UK anti-trust watchdog will publish preliminary findings in November.

Britain is skeptical about the EU measure, believing market structure should be left to anti-trust bodies and that mandatory rotation of auditors is not the answer to boosting competition. It is also leery of giving EU regulator ESMA oversight powers.

Jensen Comment
When the Social Security age is raised to 75, both an auditor and a tenured professor could have three tours of duty before retiring. Maybe they could even wear combat tour ribbons on their chests like they do on military uniforms.

Bob Jensen's threads on audit firm professionalism and independence are at
http://www.trinity.edu/rjensen/Fraud001c.htm

Question
What will be the major drawback of the Congressional proposal to ban audit firm rotation mandates?

Answer
Many jobs will be lost because tens of tens of thousands of auditors will not have to buy new motor homes for their families to live in.

 

Teaching case from The Wall Street Journal Accounting Weekly Review on March 30, 2012

Auditor 'Rotation' Debate Heats Up
by: Michael Rapoport
Mar 28, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Auditing, Auditing Services, Auditor Changes, Public Accounting

SUMMARY: "Congress is poised to wade into the debate over 'term limits' for audit firms, in a move that has some proponents worried that the business community may be throwing its weight around to block a significant overhaul." The draft of a bill will be discussed in a House subcommittee on Wednesday, March 28, 2012.

CLASSROOM APPLICATION: The article is useful to discuss ethics and public accounting business management as well as the Public Company Accounting Oversight Board (PCAOB), most likely in an auditing class.

QUESTIONS: 
1. (Advanced) What is the Public Company Accounting Oversight Board (PCAOB)? What is its responsibility with respect to the auditing profession?

2. (Advanced) What has the PCAOB proposed in regards to auditor rotation?

3. (Introductory) As described in the article, what are the arguments in favor of the PCAOB's proposal?

4. (Introductory) What are the arguments against this proposal?

5. (Introductory) What course of action are some members of Congress considering in relation to audit partner rotation?
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Auditor 'Rotation' Debate Heats Up," by: Michael Rapoport, The Wall Street Journal, March 28, 2012 ---
https://mail.google.com/mail/?shva=1#inbox/13662348b23d75bf

Congress is poised to wade into the debate over "term limits" for audit firms, in a move that has some proponents worried that the business community may be throwing its weight around to block a significant overhaul.

A draft bill expected to be discussed at a House subcommittee hearing Wednesday would block regulators from requiring that companies change their outside auditors regularly. The move would be a pre-emptive strike against the Public Company Accounting Oversight Board, the government's audit-industry regulator, which is considering so-called rotation as a way of ensuring auditors don't get too cozy with their clients.

Some supporters of rotation believe prominent opponents, like the accounting industry and the U.S. Chamber of Commerce, have enlisted Congress to come to their aid. Some big accounting firms and the chamber have lobbied Congress on the issue or are major campaign contributors to the congressmen involved with the draft bill, according to trackers of campaign finance and lobbying reports.

"The business community has enormous resonance with this Congress," said former Securities and Exchange Commission Chairman Arthur Levitt, who supports rotation and spoken out in favor of it. Along with legislation easing corporate-governance rules for new public firms, blocking auditor rotation "would be a further erosion of investor protection," he said.

PricewaterhouseCoopers LLP, one of the Big Four accounting firms, says it hasn't asked Congress to weigh in even though the firm opposes rotation. But "we recognize that others may have different opinions about how best to engage the PCAOB," said Laura Cox Kaplan, the firm's leader for U.S. government and regulatory affairs.

The chamber, the board and the other Big Four firms—Ernst & Young LLP, KPMG LLP and Deloitte LLP—declined to comment or didn't provide comment.

In testimony prepared for Wednesday's hearing, however, chamber official Tom Quaadman supports a congressional ban, contending that rotation is "a matter of corporate governance outside of the PCAOB's realm."

A PCAOB spokeswoman said the Sarbanes-Oxley corporate-overhaul law gives the board authority over auditor-independence issues, subject to SEC approval.

The board is exploring whether companies should have to change audit firms every several years and doesn't expect to make a decision on the issue until next year. Last week it held a two-day meeting to hear views on the issue.

If enacted, rotation would break up auditor-client relationships that in some cases have lasted decades. Supporters say rotation would improve auditor independence and lead to more healthy skepticism among auditors in evaluating a company's books. Critics say it would raise audit costs and deprive a company of a long-tenured auditor's institutional knowledge.

The draft bill to be discussed Wednesday would prohibit the board from requiring the use of "different auditors on a rotating basis." The bill, sponsored by Rep. Michael Fitzpatrick (R., Pa.), hasn't yet been introduced. But a draft of the measure is featured on the web page announcing Wednesday's hearing by the House Financial Services Committee's capital-markets subcommittee, and the panel has invited witnesses at the hearing to comment on it.

According to data from the Center for Responsive Politics, which tracks campaign finance, Rep. Fitzpatrick has gotten major contributions from PricewaterhouseCoopers and Deloitte during the 2012 election cycle. PwC is his 10th-biggest contributor throughout his career in Congress, and the accounting industry has given him a total of $108,779 over his entire career.

Continued in article


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

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


"IASB Previews New Hedge Accounting Rules," by Emily Chason, CFO Report, September 7, 2012 ---
http://blogs.wsj.com/cfo/2012/09/07/iasb-previews-new-hedge-accounting-rules/?mod=wsjpro_hps_cforeport

The draft is available from the IASB --- Click Here
http://www.ifrs.org/Current-Projects/IASB-Projects/Financial-Instruments-A-Replacement-of-IAS-39-Financial-Instruments-Recognitio/Phase-III-Hedge-accounting/Pages/Draft-of-IFRS-General-Hedge-Accounting.aspx 

Jensen Comment
Today I must leave early in the morning to take Erika to Concord for a medical treatment. I've not yet had time to read the above draft in detail. It appears, however, that this draft for IFRS 9 retains changes in IAS 39 that are objectionable to me relative to what I think is better in FAS 33 as amended.

Firstly, the thrust of the IFRS 9 changes will be to add more subjectivity (relative to FAS 133), especially in the area of hedge effectiveness testing. For example, if a farmer has hedges a growing crop of corn, he is likely to do so on the basis of standardized corn quality of corn futures and options trading on the CBOT or CME. It is unlikely that the corn that he ultimately takes to market will have the identical quality moisture content. In addition he will have trucking costs of getting his corn from say South Dakota to the trading market in Chicago. As a result of all this, his hedging contract acquired in June on the CBOT or CME exchange is not likely to be perfectly effective relative to the corn he brings to market in October. Thus there will be hedging ineffectiveness.

The original IAS 39, like FAS 133, had some bright line tests for the degree to which hedge accounting was allowed when there is hedge ineffectiveness. See the slide show illustrations at
www.cs.trinity.edu/~rjensen/Calgary/CD/JensenPowerPoint/06effectiveness.ppt   

There is greater likelihood that in a particular instance of hedge ineffectiveness, the original IAS 39 would result in Client A having identical accounting for the hedge ineffectiveness as Client B. Under the new IFRS 9 this becomes less assured since clients are given considerable subjective judgment in deciding how to deal with hedge ineffectiveness.

Also under FAS 133, embedded derivatives in financial contracts must be evaluated and if the embedded derivative's underlying is not "clearly and closely related" to the underlying in the host contract, the embedded derivatives must be bifurcated and accounted for separately. This leads to a lot of work finding and accounting for embedded derivatives. IFRS 9 will eliminate all that work by not making clients look for embedded derivatives. Hence, the risk that comes from having embedded derivative underlyings not clearly and clossely associated with the underlyings of the host contract can simply be ignored. I don't by into this IFRS 9 bad accounting for the sake of simplification.

I think there are other areas of difference expected differences between IFRS 9 and FAS 133 as amended. Most of the differences lie in the subjectivity allowed in accounting for hedging contracts under IFRS 9 that is not allowed in FAS 133.

September 10, 2012 reply from Bob Jensen

This afternoon received a message from PwC about the IASB's proposed changes to hedge accounting. The PwC reply is consistent with, albeit somewhat more extensive, then my reply that I sent to the AECM early this morning.

The PwC response is at --- Click Here
http://cfodirect.pwc.com/CFODirectWeb/Controller.jpf?ContentCode=MSRA-8Y2HHH&SecNavCode=MSRA-84YH44&ContentType=Content 

Note that the IASB is not really opening up these proposed hedge accounting amendments to comments. Wonder why?

Also note that the proposed IASB's amendments diverge from rather than converge toward U.S. GAAP under FAS 133 as amended. At this point in time I don't think the IASB really cares about convergence of hedge accounting rules.

My quick and dirty response is that the revised hedge accounting standards under IFRS 9 is carte blanche for having two different clients and their auditors account differently for identical hedge accounting transactions because so much subjectivity will be allowed under IFRS 9. We may even have subsidiaries of the same client accounting for identical transactions differently.

Such is the myth of comparability one is supposed to get under principles-based global standards.

Further more, it may challenge auditing Firm X that has one client claiming a hedge is effective when another client would claim the hedge is ineffective. Will auditing Firm X certify divergent accounting for the same hedge. The answer is probably yes these days if both clients are too big to lose.

Bob Jensen

So Much for the Myth That Accounting Standards Are Neutral in Terms of Business Strategy (of course it did not take IFRS 9 to reveal this to us)
"Under New Accounting Standard, CFOs Could Change Hedging Strategies:
Will finance chiefs come under more pressure to adopt hedge accounting — even though it remains entirely optional under the new standard?
"
by Andrew Sawyers
CFO.com, September 12, 2012
http://www3.cfo.com/article/2012/9/gaap-ifrs_hedge-accounting-ias-39-iasb-ifrs-derivatives-80-125-test-hedge-effectiveness 

A new international financial reporting standard (IFRS) on hedge accounting could prompt finance chiefs to change their companies’ hedging strategies under a more accommodating, principles-based regime that requires less testing.

The International Accounting Standards Board (IASB) has been pondering hedge accounting for several years in an effort to find a way to replace the unloved standard IAS 39: so unloved that it’s not part of the package of accounting standards endorsed by the European Commission for listed companies. The standard has made it tough to employ hedge accounting, which can be favorable to companies in certain circumstances.

In a recent podcast, Kush Patel, director in Deloitte’s U.K. IFRS Centre of Excellence, summarized the impact of the new rules: “More hedge-accounting opportunities, less profit and loss volatility — so as you’d expect, this has been well received.”

Under IAS 39, he said, “we saw a lot of companies change the way they manage risk: we saw them reduce the amount of complex, structured derivatives that were being used to hedge and they went for more vanilla instruments that could [qualify for] hedge accounting more easily. Now that IFRS 9 will remove some of these restrictions, I think it’s fair to say risk management could change.”

Andrew Vials, a technical-accounting partner at KPMG, said in a statement, “A company will be able to reflect in its financial statements an outcome that is more consistent with how management assesses and mitigates risks for key inputs into its core business.”

Will CFOs come under more pressure to adopt hedge accounting — even though it remains entirely optional under the new standard? “If hedge accounting becomes easier, there may be more emphasis on them to achieve hedge accounting — so although it’s voluntary, there is an element that they may feel more compelled to do hedge accounting” says Andrew Spooner, lead global IFRS financial-instruments partner at Deloitte.

The final draft of the new hedge-accounting rules was published on September 7 and will be incorporated into the existing IFRS 9 Financial Instruments at the end of the year. The IASB says it’s not seeking comments on this final draft, but is making it available “for information purposes” to allow people to familiarize themselves with it. The new rules will take effect from January 1, 2015, but companies will be allowed to adopt them sooner if they wish.

Spooner and Patel note three main areas in which the new rules are different from the old:

Changes to the instruments that qualify. It’s now easier, for example, to use option contracts without increasing income-statement volatility.

Changes in hedged items. It may not be possible, for example, for a company to hedge the particular type of coffee beans a food company buys. But it could hedge a benchmark coffee price, because it is closely related to the item it would like to hedge. Another change for the better: companies in the euro zone that want to hedge dollar purchases of oil can now more easily hedge the dollar price of the oil, then later hedge the foreign-exchange exposure without the oil-price hedge being deemed ineffective. There are also more favorable rules for hedging against credit risk and inflation.

Changes to the hedge-effectiveness requirements. Under IAS 39, a company could use hedge accounting only if a hedge is “highly effective,” meaning it must be capable of offsetting the risk by a range of 80%–125%. But the 80–125 test has been scrapped to be replaced by a principle-based test that is based on economic relationship: “You have to prove that there is a relationship between the thing you are hedging and the thing you are using,” says Patel. Having gotten rid of the quantitative threshold, there are “more opportunities for companies to reduce the amount of testing they do,” he says. “It’s a welcome change.”

Continued in article

"IASB Previews New Hedge Accounting Rules," by Emily Chason, CFO Report, September 7, 2012 ---
http://blogs.wsj.com/cfo/2012/09/07/iasb-previews-new-hedge-accounting-rules/?mod=wsjpro_hps_cforeport

The PwC response is at --- Click Here
http://cfodirect.pwc.com/CFODirectWeb/Controller.jpf?ContentCode=MSRA-8Y2HHH&SecNavCode=MSRA-84YH44&ContentType=Content 

The draft is available from the IASB --- Click Here
http://www.ifrs.org/Current-Projects/IASB-Projects/Financial-Instruments-A-Replacement-of-IAS-39-Financial-Instruments-Recognitio/Phase-III-Hedge-accounting/Pages/Draft-of-IFRS-General-Hedge-Accounting.aspx 

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

 


"Former Harvard Psychologist Fabricated and Falsified, Report Says," by Tom Bartlett, Chronicle of Higher Education, September 5, 2012 ---
http://chronicle.com/blogs/percolator/report-says-former-harvard-psychologist-fabricated-falsified/30748

Marc Hauser was once among the big, impressive names in psychology, head of the Cognitive Evolution Laboratory at Harvard University, author of popular books like Moral Minds. That reputation unraveled when a university investigation found him responsible for eight counts of scientific misconduct, which led to his resignation last year.

Now the federal Office of Research Integrity has released its report on Hauser’s actions, determining that he fabricated and falsified results from experiments. Here is a sampling:

Hauser “neither admits nor denies” any research misconduct but, according to the report, accepts the findings. He has agreed to three years of extra scrutiny of any federally supported research he conducts, though the requirement may be moot considering that Hauser is no longer employed by a university. Hauser says in a written statement that he is currently “focusing on at-risk youth”; his LinkedIn profile lists him as a co-founder of Gamience, an e-learning company.

In the statement, Hauser calls the five years of investigation into his research “a long and painful period.” He also acknowledges making mistakes, but seems to blame his actions on being stretched too thin. “I tried to do too much, teaching courses, running a large lab of students, sitting on several editorial boards, directing the Mind, Brain & Behavior Program at Harvard, conducting multiple research collaborations, and writing for the general public,” he writes.

He also implies that some of the blame may actually belong to others in his lab. Writes Hauser: “I let important details get away from my control, and as head of the lab, I take responsibility for all errors made within the lab, whether or not I was directly involved.”

But that take—the idea that the problems were caused mainly by Hauser’s inattention—doesn’t square with the story told by those in his laboratory. A former research assistant, who was among those who blew the whistle on Hauser, writes in an e-mail that while the report “does a pretty good job of summing up what is known,” it nevertheless “leaves off how hard his co-authors, who were his at-will employees and graduate students, had to fight to get him to agree not to publish the tainted data.”

The former research assistant points out that the report takes into account only the research that was flagged by whistle-blowers. “He betrayed the trust of everyone that worked with him, and especially those of us who were under him and who should have been able to trust him,” the research assistant writes.

As detailed in this Chronicle article, several members of his laboratory double-checked Hauser’s coding of an experiment and concluded he was falsifying the results so that those results would support the hypothesis, turning a failed experiment into a success. In 2007 they brought that and other evidence to Harvard officials, who began an investigation, raiding Hauser’s lab and seizing computers.

Gerry Altmann believes the report is significant because it finds that Hauser falsified data—that is, investigators found that Hauser didn’t just make up findings, but actually changed findings to suit his purposes. Altmann is the editor of a journal, Cognition, that published a 2002 paper by Hauser that has since been retracted. When you falsify data, Altmann writes in an e-mail, “you are deliberately reporting as true something that you know is not.

Continued in article

Jensen Comment
To my knowledge cheating by accountics scientists has never once been reported to the public. Perhaps this is partly due to lack of replication and lack of importance of many findings to merit whistle blowing ---
http://www.trinity.edu/rjensen/TheoryTAR.htm

Corrupted/Biased Experimentation
It would be naive to assume blatant cheating has not taken place in accoutics science, especially in areas where cheating often takes place in science. When researchers collect their own experimental data rather than purchase the data, temptations arise to take scientific shortcuts or to change findings to better suit the hypotheses under investigation.. Behavioral accounting experiments just as vulnerable as psychology experiments.


Fabricated Data
Another vulnerable area is survey research where the actual response rate is disappointing. A researcher becomes tempted to fill out some added survey instruments. In other instances for ANOVA designs it's tempting to fabricate data to achieve better balance among the cells.


Plagiarism
It would seem that plagiarism risks among accounting researchers is not less than plagiarism risk among other researchers. I do know of one instance that I've mentioned previously. One of my favorite colleagues, Professor S, at Trinity University (before he moved upward and onward) received his PhD in management from one of the Big Ten universities. call it University N.


Professor S was notified that he must return immediately to University of N concerning an investigation regarding whether his PhD diploma would be revoked. The allegation was that portions of his doctoral thesis were plagiarized from an article published by accounting professor D at University N. While Professor S was on campus, it became evident that instead Professor D had instead plagiarized from a draft of Professor S's dissertation.


The incident was then immediately hushed up by University N. Professor S retained his diploma. There was never any publicity about the plagiarism of Professor D. I only know about it because I was a close friend and colleague of Professor S.


University N did not take action like Columbia University when it fired an African American female professor of psychology for plagiarizing the some works of her colleagues.
"Columbia U. Professor Denies Plagiarism, Saying Accusers Instead Stole Her Work," by Thomas Bartlett, Chronicle of Higher Education, February 22, 2008 --
 - http://chronicle.com/daily/2008/02/1798n.htm
The investigation leading to the firing of Madonna G. Constantine proved otherwise, and she was fired.
 http://chronicle.com/daily/2008/06/3520n.htm?utm_source=at&utm_medium=en
It is strongly suspected that she secretly hung hanging noose outside her own door to symbolize that she was being racially persecuted.


Professor D continued to teach at University N until some years later when he retired at the customary retirement age. I never saw him again at an AAA Annual Meeting. Perhaps there were some lesser punishments such as taking away his travel budgets.


One of the dirtiest forms of plagiarism is when journal referees reject submitted works and later publish those ideas under different wording. I mentioned previously how a well known mathematician refereeing one of my papers rejected my paper and later published my proof in his own book. All I ever got was an apology from the editor of the journal that rejected by paper. For details see
http://www.trinity.edu/rjensen/Plagiarism.htm#ProfessorsWhoPlagiarize 


A more subtle, yet related, form of cheating is when a referee borrows a research idea from a paper that he or she rejected. This is not as direct as plagiarism of text or plagiarism of a mathematical proof, but it is cheating even if the referee conducts a better experiment.


Ghost Writers in the Ivory Tower
In the Academy there are instances where professors simply hire a ghost writer or a ghost researcher to secretly do nearly all the work, such as when a well-paid professor hires a starving, albeit brilliant, student. These days it's just as easy for a professor to hire a ghost written paper as it is for a student to hire a ghost written paper. There are many ghost writing outfits on the Internet who will write papers on virtually any topic (prices of course may vary).


A related form of cheating is more common among professors who have difficulty writing in English is to honestly conduct the research and then hire a good writer to secretly write the paper. There are variations of this type of cheating where the researcher and the writer are listed as co-authors of the paper. It is wrong to give the writer credit for the research and wrong for the researcher to get credit for a complete paper he/she never wrote.


I've encountered instances where Colleague A really wants to have Colleague B get a promotion. For instance I know of one situation where Accounting Department Chair B did did not have a good case for being promoted to full professor. Professor A became very endeared to Professor B, his boss, by adding Professor B to three papers as a co-author. After Professor B was promoted to full professor and remained on as head of the department, Professor A always got the highest pay raises in the department.


Of course there are many more games that accountics researchers play in the gray zone of gaming for tenure and promotion ---
Gaming for Tenure as an Accounting Professor ---
 http://www.trinity.edu/rjensen/TheoryTenure.htm
 (with a reply about tenure publication point systems from Linda Kidwell)



Conclusion
I think that blowing the whistle of cheating is likely to be more common in the real sciences rather than in accountics science. Accountics scientists work less with research hired employees in laboratories where such employees are more likely to detect laboratory cheating and blow the whistle.

Bob Jensen's threads on professors who cheat ---
http://www.trinity.edu/rjensen/Plagiarism.htm#ProfessorsWhoPlagiarize

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

 


Teaching Case from The Wall Street Journal Accounting Weekly Review on September 7, 2012

New York Probes Private-Equity Tax Practices
by: Reed Albergotti, Mark Maremont and Gregory Zuckerman
Sep 04, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Capital Gains, Individual Income Taxation, Tax Evasion, Taxation

SUMMARY: New York Attorney General Eric Schneiderman is championing an "...investigation into the tax practices of the private-equity industry...looking for potential wrongdoing....In the main strategy in question...private-equity firms or individuals at the firms voluntarily waive management fees due to them from investors. Instead they ask the investors to place that money in certain funds managed by the firms. The change can turn management fees...into investments that could enjoy capital gains treatment...."

CLASSROOM APPLICATION: The article may be used in a tax class to discuss ordinary income versus capital gains, tax avoidance and tax evasion, and the relationship of the regulatory review process to political motivations.

QUESTIONS: 
1. (Advanced) Define tax avoidance and tax evasion.

2. (Advanced) Do you think the concerns raised in the article relate to tax avoidance as the author describes it? Support your answer.

3. (Introductory) Who is undertaking the review of private-equity firms' tax practices? Why is this person the appropriate individual to do so? Why might the motivation to make this review now be politically motivated?

4. (Introductory) As described in the article, how does the strategy known as fee-waiver conversion reduce taxes owed by principals operating private equity firms?
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"New York Probes Private-Equity Tax Practices," by Reed Albergotti, Mark Maremont and Gregory Zuckerman, The Wall Street Journal, September 4, 2012 ---
http://professional.wsj.com/article/SB10000872396390443571904577629831800831466.html?mod=djem_jiewr_AC_domainid&mg=reno-wsj

A New York investigation into the tax practices of the private-equity industry is looking for potential wrongdoing ranging from delay of tax payments to avoidance of them entirely.

The main focus of the investigation, say people familiar with it, is whether and how some firms convert certain management fees into investments that are eligible for more-favorable tax treatment. Partners at some of the nation's largest private equity firms have used the practice for years, though it also is one that several firms have avoided, some industry practitioners have called risky and some academics have called potentially illegal.

The investigation, by the office of New York Attorney General Eric Schneiderman, opens another front of attack on the industry, which has been under a microscope during the presidential campaign of Republican nominee Mitt Romney. Mr. Romney formerly led private-equity firm Bain Capital . As previously reported, Mr. Romney's attorney said he didn't participate in the fee-waiver program at Bain.

Some Republicans publicly and privately over the weekend derided the review as politically motivated. Mr. Schneiderman is a Democrat. A person familiar with his office's thinking said the concerns over industry tax practices have long been discussed in academic papers, and the review came out of the office's new taxpayer protection bureau.

The person added that subpoenas seeking information from firms were sent in early July, before this particular issue came into the public eye late last month.

A representative for the Internal Revenue Service didn't comment.

In the main strategy in question, known as a fee-waiver conversion, private-equity firms or individuals at the firms voluntarily waive management fees due to them from the firm's investors. Instead, they ask the investors to place that money in certain funds managed by the firms. The change can turn management fees, taxed as ordinary income at federal rates of 35%, into investments that could enjoy capital-gains treatment, at 15% federal rates. The attorney general's office is concerned such a conversion could be a form of tax avoidance.

The inquiry is somewhat unusual, because New York State doesn't offer favorable tax treatment for capital gains. In that respect, the distinction between a characterization of ordinary income or capital gain wouldn't matter to the state's coffers.

One person familiar with the investigation said New York still could lose out from such a strategy because it could allow for payment of taxes to be delayed, perhaps for many years, until an investment is sold.

The attorney general's office also is investigating whether industry participants engaged in a strategy to avoid taxes altogether on some management fees, according to the person. These people might do this by claiming money received in this arrangement wasn't income, but the return of capital, which isn't subject to taxes.

It isn't clear if such an approach is common, if used at all. Some tax practitioners aware of the so-called fee-waiver conversion approach said they were unfamiliar with this more-extreme version of the idea.

Thirteen firms in July were sent subpoenas for information, said the person. The investigation potentially could bring allegations under false claims laws in addition to tax laws, this person said.

The practice of converting management fees into investments subject to capital-gains treatment has been the subject of debate for many years within the private-equity industry.

Some of the largest firms in the business, such as Bain and Apollo Global Management, APO +0.82% have taken advantage of this strategy, according to filings and documents. KKR KKR +2.01% & Co. used the strategy from 2007 until 2009, when it became a public company, according to a person familiar with the matter. Still, others, such as Blackstone Group LP, BX +3.95% Carlyle Group CG -0.53% and Madison Dearborn Partners LLC, never employed the strategy, according to people familiar with the matter.

Defenders say the Internal Revenue Service for years hasn't contested the approach, giving firms confidence to employ it. They also say it gives employees a way to bet on their funds, as these fees can replace money employees are expected to invest in the funds.

"Management fee waivers are legal, widely recognized, and often part of negotiated agreements between the alternative investment community and investors," says Steve Judge, president and chief executive of the Private Equity Growth Capital Council.

Firms that have elected not to employ the strategy view it as too complex to present to their investors, prefer to recognize fee revenue when it is generated, or worry the practice could come under scrutiny.

Continued in article

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


Teaching case from The Wall Street Journal Accounting Weekly Review on September 7, 2012

Facebook Plays Defense
by: Geoffrey A. Fowler
Sep 05, 2012
Click here to view the full article on WSJ.com
 

TOPICS: Executive Compensation, Individual Taxation, Stock Price Effects, Stockholders' Equity

SUMMARY: "In a regulatory [Form 8-K] filing Tuesday, Facebook said Chief Executive Mark Zuckerberg won't sell any stock in the company for a year, and that two of its directors...have no plans to sell their personal holdings beyond the amount needed to cover their tax liabilities." The discussion in the article emphasizes the company's plans to maintain a relatively constant level of outstanding shares and also mentions tax treatment of individuals receiving the restricted stock.

CLASSROOM APPLICATION: The article may be used in a tax class to cover the topic of restricted stock and in a financial accounting class covering authorized, issued, and outstanding shares. NOTE: INSTRUCTORS WILL WANT TO REMOVE THE FOLLOWING STATEMENTS AS THEY CONTAIN ANSWERS TO THE QUESTIONS ASKED IN THE REVIEW. Restricted stock is taxed similarly to non-qualified stock options except that employees are taxed on the full fair value of the stock at the vesting date, unless the employee makes an election under section 83(b) to accelerate the date to the grant date. As described in the article from review of an SEC Form 8-K filing, Facebook intends to maintain a similar level of outstanding shares after the vesting of the restricted stock as before the vesting date by repurchasing treasury shares.

QUESTIONS: 
1. (Introductory) What is restricted stock? What will happen in October in relation to Facebook's employees' restricted stock units?

2. (Advanced) How are issuances of restricted stock units treated for tax purposes? In your answer, explain why the two directors mentioned in the article might sell shares because they face tax liabilities if they otherwise do not plan to sell these shares of stock.

3. (Advanced) Define the terms authorized, issued, and outstanding shares of stock. How will the issuance of the restricted stock affect each of these categories of stock?

4. (Introductory) According to the article, what will Facebook do to offset the impact of releases of restricted stock previously granted to executives and employees? Again, explain the impact of this action on the three types of stock identified above.

5. (Advanced) Why is Facebook's action important to shareholders who bought the stock upon its initial public offering?
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Facebook Plays Defense," by Geoffrey A. Fowler, The Wall Street Journal, September 5, 2012 ---
http://professional.wsj.com/article/SB10000872396390443759504577631854230025164.html?mod=djem_jiewr_AC_domainid&mg=reno-wsj

Facebook Inc. FB +2.00% took steps Tuesday to reassure investors and employees worried about its plummeting stock price, as the social network's shares hit new lows.

In a regulatory filing Tuesday, Facebook said Chief Executive Mark Zuckerberg won't sell any stock in the company for a year, and that two of its directors—Marc Andreessen and Donald Graham—have no plans to sell their personal holdings beyond the amount needed to cover their tax liabilities.

Facebook also detailed how it will essentially buy back 101 million shares when it issues previously restricted stock units to its staff in October. At recent prices, it would spend roughly $1.9 billion to keep those shares off the market.

Together, the steps function like a kind of defensive wall around the Facebook share price. They effectively reduce the amount of Facebook stock in the public market and spread out the amount of shares that could flood the market in November after a lockup period on the stock expires.

Facebook spokesman Larry Yu said the details in the filing were approved by the company's compensation committee on Aug. 30. "We wanted to get the filing out as soon as we could after that meeting as a measure of clarity and transparency," he said.

Mr. Yu declined to comment on the impact that the moves might have on investors.

Facebook's stock has been in a tailspin since the Menlo Park, Calif., company's initial public offering in May. After making their market debut at $38 a share amid much hype that month, they have plunged more than 50% over concerns about how much the company is really worth.

On Tuesday, Facebook's shares dropped to a fresh low of $17.73 in 4 p.m. trading after analysts at the two biggest underwriters for the company's IPO—Morgan Stanley MS +3.51% and J.P. Morgan Chase JPM +4.08% & Co.—cut their price targets on the stock.

In after-hours trading following the regulatory filing, Facebook's shares ticked up 1.7% to $18.03.

Facebook's stock has continued to suffer as share lockups began expiring last month, releasing 271 million shares—or nearly 13% of those outstanding—on the market. More lockup expirations in October, November and December will allow insiders and others to sell more than 1.4 billion shares.

Enlarge Image image image Julie Jacobson/Associated Press

Facebook said Mr. Zuckerberg won't sell any shares in the social network for a year. Mr. Zuckerberg, above, in May.

Last month, director and early investor Peter Thiel sold the majority of his Facebook holdings—some 20.1 million shares—after restrictions on insider selling lifted.

Facebook has publicly said little about its stock slide but internally is reassuring employees about their shares. In a companywide meeting last month, Mr. Zuckerberg told them it may be "painful" to watch the stock plunge, but that investments Facebook has made will soon bear fruit.

In its filing, Facebook said Mr. Zuckerberg "has no intention to conduct any sale transactions in our securities for at least 12 months." Mr. Zuckerberg sold Facebook stock in the IPO to cover his tax liabilities, and now holds about 444 million shares of Class B common stock and an option exercisable for an additional 60 million Class B shares.

A Facebook spokesman declined to make Mr. Zuckerberg available to comment.

A spokeswoman declined to make Mr. Andreessen available for comment. Mr. Graham declined to comment.

Facebook also said it plans to withhold 45% of employees' restricted stock units to cover their tax liabilities, paying the obligations, worth about $1.9 billion, in cash and from existing credit facilities. In doing so, it would remove 101 million shares from the market for accounting purposes, about 4% of the shares outstanding. Facebook also said the lockup date for some employees' stock would be Oct. 29, after previously suggesting it might fall on Nov. 14.

Continued in article

Bob Jensen's threads on employee stock option accounting ---
http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm

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


"When Is an Asset not an Asset? A new lease accounting proposal by regulators is still getting pummeled by finance executives," by Kathleen Hoffelder, CFO.com, September  14, 2012 ---
http://www3.cfo.com/article/2012/9/gaap-ifrs_lease-accounting-fasb-iasb-convergence-equipment-lease

When a corporation leases a building, is the adjoining parking lot automatically included? Or should the lot be accounted for separately? Does it make economic sense to count the lot as a separate asset from the building, since in a typical suburban office complex one generally doesn’t exist without the other?

Such questions are getting tougher and tougher to answer for CFOs and other executives who account for lease expenses that their companies incur – especially when you consider that the parties in the debate can’t even agree on such a basic element as the definition of an “asset.” In the example above, for instance, is the parking lot an asset owned by the lessee, or is it simply a piece of rented property?

The confusion stems from a lease accounting proposal jointly agreed upon by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) in June that requires lease expenses to be recorded on corporate balance sheets. The boards decided that lessees should distinguish between equipment and property leases, and that the distinction should be based on whether the lessee acquires and/or uses up more than an “insignificant” portion of the underlying asset. Along with other criteria, if a lessee buys or consumes more than that amount, it would have to account for its cost on a property-lease basis; if less, than the arrangement would be deemed an equipment lease.

FASB and IASB further came to an agreement on having property leases accounted for using a straight-line approach (in which a single lease expense is recognized over the life of a lease) and equipment leases accounted for in a front-loaded manner (in which larger interest charges occur at the beginning of a lease than at the end).

Ralph Petta, chief operating officer at the Equipment Leasing and Finance Association (ELFA), notes that the boards’ decision to make the equipment lease expense recognition front-loaded creates a lot of problems. “It makes the accounting more complex than it needs to be,” he says. Since equipment leases have not previously been front-loaded, lessees would have to do a whole lot more calculating of asset values if the plan goes through.

While ELFA supports having leases recorded on lessees’ balance sheets and incorporating two types of leases for property and equipment, the association’s leaders find fault with the way the boards are addressing those issues now.

Critics of the proposal like Rod Hurd, CFO of Bridgeway Capital Advisors and chair of ELFA’s financial committee, don’t think the standard setters’ plan correctly addresses most lessees’ accounting needs.

For one thing, he notes the “economics” of the FASB/IASB proposal don’t jibe with general accounting principles. In a front-loaded lease on a balance sheet, as in the case of an equipment lease, the asset appears to be worth less than its present economic value, notes Hurd.

FASB and IASB’s front-loaded approach for equipment leases considers all equipment leases as purchases, perhaps reasoning that, in many cases, short-term lessees resemble owners more than renters. ELFA and others, however, say that the concept doesn’t match reality.

Continued in article

"Diversity among Analysts Makes Objective of FASB-IASB Lease Accounting Difficult to Achieve," BNA, July 31, 2012 ---
http://www.bna.com/diversity-among-analysts-b12884910914/

Jensen Comment
In my opinion, standard setters, corporations, and financial analysts are avoiding the most important and the most troublesome aspect of lease accounting --- how to account for lease renewals. As long as lessees and can simply look at one lease term for accounting purposes, the leases will be written for shorter terms and thereby defeat the purpose of getting OBSF debt on the balance sheet.

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

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


A Guide through IFRS 2012 (Green Book in English, Red Book in Spanish) ---
http://shop.ifrs.org/ProductCatalog/Product.aspx?ID=1713

Copies are priced at £90 each, plus shipping. As an academic/student you will be entitled to a 45% discount off the normal price.

If you require further information on A Guide through IFRS 2012 (Green Book) (ISBN 978-1-907877-63-6; product ID: 1713), please visit our
Web Shop and place your order. Alternatively, download the order form from the shop and return it to us by email, fax or post.

eIFRS and Comprehensive subscribers can access the electronic files of A Guide through IFRS 2012 (Green Book)
here.
You will be required to provide your login details. Comprehensive subscribers will soon receive a copy by mail.

Jensen Comment
This illustrates the frustration of hard copy. Getting a novel or even a fact book in hard copy is often very satisfying. For example, looking up from a 2000 almanac of facts is not misleading as long as you know the book was published in 2000 and that for facts since 2000 you must search elsewhere.

But accounting standards are being amended so frequently these days, the 2012 IFRS Green and Red Books can be somewhat misleading in a matter of months. As long as readers are diligent and highly aware that these books are in many ways obsolete the moment they come off the printing presses, perhaps there is no big danger. But lazy accountants and accounting teachers who grab a Green Book or Red Book and consider the findings to be authoritative without further checking may be revealing that they are in fact lazy.

September 20, 2012 reply from Pat Walters

Bob:

The difference between the Green book and the Red (all issued standards regardless of effective dates) and Blue (standards effective as of the beginning of the most recent year) are as follows:

Red and Blue are available in early January of the relevant year and also available on-line as soon as issued. The Green book is an annotated/cross referenced version of the Red book. It takes staff considerable time to do this annotation, which is why it generally comes out in September. The Green book is of course extremely useful, but essential to understanding and applying the standard. In no way are the standards only available until 9 months after the January 1..

The basic IFRSs are available for free on the IASB website. One only needs a subscription to access the basis for conclusions and other ancillary materials the IASB may publish.

Individuals and students can get full access to eIFRS for $25 and $20 respectively by joining the IAAER. I'm not even sure that one needs to be an academic to get an individual membership. That is next to nothing for on-line access in the general scheme of things and one can download and print any of the on-line documents.

Pat


New Global Code of Ethics for Accountants

"When Should Accountants Spill the Beans? A new code of ethics puts finance chiefs on the hook to report suspected fraud to corporate boards,"
by Kathleen Hoffelder, CFO.com, September 6, 2012 ---
http://www3.cfo.com/article/2012/9/auditing_international-federation-of-accountants-iesba-code-of-ethics

Under proposed changes to a global ethics code for accountants, while auditors must report a suspected fraud to outside authorities, management accountants need only report their suspicions internally. At the same time, if corporate accountants spill the beans to CFOs, finance chiefs must report what they’ve learned to other senior executives and the audit committee of the board.

As a matter of principle, corporate accountants have always maintained a degree of confidentiality about companies’ finances. But there has never been any guidance concerning when that confidentiality should be breached.

In the case of suspected fraud or other illegal acts, however, the International Ethics Standards Board for Accountants (IESBA), an independent standard-setting board, is finally suggesting new steps that different accountants should take to disclose that information to management, the board, or external sources. Last month the IESBA issued an exposure draft on how professional accountants should disclose suspected illegal acts committed by a client or employer. The draft adds changes to the Code of Ethics for Professional Accountants, which was first revised in 2009.

The IESBA exposure draft distinguishes between auditors and corporate and other professional accountants. If the suspected illegal act affects financial reporting or is within the expertise of the auditor, the auditor would be required to discuss the issue with management and the audit committee. If the response within the company is, in the auditor’s judgment, “not appropriate” and “of such consequence that disclosure would be in the public interest,” the auditor must disclose the suspected illegalities to “appropriate” external authorities, according to the proposal.

For other professional accountants, including those who work for corporations, the approach would be similar except for one thing: while auditors are required to report to an appropriate authority, staff and other accountants serving the company would be only obliged to discuss it with management and the audit committee.

“For accountants, it is not a requirement to disclose to an appropriate authority; it’s a right they are expected to exercise,” explains an official at the IESBA. “We recognize the fact there are accountants at all levels within the organization,” the official adds. “For an accountant in business to have a requirement to always report out might be going a little far, so that’s why we have that slightly different test.”

All this added responsibility for accountants, however, is not expected to lessen the role CFOs must play in ensuring their company’s financial reporting runs as accurately as possible.

If a finance chief is told by his or her staff accountant about a suspected illegal act, the CFO would be governed by the same code of ethics, since he or she is in the accounting reporting chain. “All professional accountants have a part to play here if they encounter a suspected illegal act. A distinguishing mark of the accounting profession is its responsibility of acting in the public interest,” says the IESBA official.

CFO.com (http://s.tt/1mGcO)

Continued in article

Bob Jensen's threads on whistle blowing ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#WhistleBlowing


"2012 tax software survey:  Which products and features yielded frustration or bliss?" by Paul Bonner, Journal of Accountancy, September 2012 ---
http://www.journalofaccountancy.com/Issues/2012/Sep/20125667.htm

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


A new expected credit loss impairment model

"FASB takes new path in contentious financial instruments project," by Ken Tysiac, Journal of Accountancy, August 31, 2012 ---
http://journalofaccountancy.com/News/20126359.htm

Bob Jensen's threads on impairment ---
http://www.trinity.edu/rjensen/Theory02.htm#Impairment


In the Store Point and Click:  Another Example of Technology Replacing Labor
"Walmart Is Testing A Scan-And-Go iPhone App That Could One Day Replace Cashiers," by Alyson Shontell, Business Insider, September 1, 2012 ---
http://www.businessinsider.com/walmart-is-testing-a-scan-and-go-iphone-app-that-could-replace-cashiers-2012-9

In Rogers Arkansas, Walmart recently asked employees and their friends with iPhones to test out a new self scan-and-go app. It's one of a few mobile initiatives Walmart is working on that could one day replace or aid its many cashiers.

 

The test was put together by Walmart Labs. The app let employees scan items on their phones but not pay on the devices. Instead the app transferred all scanned items to a self-checkout kiosk.

But Walmart has said it's working on a mobile payment network with other retailers that could rival current solutions like Google Wallet.

Walmart spokesman David Tovar tells Reuters the company is "continually testing new and innovative ways to serve customers and enhance the shopping experience in our stores."

Walmart's US stores spend about $12 millions on cashier wages per second, so an app like this could save the company a lot of money.


"Tax Court Rejects Geithner/Turbo Tax Defense,"
Bartlett v. Commissioner, T.C. Memo. 2012-254 (Sept. 4, 2012):
http://www.ustaxcourt.gov/InOpHistoric/BartlettMemo.TCM.WPD.pdf

Question
How nasty should the IRS get when trying to collect from its boss?
Warning:  It never pays to get nasty with the IRS, even for the boss (who I'm sure already coughted up without a real fight)

From Paul Caron

Prior TaxProf Blog coverage:

 

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


August 30, 2012
At its meeting yesterday, the United States Financial Accounting Standards Board (FASB) reversed its position on a joint decision made recently with the IASB on the measurement requirements for an investment company’s interest in another investment company.
http://www.iasplus.com/en/news/2012/august/fasb-reverses-decision-on-accounting-for-interests-in-other-investment-companies


Student Assignment on Fraud: Compare the Stockton Versus Orange County Bankruptcies

The Cause of Stockton's Bankruptcy:  Lousy Risk Disclosures on Bond Sales for Stockton's Pension Funds

"How Plan to Help City Pay Pensions Backfired," by Mary Williams Walsh,  The New York Times, September 3, 2012 ---
http://www.nytimes.com/2012/09/04/business/how-a-plan-to-help-stockton-calif-pay-pensions-backfired.html?_r=1

Jeffrey A. Michael, a finance professor in Stockton, Calif., took a hard look at his city’s bankruptcy this summer and thought he saw a smoking gun: a dubious bond deal that bankers had pushed on Stockton just as the local economy was starting to tank in the spring of 2007, he said.

Stockton sold the bonds, about $125 million worth, to obtain cash to close a shortfall in its pension plans for current and retired city workers. The strategy backfired, which is part of the reason the city is now in Chapter 9 bankruptcy. Stockton is trying to walk away from the so-called pension obligation bonds and to renegotiate other debts.

After reviewing an analysis of the bond deal, underwritten by the ill-fated investment bank, Lehman Brothers, and watching a recording of the Stockton City Council meeting where Lehman bankers pitched the deal, Mr. Michael concluded that “Stockton is entitled to some relief, due to deceptive and misleading sales practices that understated the risk.”

“Lehman Brothers just didn’t disclose all the risks of the transaction,” he said. “Their product didn’t work, in the same way as if they had built a marina for the city and then the marina collapsed.”

Financial analysts and actuaries say essentially the same pitch that swayed Stockton has been made thousands of times to local governments all over the country — and that many of them were drawn into deals that have since cost them dearly.

Since virtually all pension obligation bonds turn on the same basic strategy that Stockton followed, Mr. Michael’s research could be a road map for avoiding more such problems, or perhaps for seeking redress. His analysis was part of his August economic forecast for the region, which he prepares as director of the Business Forecasting Center at the University of the Pacific.

There are about $64 billion in pension obligation bonds outstanding, and even though issuance has slowed, more of the bonds are coming to market, even now.

Officials in Fort Lauderdale, Fla., are scheduled to vote on a $300 million pension obligation bond on Wednesday, for instance. Hamden, Conn., has amended its charter to allow for the bonds to rescue a city pension fund that is wasting away. Oakland, Calif., recently issued about $211 million of the bonds, following the lead of several other California cities and counties.

The basic premise of all pension obligation bonds is that a municipality can borrow at a lower rate of interest than the rate its pension fund assumes its assets will earn on average over the long term. Critics contend that municipalities that try this are in essence borrowing money and betting it on the stock market, through their pension funds. The interest on pension obligation bonds is not tax-exempt for this reason.

Alicia H. Munnell, director of the Center for Retirement Research at Boston College, looked at outcomes for nearly 3,000 pension obligation bonds issued from 1986 to 2009 and found that most were in the red. “Only those bonds issued a very long time ago and those issued during dramatic stock downturns have produced a positive return,” Ms. Munnell wrote with colleagues Thad Calabrese, Ashby Monk and Jean-Pierre Aubry. “All others are in the red.” Only one in five of the pension obligation bonds issued since 1992 has matured, so the results could change in the future.

Among the places where the strategy has failed miserably is New Orleans, which sold about $170 million of such debt in 2000 to produce cash to finance the pensions of 820 retired firefighters. Until then, New Orleans had never funded their benefits and simply paid them out of pocket, leaving the retirees fearful that in a budget squeeze, the city might renege.

City officials based the deal on the expectation that the bond proceeds would be invested in assets that would pay 10.7 percent a year — an unusually aggressive assumption, but one that made the numbers work. New Orleans’s credit was weak, and its borrowing rate was expected to be 8.2 percent. To get the rate on the bonds down as much as possible, New Orleans also issued variable-rate debt, combined with derivatives in an attempt to hedge against rate increases.

But instead of earning 10.7 percent a year, the bond proceeds the city set aside for the firefighters’ pensions lost value over the years, first in the dot-com crash and then in the financial crisis. And instead of hedging against interest rate increases, the derivatives failed, leaving New Orleans paying 11.2 percent interest. The city also has a $115 million balloon payment coming due on the debt in March.

Continued in article

Jensen Comment
An interesting assignment for students might be to compare the bad investment causes of bankruptcy of Stockton, CA versus Orange County , CA,

Listen to Part of a Sixty Minutes video that I made available to my my students learning how to account for derivative financial instruments ---
http://www.cs.trinity.edu/~rjensen/000overview/mp3/SIXTY01.mp3

Boo to Merrill Lynch
Listen to Part of a Sixty Minutes video that I made available to my my students learning how to account for derivative financial instruments ---
http://www.cs.trinity.edu/~rjensen/000overview/mp3/SIXTY01.mp3

Merrill Lynch was a major player in the infamous Orange County fraud when selling derivative financial instruments.  You can read more about this at http://www.trinity.edu/rjensen/FraudCongress.htm#DerivativesFrauds 

It constantly amazes me how often the name Merrill Lynch crops up in news accounts of both outright frauds and concerns over ethics.  The latest account is typical.  A senior vic

They were an admixture of old-fashioned and uncouth, a duo almost as unlikely as Neil Simon's odd couple.  The seventy-year-old had been married to the same woman for forty years, in the same job for more than twenty, and in the same place--Orange County, California--forever.  The fifty-four-year-old had recently divorced and remarried, switched jobs often and moved even more frequently, most recently to a million-dollar home in swanky Moraga, east of Oakland, California.  Despite their obvious differences, they spoke on the phone virtually every day for many years.  They first met in 1975 and had traded billions of dollars of securities with each other.  The elder of the pair was the Orange County treasurer, Robert Citron; the younger was a Merrill Lynch bond salesman, Mike Stamenson.  Together they created what many officials described as the biggest financial fiasco in the United States: Orange County's $1.7 billion loss on derivative
Frank Partnoy, Page 157 of Chapter 8 entitled "The Odd Couple"
F.I.A.S.C.O. : The Inside Story of a Wall Street Trader by Frank Partnoy
- 283 pages (February 1999) Penguin USA (Paper); ISBN: 0140278796 
A longer passage from Chapter 8 appears at http://www.trinity.edu/rjensen/fraud.htm#DerivativesFraud 

A second passage beginning on Page 166 reads as follows:

Also on December 5, Orange County filed the largest municipal bankruptcy petition in history.  Orange County's funds covered nearly two hundred schools, cities, and special districts.  The losses amounted to almost $1,000 for every  man, woman, and child in the county.  The county's investments, including structured notes, had dropped 27 percent in value, and the county said it no longer could meet its obligations.

The bankruptcy filing made the ratings agencies look like fools.  Just a few months before, in August 1994, Moody's Investors Service had given Orange County's debt a rating of Aa1, the highest rating of any California county.  A cover memo to the rating letter stated, "Well done, Orange County."  Now, on December 7, an embarrassed Moody's declared Orange County's bonds to be "junk"--and Moody's was regarded as the most sophisticated ratings agency.  The other major agencies, including S&P, also had failed to anticipate the bankruptcy.  Soon these agencies would face lawsuits related to their practice of rating derivatives.

On Tuesday, January 17, 1995, Robert Citron and Michael Stamenson delivered prepared statements in an all-day hearing before the California Senate Special Committee on Local Government Investments, which had subpoenaed them to testify.  It was a pitiful display.  Citron left his wild clothes at home, testifying in a dull gray suit and bifocals.  He apologized and pleaded ignorance.  He said, "In retrospect, I wish I had more education and training in complex government securities."  Stuttering and subdued, appearing to be the victim, Citron tried to excuse his whole life: He didn't serve in the military because he had asthma; he didn't graduate from USC because of financial troubles; he was an inexperienced investor who had never even owned a share of stock.  It was pathetic.

Stamenson also said he was sorry and cited the enormous personal pain the calamity had produced.  He pretended naivete.  He said Citron was a highly sophisticated investor and that he had "learned a lot" from him.  Stamenson's story was as absurd as Citron's was sad.  When Stamenson asserted that he had not acted as a financial adviser to the county, one Orange County Republican, Senator William A. Craven, couldn't take it anymore and called him a liar.  Stamenson finally admitted that he had spoken to Citron often--Citron had claimed every day--but he refused to concede that he had been an adviser.  At this point Craven exploded again, asking, "Well, what the hell were you talking about to this man every day?  The weather?"  Citron's lawyer, David W. Wiechert, was just as angry.  He said, "For Merrill Lynch to distance themselves from this crisis would be akin to Exxon distancing themselves from the Valdez."

 

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


"WHAT IS PENSION EXPENSE, REALLY? THE CASE OF WEYERHAEUSER," by Anthony H. Catanach and J. Edward Ketz, Grumpy Old Accountants Blog, September 17, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/759

As you may recall, we previously discussed problems in government pension accounting (see California Budget Woes and Chimerical Pension Beliefs: GASB Could Help if it Had the Will”).  In this essay we turn our attention to corporate pension accounting, pension expense specifically, using Weyerhaeuser disclosures as an example.

Let’s begin with a brief review of the FASB’s pension rules in ASR 715.  The firm reports pension assets and liabilities in the balance sheet, netted.  The entity’s pension assets can include cash, investments, and any other assets that are in the pension plan, and these are valued at fair value.  The firm also measures its liability, the projected benefit obligation (PBO), which equals the present value of the estimated pension cash outflows to retirees, which these former employees have already earned.  The pension assets and liabilities are then netted against each other, yielding what we actually see on the balance sheet. If assets exceed liabilities, the net amount is displayed in the asset section of the balance sheet.  If the liabilities are greater, the net amount is shown in corporate liabilities.

In the income statement, the firm reports pension expense, a complex amalgam quite different from pension contributions.  GAAP pension expense is defined as the period service cost (increase in PBO), plus the period’s interest on the PBO, minus the expected (not actual) return on the plan assets, less any amortization of prior service cost, and finally, plus or minus any amortization of pension gains and losses.  And as we would expect from our accounting standard-setters, some items bypass the income statement: prior service costs and pension gains and losses.  These two items are shown in the shareholders’ equity section of the balance sheet, in accumulated other comprehensive income (loss).  Given the complexity of the FASB’s rules, the financial statements are supplemented with an ever increasing myriad of footnote disclosures that describe various details and assumptions so the reader can “better” assess the company’s pension position.

While one can do a lot of analysis when it comes to pension expense, our focus is on the interest cost and the expected return on pension assets components. These two items warrant particular scrutiny given management’s considerable discretion in their measurement, and because changes in their measurements can have major effects on the bottom line and on reported liabilities.

The following analysis relies in part on a very good study written by Nick Gibbons, an analyst at Gradient AnalyticsThe study is entitled “Pension Issue Commentary #4,” and was published on June 21, 2012.  Last year’s report may be found at http://www.earningsquality.com/commentary.do?action=View.

As stated before, the PBO is the present value of estimated future retiree cash outflows discounted at some appropriate rate, and the interest cost component of pension expense is that same assumed rate multiplied by the beginning-of-the-year value of the PBO.  Both items depend on the assumed rate that is used.  Not surprisingly, higher rates will lower the PBO liability, but increase the interest charge, and related pension expense.

From Weyerhaeuser’s 2011 10-K footnote 8, one sees that the firm applies a discount rate of 4.5% and obtains a PBO of $5,841 (all dollar amounts in millions).  (The 4.5% rate is for U.S. plans, while the rate for Canadian plans is 4.9%).  In his study, Gibbons created a sample of 354 companies, analyzed their 2011 pension disclosures, and found a median discount rate of 4.75%. So, given the proximity of Weyerhaeuser’s discount rate to the median rate, we are somewhat comfortable with Weyerhaeuser’s choice.

However, if one is uncomfortable with a company’s assumed rate, or if one desires to do a sensitivity analysis, there is an easy tack to employ.  Given that pension payouts already earned extend several decades into the future, one can assume the debt is a perpetuity, a stream of cash payments that continues forever.  Since the present value interest factors get pretty small 20 years out, and further, the error should be relatively small.  Then the value of an “adjusted” PBO would equal the reported PBO times the reported rate divided by the “adjusted” rate believed to be more realistic.

For example, let’s say we question the reasonableness of Weyerhaeuser’s rate…let’s say we think it really should be 3.5%.  What happens?  Well, the PBO soars by almost 28.6% to $7,510:

 (($5,841 X 4.5%) ÷ 3.5%) = $7,510

 Conversely, if we believe that the “adjusted” rate should be 5.5%, the PBO liability drops 18.2% to $4,779.

(($5,841 X 4.5%) ÷ 5.5%) = $4,779

 And if the “adjusted” rate is assumed to be 4.75% (to standardize everybody’s rate and increase comparability given Gibbons’ study), the PBO value is $5,533.  A change of merely one quarter of one percent decreases the liability by $308, a change of 5.3%.

(($5,841 X 4.5%) ÷ 4.75%) = $5,533

 These examples demonstrate the impact of the discount rate on the projected benefit obligation and on the pension expense.  Given how easily managers can manipulate reported pension liabilities, such a sensitivity analysis is an important aspect of pension analysis.

The second big assumption that managers may not be able to resist “tinkering” with is the expected rate of return on the pension assets.  Allegedly, the FASB employs the expected rate of return (rather than the actual rate of return) to try to supply a long-term perspective and smooth the pension costs.

Continued in article

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


"Global curbs loom on offshore corporate tax avoidance," by Chris Vellacott, Reuters, August 30, 2012 ---
http://www.reuters.com/article/2012/08/30/us-offshoretax-curbs-idUSBRE87T0NT20120830

Cash-strapped governments keen to replenish their coffers and international bodies such as the OECD are stepping up efforts to claw back revenue lost when companies shift profit overseas to cut their tax bills.

A legal and routine practice known as transfer pricing, whereby subsidiaries of the same company in different countries trade with each other, is sometimes used by companies to move cash to jurisdictions with lower tax rates, such as tax havens.

But the process can be abused by inflating the price of goods and services traded with overseas units in order to shift more money offshore and evade corporate taxes, and authorities now want to toughen up their policies and close loopholes.

"Tax base erosion and profit shifting are real problems, they need to be dealt with," Joe Andrus, head of the transfer pricing unit at the Organisation for Economic Co-operation and Development, which sets the international guidelines on the practice, told Reuters.

Campaigners say economic damage caused by aggressive use of transfer pricing extends far beyond depriving governments of developed countries of revenue in fiscally straightened times.

The charity Christian Aid estimates the world's poorest countries are deprived of $160 billion in tax revenues every year by multinationals transferring profit beyond borders. The practice also distorts the economies of tax havens into which multinationals shift the profits.

Joao Pedro Martins, a Lisbon-based economist and author of a book about the Portuguese autonomous region of Madeira, says the "exports" of hundreds of multinational subsidiaries registered in the island have distorted its GDP at the locals' expense.

Though unemployment runs at more than 14 percent, the island's per capita GDP is 103 percent of the EU average, compared with 78 percent for the whole of Portugal, making it the second-richest part of the country after the capital Lisbon.

This means Madeira loses out on millions of euros of EU support it might otherwise get under a program of grants for regions with per capita GDP of less than 75 percent of the European average, Martins says.

The OECD champions a set of guidelines known as the "arm's-length" method which permits transfer pricing only when transactions between affiliates at are struck at market rates.

However, organizations can skirt this rule through trade in intangible assets or services where pricing can be arbitrary and much harder to benchmark against a global market rate.

"There is no such thing as an arms length price. The idea of the arms length price is fundamentally flawed from the outset," says John Christensen, director at pressure group Tax Justice Network which campaigns against aggressive tax avoidance.

Continued in article

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


Accounting Students Dropping Out of Accountics Science Doctoral Programs

September 5, 2012 message from Professor XXXXX

Hello Bob:

Thought you might find the following interesting.

I had a student as an undergrad that I encouraged to get a PhD.  She went out and worked a few years and came back to get a master’s degree.  During the master’s degree she decided what she really wanted was to be a professor and applied for a PhD degree at Tennessee.  Got accepted and went without finishing her masters.  One year later I found her in my master’s class.  She was so fed up with the total emphasis on what you have been calling accountics that she dropped out and came back to finish her masters.  I have been trying to convince her that it was just Tennessee and she really did want to become a professor but it has been an uphill battle and I would say at this point highly unlikely that she will ever again consider being a professor.

XXXXX

September 5, reply from Bob Jensen

Dear Professor XXXXX,

It's not just Tennessee. Virtually all accounting doctoral programs in AACSB accredited universities have literally been taken over by accountics science researchers --- http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

This is one of the main reason the 2012 Pathways Commission Report appeals for alternative tracks to be commenced in accountancy doctoral programs.

I had a similar (actually brilliant) student who did complete his masters degree in accounting at Trinity University. He was a joint accounting and mathematics  undergraduate major. He was admitted to the University of Texas doctoral program and dropped out for the same reason you mention above --- too much accountics and too little accounting even though he was doing well in his accountics science courses. He just was more interested in accounting than accountics.

Thanks,
Bob Jensen

September 5, 2012 reply from Professor YYYYY

We had a retired Marine who completed our BS and MS program. He was an extremely good student, so much so that we hired him as a lecturer when he completed his master's degree. After a few years he decided at age 45 to go get his PhD. He looked at several programs (RRRRR SSSSS, and TTTTT because they are all about 3-4 hours away and his family was not going to move with him).

He finally decided on TTTTT. TTTTT is a good school, but definitely not elite or one of the Top 10 accountics science programs. I felt that he could get a decent doctoral program there. He hated it despite doing well in the classes. He was frustrated at reading nothing but mathematics and statistical papers that had nothing to do with what he wanted to pursue; teaching and professional research. He mentioned this in class on several occasions and was basically told that real accounting professors were not interested in teaching. The PhD was a research degree and as such you would not be learning how to teach, it was assumed that you knew enough of that when admitted to the program and that your real goal should be to get placed at a school where teaching would not interfere with research. On several occasions the students took him aside and said to be careful about being out spoken in class regarding teaching and professional research. If he continued to mention those things the faculty would not be amenable to working with him on research projects or help him get through. I can remember back to my doctoral program in the late 90's and we did the same thing. To get along with the faculty you never expressed a desire to teach, it was all about research. Among your fellow students you could be open about desires to teach, but not faculty. I can remember several faculty members during my job search admonishing me for the schools where I was interviewing because they were "teaching schools" and beneath their desires for where grads of our schools should be applying. (this part of the message was deleted by Jensen)

What's more, when the doctoral student in question asked his adviser about application of the research to the profession the adviser was flummoxed by what he meant. It was not his job to apply his research to the profession but rather the profession to find what it needed if they wanted to. He said that personally he didn't feel any need to try to better the profession and that his profession was not accounting but academia. Needless to say he was discouraged and left TTTTT before the end of his first semester. He passed all four parts of his CPA exam (all >90) and is now working at one of the larger local CPA firms doing quite well.

Thought you might like to her another anecdotal report on what's going on in the ivory towers. I really enjoy having Steve Kachelmeyer on the listserv and the debates that go on because of his willingness to interact. I know he brings a very different perspective from the majority of us on the list who are not big name researchers.

Hope all is going well with you and Erika. The weather in Texas is miserably hot, not as abd as last year, but still hot. Forecast is for 105 tomorrow, September 6th!

 

The Sad State of Accounting Doctoral Programs in North America

"Exploring Accounting Doctoral Program Decline:  Variation and the Search for Antecedents," by Timothy J. Fogarty and Anthony D. Holder, Issues in Accounting Education, May 2012 ---
Not yet posted on June 18, 2012

ABSTRACT
The inadequate supply of new terminally qualified accounting faculty poses a great concern for many accounting faculty and administrators. Although the general downward trajectory has been well observed, more specific information would offer potential insights about causes and continuation. This paper examines change in accounting doctoral student production in the U.S. since 1989 through the use of five-year moving verges. Aggregated on this basis, the downward movement predominates, notwithstanding the schools that began new programs or increased doctoral student production during this time. The results show that larger declines occurred for middle prestige schools, for larger universities, and for public schools. Schools that periodically successfully compete in M.B.A.. program rankings also more likely have diminished in size. of their accounting Ph.D. programs. Despite a recent increase in graduations, data on the population of current doctoral students suggest the continuation of the problems associated with the supply and demand imbalance that exists in this sector of the U.S. academy.

September 5, 2012 reply from Dan Stone

This is very sad and very true.

Tim Fogarthy talks about the "ghettoization" of accounting education in some of his work and talks. The message that faculty get, and give, is that if a project has no chance for publication in a top X journal, then it is a waste of time. Not many schools are able to stand their ground, and value accounting education, in the face of its absence in any of the "top" accounting journals.

The paradox and irony is that accounting faculty devalue and degrade the very thing that most of them spend the most time doing. We seem to follow a variant of Woody Allen's maxim, "I would never join a club that would have me as a member." Here, it is, "I would never accept a paper for publication that concerns what I do with most of my time."

As Pogo said, "we have met the enemy and they is us."

Dan Stone

Jensen Comment
This is a useful update on the doctoral program shortages relative to demand for new tenure-track faculty in North American universities. However, it does not suggest any reasons or remedies for this phenomenon.  The accounting doctoral program in many ways defies laws of supply and demand. Accounting faculty are the among the highest paid faculty in rank (except possibly in unionized colleges and universities that are not wage competitive). For suggested causes and remedies of this problem see --- See Below!

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

Especially note the table of the entire history of accounting doctoral graduates for all AACSB universities in the U.S. ---
http://www.jrhasselback.com/AtgDoct/XDocChrt.pdf
In that table you can note the rise or decline (almost all declines) for each university.

Links to 91 AACSB University Doctoral Programs ---
http://www.jrhasselback.com/AtgDoct/AtgDoctProg.html

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 

The AAA's Pathways Commission Accounting Education Initiatives Make National News
Accountics Scientists Should Especially Note the First Recommendation

"Accounting for Innovation," by Elise Young, Inside Higher Ed, July 31, 2012 ---
http://www.insidehighered.com/news/2012/07/31/updating-accounting-curriculums-expanding-and-diversifying-field

Accounting programs should promote curricular flexibility to capture a new generation of students who are more technologically savvy, less patient with traditional teaching methods, and more wary of the career opportunities in accounting, according to a report released today by the Pathways Commission, which studies the future of higher education for accounting.

In 2008, the U.S. Treasury Department's  Advisory Committee on the Auditing Profession recommended that the American Accounting Association and the American Institute of Certified Public Accountants form a commission to study the future structure and content of accounting education, and the Pathways Commission was formed to fulfill this recommendation and establish a national higher education strategy for accounting.

In the report, the commission acknowledges that some sporadic changes have been adopted, but it seeks to put in place a structure for much more regular and ambitious changes.

The report includes seven recommendations:

According to the report, its two sponsoring organizations -- the American Accounting Association and the American Institute of Certified Public Accountants -- will support the effort to carry out the report's recommendations, and they are finalizing a strategy for conducting this effort.

Hsihui Chang, a professor and head of Drexel University’s accounting department, said colleges must prepare students for the accounting field by encouraging three qualities: integrity, analytical skills and a global viewpoint.

“You need to look at things in a global scope,” he said. “One thing we’re always thinking about is how can we attract students from diverse groups?” Chang said the department’s faculty comprises members from several different countries, and the university also has four student organizations dedicated to accounting -- including one for Asian students and one for Hispanic students.

He said the university hosts guest speakers and accounting career days to provide information to prospective accounting students about career options: “They find out, ‘Hey, this seems to be quite exciting.’ ”

Jimmy Ye, a professor and chair of the accounting department at Baruch College of the City University of New York, wrote in an email to Inside Higher Ed that his department is already fulfilling some of the report’s recommendations by inviting professionals from accounting firms into classrooms and bringing in research staff from accounting firms to interact with faculty members and Ph.D. students.

Ye also said the AICPA should collect and analyze supply and demand trends in the accounting profession -- but not just in the short term. “Higher education does not just train students for getting their first jobs,” he wrote. “I would like to see some study on the career tracks of college accounting graduates.”

Mohamed Hussein, a professor and head of the accounting department at the University of Connecticut, also offered ways for the commission to expand its recommendations. He said the recommendations can’t be fully put into practice with the current structure of accounting education.

“There are two parts to this: one part is being able to have an innovative curriculum that will include changes in technology, changes in the economics of the firm, including risk, international issues and regulation,” he said. “And the other part is making sure that the students will take advantage of all this innovation.”

The university offers courses on some of these issues as electives, but it can’t fit all of the information in those courses into the major’s required courses, he said.

Continued in article

Jensen Comment
This is one of the most important initiatives to emerge from the AAA in recent years.

I would like to be optimistic, but change will be very slow. President Wilson, who was also an PhD professor, once remarked that it's easier to move a cemetery than to change a university.

It is easier to move a cemetery than to affect a change in curriculum.
Woodrow Wilson

President of Princeton University 1902-1910
President of the United States 1913-1921

And in the 21st Century you can imagine the lawsuits that would clog the courts if a town tried to move a cemetery.

Bob Jensen's threads on Higher Education Controversies and Need for Change ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm

The sad state of accountancy doctoral programs ---
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

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 

July 31, 2012 reply from Paul Williams

Bob, A good place to start is to jettison pretenses of accounting being a science. As Anthony Hopwood noted in his presidential address, accounting is a practice. The tools of science are certainly useful, but using those tools to investigate accounting problems is quite a different matter than claiming that accounting is a science. Teleology doesn't enter the picture in the sciences -- nature is governed by laws, not purposes. Accounting is nothing but a purposeful activity and must (as Jagdish has eloquently noted here and in his Critical Perspectives on Accounting article) deal with values, law and ethics. As Einstein said, "In nature there are no rewards or punishments, only consequences." For a social practice like accounting to pretend there are only consequences (as if economics was a science that deals only with "natural kinds) has been a major failing of the academy in fulfilling its responsibilities to a discipline that also claims to be a profession. In spite of a "professional economist's" claims made here that economics is a science, there is quite some controversy over that even within the economic community. Ha-Joon Chang, another professional economist at Cambridge U. had this to say about the economics discipline: "Recognizing that the boundaries of the market are ambiguous and cannot be determined in an objective way lets us realize that economics is not a science like physics or chemistry, but a political exercise. Free-market economists may want you to believe that the correct boundaries of the market can be scientifically determined, but this is incorrect. If the boundaries of what you are studying cannot be scientifically determined what you are doing is not a science (23 Things They Don't Tell You About Capitalism, p. 10)." The silly persistence of professional accountants in asserting that accounting is apolitical and aethical may be a rationalization they require, but for academics to harbor the same beliefs seems to be a decidedly unscientific posture to take. In one of Ed Arrington's articles published some time ago, he argued that accounting's pretenses of being scientific are risible. As he said (as near as I can recall): "Watching the positive accounting show, Einstein's gods must be rolling in the aisles."


"For Spain's Jobless, Time Equals Money," by Matt Moffett, The Wall Street Journal, August 27, 2012 ---
http://professional.wsj.com/article/SB10000872396390443404004577577352038273664.html?mg=reno-wsj

Even though she's one of millions of young, unemployed Spaniards, 22-year-old Silvia Martín takes comfort in knowing that her bank is still standing behind her. It's not a lending institution, but rather a time bank whose nearly 400 members barter their services by the hour.

Ms. Martín, who doesn't own a car and can't afford taxis, has relied on other time-bank members to give her lifts around town for her odd jobs and errands, as well as to help with house repairs. In return, she has cared for members' elderly relatives, organized children's parties and even hauled boxes for a member moving to a new house.

The time bank not only saves her cash, she says, but also lifts her spirits by making her feel "part of a community that's taking some positive action during hard times."

As Europe's leaders struggle with a five-year-old economic crunch that has saddled Spain with the industrialized world's highest jobless rate, young Spaniards are increasingly embracing such bottom-up self-help initiatives to cope. The diverse measures—some commonly associated with rural or disaster-zone economies—supplement a public safety net that is fraying under government austerity programs.

Besides time banks, they include barter markets springing up in barrios, local currencies designed to spur the flagging retail economy, and charity networks that repurpose discarded goods. An environmental group recently launched Huertos Compartidos, or Shared Gardens, that links up owners of vacant land with those willing to plant vegetables in them and share the harvest.

The growth of time banks revives a concept pioneered by 19th-century anarchists and socialists in the U.S. and Europe, who wanted to test their philosophy that prices of goods and services should more closely reflect the labor involved in producing them.

The number of such banks in Spain—some run by neighborhood associations, others by local governments—has nearly doubled to 291 over the past two years, according to a survey by Julio Gisbert, a banker who runs a website called Vivir Sin Empleo, or Living Without Work, that tracks mutual-aid initiatives. Some economists worry that the rise of such informal systems of economic exchange is pushing more of Spain's economy underground—out of the view of regulators and tax collectors, and effectively sending the country back in time developmentally.

"It's a step backward not only for a euro country, but also for a developed country," says José García Montalvo, an economics professor at the University of Pompeu Fabra in Barcelona.

Banks and social currencies, he says, can backfire on the broader economy since the income received from such arrangements often goes undeclared, therefore depriving the government of tax revenue. Social currencies and time banks also preclude taking on debt, adds Mr. García Montalvo, which in moderate levels can help people start businesses and access beneficial goods and services that they can't afford upfront.

Others, though, say the measures represent a significant stabilizing force in society. For "people who can't find work, these kinds of possibilities of exchanges and mutual help can help make bearable a situation that otherwise would be unsustainable," says José Luis Álvarez Arce, director of the economics department at the University of Navarra.

Continued in article

How "employed" people in America evade taxes via the underground cash and barter economy ---
http://www.cs.trinity.edu/~rjensen/temp/TaxNoTax.htm


Can You Train Business School Students To Be Ethical?
The way we’re doing it now doesn’t work. We need a new way

Question
What is the main temptation of white collar criminals?

Answer from http://www.trinity.edu/rjensen/FraudEnronQuiz.htm#01
Jane Bryant Quinn once said something to the effect that, when corporate executives and bankers see billions of loose dollars swirling above there heads, it's just too tempting to hold up both hands and pocket a few millions, especially when colleagues around them have their hands in the air.  I tell my students that it's possible to buy an "A" grade in my courses but none of them can possibly afford it.  The point is that, being human, most of us are vulnerable to some temptations in a weak moment.  Fortunately, none of you reading this have oak barrels of highly-aged whiskey in your cellars, the world's most beautiful women/men lined up outside your bedroom door, and billions of loose dollars swirling about like autumn leaves in a tornado.  Most corporate criminals that regret their actions later confess that the temptations went beyond what they could resist.  What amazes me in this era, however, is how they want to steal more and more after they already have $100 million stashed.  Why do they want more than they could possibly need?

"Can You Train Business School Students To Be Ethical? The way we’re doing it now doesn’t work. We need a new way," by Ray Fisman and Adam Galinsky, Slate, September 4, 2012 ---
http://www.slate.com/articles/business/the_dismal_science/2012/09/business_school_and_ethics_can_we_train_mbas_to_do_the_right_thing_.html

A few years ago, Israeli game theorist Ariel Rubinstein got the idea of examining how the tools of economic science affected the judgment and empathy of his undergraduate students at Tel Aviv University. He made each student the CEO of a struggling hypothetical company, and tasked them with deciding how many employees to lay off. Some students were given an algebraic equation that expressed profits as a function of the number of employees on the payroll. Others were given a table listing the number of employees in one column and corresponding profits in the other. Simply presenting the layoff/profits data in a different format had a surprisingly strong effect on students’ choices—fewer than half of the “table” students chose to fire as many workers as was necessary to maximize profits, whereas three quarters of the “equation” students chose the profit-maximizing level of pink slips. Why? The “equation” group simply “solved” the company’s problem of profit maximization, without thinking about the consequences for the employees they were firing.

 

Rubinstein’s classroom experiment serves as one lesson in the pitfalls of the scientific method: It often seems to distract us from considering the full implications of our calculations. The point isn’t that it’s necessarily immoral to fire an employee—Milton Friedman famously claimed that the sole purpose of a company is indeed to maximize profits—but rather that the students who were encouraged to think of the decision to fire someone as an algebra problem didn’t seem to think about the employees at all.

 

The experiment is indicative of the challenge faced by business schools, which devote themselves to teaching management as a science, without always acknowledging that every business decision has societal repercussions. A new generation of psychologists is now thinking about how to create ethical leaders in business and in other professions, based on the notion that good people often do bad things unconsciously. It may transform not just education in the professions, but the way we think about encouraging people to do the right thing in general.

 

At present, the ethics curriculum at business schools can best be described as an unsuccessful work-in-progress. It’s not that business schools are turning Mother Teresas into Jeffrey Skillings (Harvard Business School, class of ’79), despite some claims to that effect. It’s easy to come up with examples of rogue MBA graduates who have lied, cheated, and stolen their ways to fortunes (recently convicted Raj Rajaratnam is a graduate of the University of Pennsylvania’s Wharton School of Business; his partner in crime, Rajat Gupta, is a Harvard Business School alum). But a huge number of companies are run by business school grads, and for every Gupta and Rajaratnam there are scores of others who run their companies in perfectly legal anonymity. And of course, there are the many ethical missteps by non-MBA business leaders—Bernie Madoff was educated as a lawyer; Enron’s Ken Lay had a Ph.D. in economics.

 

In actuality, the picture suggested by the data is that business schools have no impact whatsoever on the likelihood that someone will cook the books or otherwise commit fraud. MBA programs are thus damned by faint praise: “We do not turn our students into criminals,” would hardly make for an effective recruiting slogan.

 

If it’s too much to expect MBA programs to turn out Mother Teresas, is there anything that business schools can do to make tomorrow’s business leaders more likely to do the right thing? If so, it’s probably not by trying to teach them right from wrong—moral epiphanies are a scarce commodity by age 25, when most students start enrolling in MBA programs. Yet this is how business schools have taught ethics for most of their histories. They’ve often quarantined ethics into the beginning or end of the MBA education. When Ray began his MBA classes at Harvard Business School in 1994, the ethics course took place before the instruction in the “science of management” in disciplines like statistics, accounting, and marketing. The idea was to provide an ethical foundation that would allow students to integrate the information and lessons from the practical courses with a broader societal perspective. Students in these classes read philosophical treatises, tackle moral dilemmas, and study moral exemplars such as Johnson & Johnson CEO James Burke, who took responsibility for and provided a quick response to the series of deaths from tampered Tylenol pills in the 1980s.
It’s a mistake to assume that MBA students only seek to maximize profits—there may be eye-rolling at some of the content of ethics curricula, but not at the idea that ethics has a place in business. Yet once the pre-term ethics instruction is out of the way, it is forgotten, replaced by more tangible and easier to grasp matters like balance sheets and factory design.  Students get too distracted by the numbers to think very much about the social reverberations—and in some cases legal consequences—of employing accounting conventions to minimize tax burden or firing workers in the process of reorganizing the factory floor.

 

Business schools are starting to recognize that ethics can’t be cordoned off from the rest of a business student’s education. The most promising approach, in our view, doesn’t even try to give students a deeper personal sense of mission or social purpose – it’s likely that no amount of indoctrination could have kept Jeff Skilling from blowing up Enron. Instead, it helps students to appreciate the unconscious ethical lapses that we commit every day without even realizing it and to think about how to minimize them.  If finance and marketing can be taught as a science, then perhaps so too can ethics.

 

These ethical failures don’t occur at random – countless experiments in psychology and economics labs and out in the world have documented the circumstances that make us most likely to ignore moral concerns – what social psychologists Max Bazerman and Ann Tenbrusel call our moral blind spots.  These result from numerous biases that exacerbate the sort of distraction from ethical consequences illustrated by the Rubinstein experiment. A classic sequence of studies illustrate how readily these blind spots can occur in something as seemingly straightforward as flipping a fair coin to determine rewards. Imagine that you are in charge of splitting a pair of tasks between yourself and another person. One job is fun and with a potential payoff of $30; the other tedious and without financial reward. Presumably, you’d agree that flipping a coin is a fair way of deciding—most subjects do. However, when sent off to flip the coin in private, about 90 percent of subjects come back claiming that their coin flip came up assigning them to the fun task, rather than the 50 percent that one would expect with a fair coin. Some people end up ignoring the coin; more interestingly, others respond to an unfavorable first flip by seeing it as “just practice” or deciding to make it two out of three. That is, they find a way of temporarily adjusting their sense of fairness to obtain a favorable outcome.

 

Jensen Comment
I've always thought that the most important factors affecting ethics were early home life (past) and behavior others in the work place (current). I'm a believer in relative ethics where bad behavior is affected by need (such as being swamped in debt) and opportunity (weak internal controls at work).  I've never been a believer in the effectiveness of teaching ethics in college, although this is no reason not to teach ethics in college. It's just that the ethics mindset was deeply affected before coming to college (e.g. being street smart in high school) and after coming to college (where pressures and temptations to cheat become realities).

An example of the follow-the-herd ethics mentality.
If Coach C of the New Orleans Saints NFL football team offered Player X serious money to intentionally and permanently injure Quarterback Q of an opposing team, Player X might've refused until he witnessed Players W, Y, and Z being paid to do the same thing.  I think this is exactly what happened when several players on the defensive team of the New Orleans Saints intentionally injured quarterbacks for money.

New Orleans Saints bounty scandal --- http://en.wikipedia.org/wiki/New_Orleans_Saints_bounty_scandal

 

Question
What is the main temptation of white collar criminals?

Answer from http://www.trinity.edu/rjensen/FraudEnronQuiz.htm#01
Jane Bryant Quinn once said something to the effect that, when corporate executives and bankers see billions of loose dollars swirling above there heads, it's just too tempting to hold up both hands and pocket a few millions, especially when colleagues around them have their hands in the air.  I tell my students that it's possible to buy an "A" grade in my courses but none of them can possibly afford it.  The point is that, being human, most of us are vulnerable to some temptations in a weak moment.  Fortunately, none of you reading this have oak barrels of highly-aged whiskey in your cellars, the world's most beautiful women/men lined up outside your bedroom door, and billions of loose dollars swirling about like autumn leaves in a tornado.  Most corporate criminals that regret their actions later confess that the temptations went beyond what they could resist.  What amazes me in this era, however, is how they want to steal more and more after they already have $100 million stashed.  Why do they want more than they could possibly need?

See Bob Jensen's "Rotten to the Core" document at http://www.trinity.edu/rjensen/FraudRotten.htm
The exact quotation from Jane Bryant Quinn at http://www.trinity.edu/rjensen/FraudRotten.htm#MutualFunds

Why white collar crime pays big time even if you know you will eventually be caught ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays

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

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

September 5, 2012 reply from Paul Williams

Bob,

This is the wrong question because business schools across all disciplines contained therein are trapped in the intellectual box of "methodological individualism." In every business discipline we take as a given that the "business" is not a construction of human law and, thus of human foible, but is a construction of nature that can be reduced to the actions of individual persons. Vivian Walsh (Rationality Allocation, and Reproduction) critiques the neoclassical economic premise that agent = person. Thus far we have failed in our reductionist enterprise to reduce the corporation to the actions of other entities -- persons (in spite of principal/agent theorists claims). Ontologically corporations don't exist -- the world is comprised only of individual human beings. But a classic study of the corporation (Diane Rothbard Margolis, The Managers: Corporate Life in America) shows the conflicted nature of people embedded in a corporate environment where the values they must subscribe to in their jobs are at variance with their values as independent persons. The corporate "being" has values of its own. Business school faculty, particularly accountics "scientists," commit the same error as the neoclassical economists, which Walsh describes thusly:

"...if neo-classical theory is to invest its concept of rational agent with the penumbra of moral seriousness derivable from links to the Scottish moral philosophers and, beyond them, to the concept of rationality which forms part of the conceptual scheme underlying our ordinary language, then it must finally abandon its claim to be a 'value-free` science in the sense of logical empiricism (p. 15)." Business, as an intellectual enterprise conducted within business schools, neglects entirely "ethics" as a serious topic of study and as a problem of institutional design. It is only a problem of unethical persons (which, at sometime or another, includes every human being on earth). If one takes seriously the Kantian proposition that, to be rationally ethical beings, humans must conduct themselves so as to treat always other humans not merely as means, but also always as ends in themselves, then business organization is, by design, unethical. Thus, when the Israeli students had to confront employees "face-to-face" rather than as variables in a profit equation, it was much harder for them to treat those employees as simply disposable means to an end for a being that is merely a legal fiction. One thing we simply do not treat seriously enough as a worthy intellectual activity is the serious scrutiny of the values that lay conveniently hidden beneath the equations we produce. What thoughtful person could possibly subscribe to the notion that the purpose of life is to relentlessly increase shareholder wealth? Increasing shareholder value is a value judgment, pure and simple. And it may not be a particularly good one. Why would we be surprised that some individuals conclude that "stealing" from them (they, like the employees without names in the employment experiment, are ciphers) is not something that one need be wracked with guilt about. If the best we can do is prattle endlessly on about the "tone at the top" (do people who take ethics seriously get to the top?), then the intellectual seriousness which ethics is afforded within business schools is extremely low. Until we start to appreciate that the business narrative is essentially an ethical one, not a technical one, then we will continue to rue the bad apples and ignore how we might built a better barrel.

Paul

September 5, 2012 reply from Bob Jensen

Hi Paul,


Do you think the ethics in government is in better shape, especially given the much longer and more widespread history of global government corruption throughout time? I don't think ethics in government is better than ethics in business from a historical perspective or a current perspective where business manipulates government toward its own ends with bribes, campaign contributions, and promises of windfall enormous job benefits for government officials who retire and join industry?


Government corruption is the name of the game in nearly all nations, beginning with Russia, China, Africa, South America, and down the list.


Political corruption in the U.S. is relatively low from a global perspective.
See the attached graph from
http://en.wikipedia.org/wiki/Corruption_%28political%29

 

 

Respectfully,
Bob Jensen

Question
How does capitalism possibly reduce as well as increase corruption in government?

 

Answer
I think it's because some of the more onerous types of governmental corruption, particularly outright bribery and extortion, are enormous frictions on having capitalism succeed.. If capitalism is to work at all, some of the most onerous types of political corruption have to be greatly reduced. Russian never realized this, and hence Russia remains one of the most violently corrupt and least successful "capitalist" nations on the planet.
 

"Mohammed Ibrahim: The Philanthropist of Honest Government Africa's cellphone billionaire, Mohammed Ibrahim, is offering a rich payoff for African leaders who don't take payoffs. He says it'll do for development what foreign aid never has," The Wall Street Journal, September 7, 2012 ---
http://professional.wsj.com/article/SB10000872396390444318104577587641175010510.html?mod=djemEditorialPage_t&mg=reno64-wsj

Jensen Comment
What struck me in the above how political corruption tends to be lower in many nations that rely more on capitalism and market distributions. Note in particular the tiny blue strip of Chile in that map. At one time Chile was one of the most corrupt nations of the world. Then some students of the Chicago School are given credit for making Chile literally the most capitalist nation in South America as well as the world in general (of course not without lingering inequality problems).- ---
http://en.wikipedia.org/wiki/Chicago_Boys
Chile has the best credit standing in Latin America.

Also note how non-capitalist nations that are wealthy in resources such as Russia, Saudi Arabia, and Veneszuela are the most corrupt in the world.

The real test over the next 50 years will be China. China is a very corrupt nation, especially at the local levels of government. It will be interesting to see if the continued rise in capitalism can work a miracle somewhat like that in Chile ---
http://en.wikipedia.org/wiki/Chile#Economic_policies


"Revenue Recognition Leading Cause of Restatements," by Emily Chason, CFO Report, September 11, 2012 ---
http://blogs.wsj.com/cfo/2012/09/11/revenue-recognition-leading-cause-of-restatements/?mod=wsjpro_hps_cforeport

55: median number of days it has taken U.S. public companies to file restatements of financial results in 2011 and 2012.

The U.S. public companies that have restated financial results this year or last have taken a median 255 days—or roughly eight and a half months—from the date of their original financial statements to make their corrected filings, according to an analysis by Baseline Insights. Baseline analyzed data from a total of 108 restatements in 2011 and 2012, using electronic filings made to the Securities and Exchange Commission

The longest period from the original filing to restatement was 1,184 days, while the quickest restatement took just 23 days. The longer intervals often involved restatements related to stock compensation and income taxes, where a tax audit could trigger a restatement. The shorter ones often stemmed from issues related to goodwill and receivables.

The most-frequent explanations companies gave for the restatements were problems with revenue-recognition accounting and income taxes, such as the need to change an uncertain tax position. More than a third of the time, however, companies didn’t offer a reason for their restatements, particularly when they were triggered by small errors, such as reversing credit and debit balances or assigning multiple values to an electronic data tag.

“Often there is no reason given for the restatement: It’s not something you brag about,” said Joe St. Denis, managing director at Baseline Insights and former head of research at the Public Company Accounting Oversight Board.

Among the companies that detailed the cause of their restatement, 24 of them said management had identified the issue, 13 said the change resulted from comments by the SEC’s Division of Corporation Finance, and 10 said their external auditor had uncovered the issue.

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


Another Area of Non-convergence Between the FASB and the IASB
"In brief: FASB reaches conclusion on impairment model for financial assets measured at FV-OCI," PwC, September 11, 2012 --- Click Here
http://cfodirect.pwc.com/CFODirectWeb/Controller.jpf?ContentCode=TQUN-8Y2LZP&SecNavCode=MSRA-84YH44&ContentType=Content


Questions
Is corporate budgeting is a time waster and a poor measure of performance?
Do ERP systems help or hinder operating without a budget (not answered in the article below)

"Freed from the Budget: Many companies see budgeting as a time-consuming exercise of limited value. Some are resorting to a radical fix: getting rid of the budget," by Russ Banham,  CFO.com, September 1, 2012 --- Click Here
http://www3.cfo.com/article/2012/9/budgeting_budgets-rolling-forecasts-continuous-planning-beyond-budgeting-round-table-statoil-elkay-group-health-holt-cat

In his book Winning, General Electric’s Jack Welch famously griped: “It sucks the energy, time, fun, and big dreams out of an organization. It hides opportunity and stunts growth. It brings out the most unproductive behaviors in an organization, from sandbagging to settling for mediocrity.”

“It” is the corporate budgeting process. This much-hated annual exercise in setting targets, doling out resources, and providing incentives for employees is the way nearly all companies run their shops. Even organizations that have adopted monthly or quarterly rolling forecasts as a more agile way of reacting to events still produce a budget, for the most part.

Now, a few companies are doing what others fantasize about: getting rid of the budget altogether, stomping out the century-old process for good. Their guru is Steve Player, program director at the Beyond Budgeting Round Table, a learning network with more than 50 corporate members. For years, Player has railed against budgeting, which he excoriates as an expensive waste of time. A charismatic consultant and speaker, Player has his converts. Among them is Statoil, the giant Norwegian oil-and-gas company, with $90 billion in 2011 revenue and operations in 36 countries.

Statoil did away with traditional budgeting in 2005, and decided in 2010 to abolish the calendar year in its management processes whenever possible. “Not only does a budget take too much time, it is a bad yardstick for evaluating performance,” contends Bjarte Bogsnes, Statoil vice president of performance management development.

He explains that a budget creates the opportunity for “gaming” the system. “Managers are instructed to deliver on an easy-to-achieve target, told what resources they have to get there, and then are incentivized for hitting that number,” Bogsnes says. “It prevents managers from seizing opportunities to create value.”

Statoil’s radical approach is shared by three other companies profiled below: Elkay Manufacturing, Holt CAT, and Group Health Cooperative. Kenneth Merchant, a professor of accounting at the University of Southern California’s Marshall School of Business, has closely followed the Beyond Budgeting phenomenon, and estimates that at least 100 companies across the globe are on the same path. “A lot fall by the wayside or don’t reach the end destination of no budget at all,” says Merchant, who is also the school’s Deloitte & Touche LLP Chair of Accountancy. “Nevertheless, there is definite value in doing away with the budget,” he adds. “Getting to this point is the problem.”

Sensible but Unreliable Player doesn’t mince words about his disdain for the “B” word. Budgets, he asserts, can foster unethical behavior and conflicts of interest. “When companies tie incentive compensation to reaching budget goals, they create a huge conflict of interest,” he says. “Managers are incented to submit proposed budgets with low goals. Instead of reaching for outstanding performance, the budget process becomes a game of negotiating the lowest acceptable target, which is often based on assumptions outside the managers’ control.” The process also leads managers to hoard information, says Player, “since no one wants to share information that can be used against them.”

Budgets are also based on assumptions that are frequently wrong. They cost a ton of money, eat up platefuls of time, are out of date by the time they’re produced, and tend to strip local managers of their accountability, since their plans must be squeezed into the company’s goals, Player says. As a method of cost control, budgets are wanting, since managers tend to spend every cent they’ve been allocated, fearing they won’t get the same allocation the following year.

“It’s a management process that can kill the organization,” declares Player. “It’s part of the dumb stuff that finance does and should stop doing.”

Continued in article

Jensen Comment
Operating without a budget sounds like a bad idea to me. Generally the budgeting process is where the major decisions are made.

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


The Origins of Double-Entry Bookkeeping

August 28, 2012 ,message from Richard Sansing

This new book on the origins of double-entry accounting may be of interest to AECM members.

http://www.economist.com/node/21560846?fsrc=scn/fb/wl/ar/bythenumbers 

Richard Sansing

Double Entry: How the Merchants of Venice Created Modern Finance. By Jane Gleeson-White. Allen & Unwin; 294 pages; £12.99. To be published in America in October by W.W. Norton.

WHEN Luca Pacioli wrote his encyclopedia of mathematics at the end of the 15th century, the book contained pretty much everything known about maths at the time. Euclid’s ideas were gaining currency and the Arabic numbering system was spreading. The book had a relatively wide readership, as Pacioli wrote it in the vernacular and the recent invention of movable type meant that it was printed in an edition of some 2,000. A lengthy entry in this book explains for the first time a system of accounting called double-entry book-keeping. This innovation is at the centre of an entertaining and informative new book by Jane Gleeson-White. In this section

Venice

Double-entry book-keeping is “one of the greatest advances in the history of business and commerce,” declares Ms Gleeson-White. She argues that this process of recording profit and loss helped spawn the empiricism of the Renaissance and enhanced the momentum of capitalism.

The method of putting debits on one side of a ledger and credits on the other enabled Venetian merchants to record their capital, separate it from income and determine the dividends intended for investors. The system had been developed in Venice 200 years before Pacioli—the “father” of book-keeping—first recorded it.

Pacioli was a student of Alberti, an Italian humanist and polymath, before he took holy orders and became a professor of mathematics at Perugia University. He grew interested in art, inspired by the mathematical analyses of perspective by Piero della Francesca, born like him in Sansepolcro in Tuscany. A friend of Leonardo da Vinci, Pacioli went on to write a manual about chess.

Ms Gleeson-White resuscitates Pacioli’s reputation as a fine specimen of Renaissance man. Near the end of the book, the author begins to lose her way with a scarcely relevant critique of the calculation of GNP. But she has already justified Pacioli’s most significant contribution to economic history. As a neat, transparent way of collecting information about a business and rewarding capital investment, double-entry book-keeping offered a soaring new sense of the bottom line

 

From Bob Jensen's "Accounting History in a Nutshell" ---
http://www.trinity.edu/rjensen/Theory01.htm#AccountingHistory

Origins of Double Entry Accounting are Unknown

Recall that double entry bookkeeping supposedly evolved in Italy long before it was put into algebraic form in the book Summa by Luca Pacioli  and into an earlier book by Benedikt Kotruljevic.

"A Brief History of Double Entry Book-keeping (10 Episodes) ," BBC Radio ---
http://www.bbc.co.uk/programmes/b00r401p
Thanks to Len Steenkamp for the heads up

Jolyon Jenkins investigates how accountants shaped the modern world. They sit in boardrooms, audit schools, make government policy and pull the plug on failing companies. And most of us have our performance measured. The history of accounting and book-keeping is largely the history of civilisation.

Jolyon asks how this came about and traces the religious roots of some accounting practices.

Eventually, educators might be able to get copies of these audio files.

 

October 3, 2009 message from Rick Dull

Benedikt Kotruljevic (Croatian) (Dubrovnik,1416-L’Aquila,1469) (His Italian name was Benedetto Cotrugli Raguseo), who in 1458, wrote "The Book on the Art of Trading" which is now acknowledged to be the first person to write a book describing double-entry techniques? See the American Mathematical Society’s web-site: http://www.ams.org/featurecolumn/archive/book1.html .

Rick Dull


"Lehman’s Detroit Escape Means 90% Loss on Properties: Mortgages," by Oshrat Carmie, Bloomberg, September 5, 2012 ---
http://www.bloomberg.com/news/2012-09-05/lehman-s-detroit-escape-means-90-loss-on-properties-mortgages.html

Lehman Brothers Holdings Inc. has said it plans to be patient in selling real estate holdings four years after filing the largest U.S. bankruptcy in history. In Detroit, it’s willing to accept less than 10 cents on the dollar to get out while it can.

Lehman is selling a 251,000-square-foot (23,000-square- meter) office property in suburban Farmington Hills. In June, the bank offered it at auction for $10 a square foot, which would have recovered less than 10 percent of the $27.5 million mortgage it extended in 2007. It’s also selling 1 Woodward Ave., a tower overlooking the city’s riverfront and border with Canada that’s 44 percent vacant.

Detroit’s metro office market is missing out on Michigan’s revival three years after the government rescued General Motors Co. (GM) and Chrysler Group LLC amid the worst financial crisis since the 1930s. Borrowers 30 days late or more on Detroit-area office loans packaged into commercial mortgage-backed securities rose to 24 percent from 15 percent in August 2011, according to data compiled by Bloomberg, compared with 9.9 percent nationally.

“This is probably not a market where you’re going to see much growth and for that reason, it might make sense to just move on,” said Shaw Lupton, a senior real estate economist at data provider CoStar Group Inc. (CSGP) Archstone Sale

Lehman said in July it’s attempting to recover as much as $12.9 billion for creditors by selling real estate holdings that range from condos in Hawaii to Archstone Inc., the eighth- largest apartment manager in the U.S. Lehman has said it plans to hold some assets as long as 2015, waiting for opportune times to dispose of properties as the commercial and residential markets recover. It moved to take Archstone public last month.

Kimberly Macleod, a Lehman spokeswoman, declined to comment on the firm’s Detroit holdings.

Lehman had $260 million in outstanding senior loans secured by Detroit-area property at the time of its September 2008 demise, in addition to $13.2 million in mezzanine or junior loans, according to court documents.

The bank had extended some of the loans as part of a joint venture with affiliates of developer Kojaian Management Co. The partnership, which had dated to 1995, was dissolved a year after the bankruptcy and Lehman took title to 15 properties in lieu of foreclosure.

Michael Kojaian, executive vice president of Kojaian Management, declined to comment. Farmington Hills

Lehman had provided $27.5 million of debt against the three-story Farmington Hills property by 2007, an increase over the original mortgage it made in 2001 for $19.5 million, according to records filed with the assessor’s office.

The Farmington Hills site, about 30 miles (48 kilometers) northwest of Detroit, has an occupancy rate of 30 percent that will fall below 6 percent when mortgage company Quicken Loans Inc. leaves, according to Larry Emmons, a senior managing director at broker Newmark Grubb Knight Frank in Southfield, Michigan.

“It’s a good time to sell,” Emmons said. “The peak tenancy has kind of run its course and it’s going to take some major repositioning, some marketing and a general increase in market velocity for Class-B buildings before this one fills up again,” said Emmons, who isn’t involved in the deal.

Detroit’s decline isn’t uniform. Quicken’s founder Dan Gilbert has moved employees to the city’s Campus Martius Park area, the center of its tech industry. That’s less than three blocks from One Woodward Ave., the downtown Detroit office building with 333,000 square feet, according to CoStar. ‘General Upgrading’

“There’s been a general upgrading of space,” Emmons said. “A lot of the A and B buildings have been at 10-year lows so people will consolidate and upgrade their digs.”

There were 3,037 Class-B buildings totaling more than 100 million square feet in the Detroit area at the end of the second quarter, according to CoStar. The vacancy rate for Class-B buildings in the region was 21.2 percent.

Asking rent for office space in the Detroit region was $17.81 per square foot in the second quarter, the lowest on record, according to data from CoStar going back to 2000. The national average was $22.70 in the period. Vacancies were 18.4 percent in Detroit, compared with 12.7 percent nationally.

Michigan’s economic health ranked second in improvement among U.S. states in the first quarter, according to data compiled by Bloomberg. Unemployment that was the worst in the U.S. at 14.2 percent in August 2009, shortly after GM and Chrysler emerged from a U.S.-backed rescue, has since declined to 9 percent, compared with the 8.3 percent national average. Auto Sales

U.S. auto sales in August smashed through estimates and are on pace to exceed 14 million vehicles for the best year since 2007. Chrysler’s sales last month increased 14 percent, the Auburn Hills, Michigan-based company said yesterday in a statement.

While that’s spurred hiring in the state, the jobless rate in the metropolitan region that includes Detroit was 13.4 percent in July, according to the Bureau of Labor Statistics.

Detroit is reeling from a decades-long decline that since 2000 has shrunk its population by 25 percent. In April, it narrowly averted state takeover because of its budget deficit and $12 billion in long-term debt. The city is now under watch of an advisory board as part of an agreement with the state to prevent it from seeking bankruptcy.

Continued in article

Bob Jensen's threads on the bailout or lack thereof in the case of Lehman Bros. ---
http://www.trinity.edu/rjensen/2008Bailout.htm


How could this be if the Matching Principle is dead?

September 1, 2012 message from Scott Bonacker

If you need an example for a class, here is one about how third party developers and the way they offer products through Intuit  is being changed -

At a high level, the current changes are the result of revenue recognition requirements as determined by the Intuit auditors. The short story is that if Intuit sells the QuickBooks desktop product, they are required to recognize the revenue over the time period that the customer receives services related to that product. For example, if a customer is using QuickBooks 2010, and Intuit is providing support for the sync manage for that product, then (in theory) the time period for the revenue recognition is not when the software was sold. The revenue should be allocated over the time period that Intuit is incurring costs for that product. In this case, if they provide support for the Sync Manager until the product is sunsetted, then the time period could be 3 plus years as compared to recognizing the revenue in the year of purchase.

More in the article

http://www.sleeter.com/blog/2012/08/intuit-app-center-changes-and-how-they-affect-you/

 

"Global Financial Reporting: Implications for U.S.," by Mary Barth, The Accounting Review, Vol. 83, No. 5, September 2008 ---
Not free at http://www.atypon-link.com/AAA/doi/pdfplus/10.2308/accr.2008.83.5.1159

This paper identifies challenges and opportunities created by global financial reporting for the education and research activities of U.S. academics. Relating to education, after overviewing the relation between global financial reporting and U.S. GAAP, it offers suggestions for topics to be covered in global financial reporting curricula and clarifies common misunderstandings about the concepts underlying financial reporting. Relating to research, it explains how and why research can provide meaningful input into standard-setting, and identifies questions that can motivate research related Go topics on the International Accounting Standards Board’s technical agenda and to the globalization of financial reporting.

. . .

Globalization of financial reporting is becoming a reality. However, many challenges remain. There are many around the world unfamiliar with independent standard-setting and an investor focus for financial reporting. They are struggling with the changes but are learning. No change is universally popular, and revolutionary “big bang” change is very difficult. Evolutionary change is somewhat easier to implement and absorb, although changing multiple times is costly. We also have not yet fully resolved the issue of individual country modifications to standards, which stand in the way of truly global financial reporting. Outside of the U.S., there is a concern that the U.S. will dominate. This concern relates not only to our thinking about issues, but also to the way the standards are written. In particular, there is a concern that the U.S. tendency to provide considerable detailed guidance will manifest itself in global standards. Inside the U.S., there is a concern that IFRS lack rigor and, thus, are not high quality. There also is a concern that the standards are not specific enough and enforcement around the world is not strict enough to ensure consistent application. Clearly, there is a tension. However, progress in the last five years toward global financial reporting has been breathtaking, and it continues apace. The SEC permitting use of IFRS in the U.S. would be a major step forward.

The implications for U.S. academics are profound. The U.S. is deeply involved in and will be affected by global financial reporting. U.S. academics need to educate first themselves and then their students to be able to participate in a global world. There also is a myriad of open questions for research that U.S. academics can address. The capital markets are demanding a single language of business. They are demanding that the single language of business be developed internationally, not solely in the U.S. This demand for a single global language of business will be met. The market forces are too great to stop. The question is how, not whether, it will happen, and how, not whether, U.S. academics will participate.

On Page 1166 Mary flatly asserts:

First, there is no “matching principle.” That is, matching is not an end in itself and matching is not an acceptable justification for asset or liability recognition or measurement. The conceptual framework explains that matching involves the simultaneous or combined recognition of revenues and expenses that result directly and jointly from the same transactions or other events (FASB 1985, para. 146; IASB 2001, para. 95). Matching will be an outcome of applying standards if the standards require accounting information that meets the qualitative characteristics and other criteria in the conceptual framework. Matched economic positions will naturally result in matched accounting outcomes. However, the application of a matching concept in the conceptual framework does not allow the recognition of items in the statement of financial position that do not meet the definition of assets or liabilities (IASB 2001, para. 95). Thus, there would be no justification for deferring expense recognition for an expenditure that provides no future economic benefit or for deferring income recognition for a cash inflow that will not result in a future economic sacrifice.

But matching still seems to prevail even though there is no more "matching principle according to the IASB and the FASB. The answer is that revenue can be deferred when there will be "future economic sacrifice." Sounds like matching to me. Neither domestic nor international standards allow early realization of revenue before it is legally earned. The standards just do not allow automobile inventories to be written up to expected sales prices until those sales are finalized. Carrying the inventories at something other than sales value is part and parcel to the "matching principle" eloquently laid out years ago by Paton and Littleton. Both international and domestic standards still require cost amortization, depreciation, and creation of warranty reserves. These are all rooted in the "matching principle" which has not yet died when defining assets and liabilities in the conceptual framework. In most instances the historical cost is still being booked and spread over the expected life of future economic benefits. Even if a company adopted a replacement cost (current cost) adjustment of historical cost of a depreciable asset, those replacement costs still have to be depreciated since old equipment cannot simply be adjusted upward to new, un-depreciated replacement cost.

Paton and Littleton never argued that the "matching principle" for expense deferral applies to assets that have "no future economic benefits." In that case there would be no benefits against which to match the deferred expense.  Hence there's no deferral in such instances. I do not buy Barth's contention that there is no longer any "matching principle." If there are potential future benefits, the matching principle still is king except in certain instances where assets are carried at exit values such is the case for precious metals actively traded in commodity markets and financial assets not classified as "held-to-maturity."

The Matching Principle lives on when there are expected "future economic sacrifices."

September 1, 2012 message from Scott Bonacker

If you need an example for a class, here is one about how third party developers and the way they offer products through Intuit  is being changed -

At a high level, the current changes are the result of revenue recognition requirements as determined by the Intuit auditors. The short story is that if Intuit sells the QuickBooks desktop product, they are required to recognize the revenue over the time period that the customer receives services related to that product. For example, if a customer is using QuickBooks 2010, and Intuit is providing support for the sync manage for that product, then (in theory) the time period for the revenue recognition is not when the software was sold. The revenue should be allocated over the time period that Intuit is incurring costs for that product. In this case, if they provide support for the Sync Manager until the product is sunsetted, then the time period could be 3 plus years as compared to recognizing the revenue in the year of purchase.

More in the article

http://www.sleeter.com/blog/2012/08/intuit-app-center-changes-and-how-they-affect-you/

September 2, 2012 message from Bob Jensen

  • Hi Pat,


    What you've stated is merely the cause-effect argument of the Matching Principle.
     


     

    Matching Principle

    Accounting: A fundamental concept of accrual basis accounting that offsets revenue against expenses on the basis of their cause-and-effect relationship. It states that, in measuring net income for an accounting period, the costs incurred in that period should be matched against the revenue generated in the same period.
    http://www.businessdictionary.com/definition/matching-principle.html


     

    The principle that requires a company to match expenses with related revenues in order to report a company's profitability during a specified time interval. Ideally, the matching is based on a cause and effect relationship: sales causes the cost of goods sold expense and the sales commissions expense. If no cause and effect relationship exists, accountants will show an expense in the accounting period when a cost is used up or has expired. Lastly, if a cost cannot be linked to revenues or to an accounting period, the expense will be recorded immediately. An example of this is Advertising Expense and Research and Development Expense.
    http://www.accountingcoach.com/terms/M/matching-principle.html




    I think the Matching Principle still dominates standards mostly because most inventories are carried at cost (not spot prices) until revenues are recognized from sales (with some LCM frictions that are due to obsolescence, spoilage, etc.). To me that's the cause-effect Matching Principle ala Paton and Littleton (1940).


    For example, a speculating company that elects to carry harvested corn in granary rather than deliver it to market in October carries the inventory at cost rather than the current spot prices. If the corn was marked to spot prices daily this would would be a violation of the Matching Principle. One inconsistency in the accounting standards is that we do mark precious metals to spot in violation of the Matching Principle. But we carry most commodities at historical cost with supplemental disclosures of fair values.


    This begs the question of why there's an accounting difference between corn versus gold. One basis for this difference is that corn stored in a company's granary is more likely to vary from the exacting standardized standards of corn defining the spot prices on the CBOT, CME, CBOE, etc. Significant error might arise, for example, by marking this granary corn to CBOT spot prices for corn not exactly alike the corn traded on the CBOT.


    Corn stored in a granary tends to lose moisture content, and not all granaries are alike. Corn in a Minnesota granary in December has a different moisture loss than corn stored in a Mississippi granary in December. However, gold stored in a Minnesota vault stays the same as gold stored in a Mississippi vault. Hence, there is some basis for marking gold inventories to CBOT spot prices while not marking corn inventories to CBOT spot prices.



    In the case of sales of goods under long-term warranties such as a five-year warranty of the sale of a vehicle, we recognize the full revenue in the year of the sale and then estimate the warranty costs to be deducted from that full revenue.


    In the case of Quickbooks we defer some of the revenue because of future services paid in advance. Hence, full revenue is not recognized when collected. We recognize the deferred revenue over time via the Matching Principle.


    This begs the question on why there's a difference between deferring a portion of revenues for Quickbooks and not deferring revenues for long-term warranties. I think the key difference is the proportion of customers who will need future services.


    In the case of Quickbooks, all customers receive future services with a portion of "revenues" collected in advance. Hence some revenue collected in advance is deferred, thereby deferring a high proportion of profit recognition for all customers. This is the Matching Principle whether you want to admit it or not.


    In the case of warranties, only a small proportion proportion of the sales revenue will be lost in future years to warranties since most customers will not demand warranty services. Hence, no revenue is deferred, although warranty costs are estimated for matching purposes. This is the Matching Principle whether you want to admit it or not.


    The Matching Principle lives on irrespective of whether a portion of revenue is deferred or future estimated expenses are deducted from realized revenues.


    Respectfully,
    Bob Jensen

     

     


    Schedule UTP --- http://heinonline.org/HOL/LandingPage?collection=journals&handle=hein.journals/depbcl9&div=18&id=&page=

    Side-Step the Work-Product Doctrine. (United States v. Deloitte LLP, 610 F.3d 129, 2010)
    TaxProf Blog, September 2, 2012
    http://taxprof.typepad.com/

    Schedule UTP Impinges on the Work-Product Privilege

    Brandon Keim (J.D. 2011, Arizona State), Comment, Schedule UTP: An Attempt to Side-Step the Work-Product Doctrine. (United States v. Deloitte LLP, 610 F.3d 129, 2010), 44 Ariz. St. L.J. 343 (2012):

    This Comment argues that the recent decision in Deloitte prohibits nationwide implementation of Schedule UTP because the IRS's rulemaking authority is subject to the work-product doctrine, and the Deloitte decision provides work-product protection for the information sought on Schedule UTP. Part II of this Comment provides a summary of the work-product doctrine by briefly discussing Hickman v. Taylor, in which the Supreme Court first recognized the work-product doctrine and discussed its underlying purposes. Part II also discusses Rule 26(b)(3) of the Federal Rules of Civil Procedure, which codifies the work-product doctrine and protects most documents “prepared in anticipation of litigation.” Although it is well established that a taxpayer may assert this privilege in response to an administrative summons, including one issued by the IRS, whether the privilege applies to tax returns remains an open question.

    Part III argues that the work-product doctrine applies to tax returns, including Schedule UTP. It shows that the schedule purports to obtain protected work-product under the test most commonly used by courts (the “because of” test) when construing the “prepared in anticipation of litigation” standard. The First Circuit's opinion in Textron seemed to give the IRS considerable authority to obtain tax accrual work papers through Schedule UTP because the court concluded that the work-product doctrine did not protect those work papers from disclosure. But the District of Columbia Circuit's recent decision in Deloitte correctly shows that the work-product privilege protects some of the information that Schedule UTP seeks. Thus, the IRS should consider revising Schedule UTP to take into account the principles espoused in Deloitte.

    The IRS should withdraw Schedule UTP because it improperly requires a taxpayer to disclose information protected by the work-product privilege. If the IRS refuses to do so, it should revise its policy of restraint to prohibit claims of waiver based on information supplied on Schedule UTP. Unfortunately, however, the IRS has shown little interest in responding to privilege concerns regarding Schedule UTP, and Congressional involvement may be necessary to protect taxpayers. Part IV thus proposes statutory language that would support the policies underlying the work-product doctrine but that would also enhance the IRS's enforcement efforts.


    "Countdown to a Tax Hike," The Wall Street Journal, August 31, 2012 ---
    http://professional.wsj.com/article/SB10000872396390444772804577619583044242606.html?mod=WSJ_Taxes_Taxes_2&mg=reno64-wsj

    The best advice, experts say: make a few important moves now, and be ready to react quickly in the months ahead.

    To recap: At year's end, rates on ordinary income, interest, capital gains, dividends, gifts and estates are set to jump—in some cases sharply. Other tax benefits will lapse as well, affecting all levels of taxpayers. (Please see the tables below and on Page B10.)

    Few observers expect any major tax legislation before the Nov. 6 election. After that, there won't be much time. The House of Representatives has scheduled only 16 working days before its adjournment on Dec. 14. While the Senate has more days in session, "they don't have much incentive to act if the House isn't there," notes Clint Stretch, a lawyer and former executive at Deloitte Tax LLP in Washington.

    Experts foresee two possible outcomes. One is that after the election both houses of Congress agree to extend the current rules for up to a year, buying time to make fundamental changes to the tax code while avoiding the economic consequences of huge tax increases.

    The other possibility is that the election changes the political equation so much that one party blocks a tax-rate extension, allowing the current rules to expire and pushing tough decisions into 2013.

    Lawmakers return in early January, but Mr. Stretch and others believe it could take them several months to reach an agreement and make changes retroactive to the beginning of the year.

    In that scenario, most Americans would be affected. Employees could see their take-home pay fall as higher tax rates kick in, for example, while the heirs of people who die will face a much harsher estate-tax regime.

    Lawrence Carlton, an accountant in Bedford, Mass., says he is getting more than a dozen calls a week asking what tax rates will be next year: "My clients don't believe me when I say, 'I'm sorry, I just can't tell you.'"

    So how should you prepare for the uncertain months ahead? Tax experts surveyed by the Wall Street Journal offered several dos and don'ts:

    Continued in article

    Jensen Comment
    Summary of Dos and Don'ts

    AMT --- http://en.wikipedia.org/wiki/Alternative_Minimum_Tax


    "Political Ads: Issue Advocacy or Campaign Activity Under the Tax Code?" by Erika K. Lunder, BNA, August 29, 2012 --- Click Here
    http://op.bna.com/dt.nsf/id/emcy-8xnkup/$File/Political%20Ads%20-%20Issue%20Advocacy%20or%20Campaign%20Activity%20Under%20the%20Tax%20Code%20%282%29.pdf


    Accounting History Journals

    September 1, 2012 message from Jim McKinney

    Accounting History Review was formerly titled Accounting, Business & Financial History is based out of Cardiff  University. Accounting History is a journal published by Sage as a journal of the Accounting History Special Interest Group of the Accounting and Finance Association of Australia and New Zealand. The Accounting Historians Journal a publication of the Academy of Accounting Historians is independently published (and as a result far cheaper in price) than the other two. The Accounting Historians Journal is much older than the other two having entered its 39th year of publication.  Older editions of the AHJ are available on JSTOR and other databases, with older back issues available for free at the University of Mississippi Libraries website that also maintains the AICPA libraries. I know editors at all three journals and all are quite capable and respected individuals. There is a considerable debate which of the journals are considered better than the other with arguments made for each of the three.

     

    Jim McKinney, Ph.D., C.P.A.
    Accounting and Information Assurance
    Robert H. Smith School of Business
    4333G Van Munching Hall
    University of Maryland
    College Park, MD 20742-1815

    http://www.rhsmith.umd.edu

     

    Bob Jensen's "Accounting History in a Nutshell" ---
    http://www.trinity.edu/rjensen/Theory01.htm#AccountingHistory


    "Electrical and cloud outages: Is it time to bring both on premise?"
    IS Assurance Blog by Jerry Trites
    July 8, 2012

    Amazon experienced an outage that affected a number of companies that rely on their cloud service. The company informed its users that its service went down due to the power outage stating: 


    "On June 29, 2012 at about 8:33 PM PDT, one of the Availability Zones (AZ) in our US-EAST-1 Region experienced a power issue.  While we were able to restore access to a vast majority of  RDS DB Instances that were impacted by this event, some Single-AZ DB Instances in the affected AZ experienced storage inconsistency issues and access could not be restored despite our recovery efforts.  These affected DB Instances have been moved into the “failed ” state." 


    This notice was actually taken from CodeGuard (a start-up that takes snapshots of websites enabling owners to undo unwanted changes) who was one of the companies affected by the outage. 

    Continued in article

    "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

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


    Another state should withdraw from the Dollar Zone so it can print its own currency
    "A Downgrade for Illinois The worst credit rating aside from California," The Wall Street Journal, August 29, 2012 ---
    |http://professional.wsj.com/article/SB10000872396390443409904577619800234602824.html?mg=reno64-wsj#mod=djemEditorialPage_t

    "Illinois Debt Cut by S&P After No Action on Pension Funding," by Michelle Kaske, Bloomberg News, August 29, 2012 ---
    http://www.bloomberg.com/news/2012-08-29/illinois-debt-cut-by-s-p-after-lack-of-action-on-pension-funding.html

    Illinois, the U.S. state with the worst-funded pension system, had the rating on its general- obligation debt cut one level by Standard & Poor’s and may face more downgrades.

    The change to an A rating followed state lawmakers’ failure to agree to reduce retirement costs during a special session Aug. 17. The outlook for the state’s debt, which now has S&P’s sixth-highest grade, is negative. California, with an A-ranking, one level below Illinois, remains S&P’s lowest-rated state.

    Illinois has an unfunded pension liability of at least $83 billion, according to state figures. It had 45 percent of what it needed to pay future retiree obligations as of 2010, the lowest among U.S. states, data compiled by Bloomberg show.

    “The downgrade reflects the state’s weak pension funding levels and lack of action on reform measures intended to improve funding levels and diminish cost pressures associated with annual contributions,” said Robin Prunty, an S&P analyst, in a report today.

    Governor Pat Quinn said today he is inviting legislative leaders to meet in early September to work on pension changes. Lawmakers have considered boosting employee contributions, passing some costs to local school districts and forcing workers to choose between the current system and receiving free retirement health care. No Surprise

    Quinn, a Democrat, said the rating cut wasn’t a surprise.

    Erasing the fifth-most populous state’s unfunded pension liability “is vital to getting our financial house in order,” Quinn said in a statement. “Today’s action by Standard & Poor’ is more evidence that we must act.”

    Illinois had about $28 billion of general-obligation debt as of May 8, according to bond documents. The state of about 13 million people plans to sell $50 million of debt next month for technology projects, John Sinsheimer, the state’s director of capital markets, said in an interview.

    Taxpayers will pay more to issue debt because of the lower rating, state Treasurer Dan Rutherford said in a statement.

    “I urge the legislature to act decisively towards comprehensive, constitutional and fair pension reforms that will reverse this situation,” he said.

    Jensen Comment
    Unlike California, Illinois significantly increased corporate tax rates to deal with its deficit. But this turned into a sham when Gov. Quinn commenced to grant tax waivers to business firms (like Caterpillar) that threatened to relocate in other states.

    In my opinion, however, Illinois stands a much better chance than California --- which by most accounts is a basket case.

    "Pension Accounting for Dummies New government reporting rules are no better than the old ones," The Wall Street Journal, July 9, 2012 ---
    http://professional.wsj.com/article/SB10001424052702304782404577488933765069576.html?mg=reno64-wsj#mod=djemEditorialPage_t

    The Government Accounting Standards Board has issued new rules that aim to crystallize government pension liabilities. It failed on that count, but it did succeed, albeit inadvertently, in making the case for defined-contribution plans.

    GASB, as it's known in the trade, sets accounting guidelines for local governments. Since the board is run mainly by former public officials, its standards are often low. The board also usually takes several years to finalize rules, so it's often behind the times. Their new rules concerning how governments discount their pension liabilities are a case in point.

    Financial economists have recommended for decades that governments calculate pension liabilities using so-called "risk-free" rates pegged to high-grade municipal bonds or long-term Treasurys. The argument goes that since pensioners are de facto secured creditors—even bankruptcy judges have been reluctant to slash retirement benefits—pensions are riskless and therefore the liabilities should be discounted at risk-free rates.

    GASB's private cousin, the Financial Accounting Standards Board (FASB), began requiring corporations to discount their pension liabilities with high-quality fixed income assets in the 1980s. However, GASB let governments stick with their desired, er, expected rate of return, which is typically about 8%. Public pension funds have returned 5.7% on average since 2000. Achieving much higher returns over the long run would require markets to perform as well as they did in the 1980s and '90s. Would that be true.

    Governments have resisted climbing down from Fantasyland because using lower discount rates would explode their liabilities. When the Financial Accounting Standards Board introduced its risk-free rate guidelines, many companies shifted workers to 401(k)s because they didn't want to report larger liabilities. Such defined-contribution plans are by definition 100% pre-funded.

    Prodded by economists and investors, GASB began considering modifying its discount rate rules a few years ago. Public pension funds, lawmakers and unions, however, pushed back hard against suggestions that governments use risk-free rates, which could more than double their liabilities. No surprise, the government troika won.

    GASB's new rules allow governments to continue discounting their liabilities at their anticipated rate of return so long as they project enough future assets to cover their obligations. At the time they forecast they'll run out of assets, they must begin discounting their liabilities with a high-grade municipal bond rate. The idea is that governments would have to issue bonds to pay retirees when their pension funds go broke.

    But few pension funds project that they'll run dry since they're hooked up to a taxpayer IV. Those in really bad shape like Chicago's will likely rig their investment and actuarial assumptions to circumvent the new rules. FASB rejected similar guidelines in the 1980s because they were too easy to dodge. The point here is that it's impossible to get governments to come clean about their pension debt, and not just because the union allies controlling pension funds have a vested interest in obfuscating the liabilities.

    In reality, nobody knows how much taxpayers will owe because so much depends on inscrutable actuarial and economic factors like interest rates 30 years from now (not even the Federal Reserve purports to be that omniscient). Slight discrepancies in assumptions can yield huge variations in estimated liabilities. One advantage of defined-contribution plans is that they don't require governments to calculate their liabilities. There are none.

     

    GASB Statement No. 68
    Accounting and Financial Reporting for Pensions—an amendment of GASB Statement No. 27
    --- Click Here
    http://www.gasb.org/cs/ContentServer?site=GASB&c=Page&pagename=GASB%2FPage%2FGASBSectionPage&cid=1176160042391 Bob Jensen's threads on the sad state of governmental accounting ---
    http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting

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


    "Four Years After Madoff, Audits and Auditors of Broker-Dealers Still Lousy," by Francine McKenna, re:TheAuditors, August 30, 2012 ---
    http://retheauditors.com/2012/08/30/four-years-after-madoff-audits-and-auditors-of-broker-dealers-still-lousy/

    Jensen Comment
    Note that Madoff had a sham auditor who was not even licensed to do audits. Apparently, the many friends of Madoff really didn't care that he did not have a deep pockets auditor. The "lousy auditing" by deep pocket large auditing firms is more of a mystery to me.

    September 1, 2012 reply from XXXXX

    Bob, I am responding to you because I can’t respond publicly under our Firm's rules. You might have an opportunity to repeat some of my comments (but don’t forward my email).

    First, why is there a presumption the PCAOB is correct? When they do an inspection, they strong arm firms into not disagreeing with them. I am not asserting that they are wrong, since none of us have an opportunity to see the inspection files, but they are probably no more right than any prosecutor is (or taxing authority) when they bring a case. As we all know, a lot of cases are lost or settled. When an inspection results in a restatement, we can all judge the issue. When an inspection results in a Part I comment, generally the inspection team believes there was insufficient auditing performed. No one independent has had the opportunity to hear both sides and determine if the work was sufficient or not.

    There is a sensationalism with Francine’s headline. Too compare a PCAOB inspection of an audit with the Madoff “auditor” is at best sensationalism. We all know that not only wasn’t an audit performed, but that the “auditor” was not qualified to perform audits. We also know that a relatively unsophisticated auditor (maybe even college senior taking an auditing class) could have turned up the Madoff fraud by merely confirming securities with a custodian. No one had to get into difficult issues like fair value or how much work to do (assuming any is more than none). This was a case where if any investor had done due diligence, they would not have been a Madoff investor (and I know a number of them who invested out of unadulterated greed).

    There seems to be a presumption that an inspection finding implies a problem. The vast majority of inspection comments do not result in any change to the registrant’s financial statement. More often, the issue is an accusation of insufficient work. The PCAOB says your sample was not large enough but don’t tell you what is should be. They disagree with professional judgment without having bright line guidelines for what the auditor should have done. It is kind of like the definition of pornography. I am sure in a number of cases the auditors did not do enough work, but believing the PCAOB findings are correct because they say they are is the opposite of the presumption of innocence. In addition, the PCAOB has the benefit of hindsight when determining which engagements to inspect and which issues to review.

    The commentators also don’t seem to relate to how engagements are picked for inspection. The PCAOB clearly says that the engagements selected are not representative of a Firm’s audit practice. Engagements are picked by risk and complexity. The PCAOB picks the higher risk, more difficult engagements. This is not a random sample of a Firm’s clients.

    My comments are not meant to imply that the PCAOB is wrong and the auditors are correct, but are merely meant to provoke a thoughtful discussion of understanding and interpreting inspection results. Remember, a prosecutor has always said he could indict a ham sandwich in front of a grand jury (since the defense doesn’t get a chance to observe, question or comment).

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


    "AIG, Surprise:  Moneymaker Its profits for taxpayers cast doubt on the notion that it behaved recklessly before the panic struck," by Holman W. Jenkins, Jr., The Wall Street Journal, August 31, 2012 ---
    http://professional.wsj.com/article/SB10000872396390443618604577623373568029572.html?mg=reno64-wsj#mod=djemEditorialPage_t

    AIG's bailout is getting the revisionist treatment. The rescue hasn't been the dismal federal experience that, say, GM's has been. Taxpayers are showing a $5 billion profit on their 53% stake in the insurer, as of yesterday's closing price.

    What's more, in the last few days, the New York Fed liquidated the last of the complex mortgage derivatives it acquired from AIG's counterparties as part of the bailout. Such transactions and related fees have netted the government about $18 billion.

    This is good news but requires some revising of theories of the crisis itself. The "toxic" and "shaky" housing derivatives that got AIG in trouble turn out, even amid the worst housing slump in 70 years, not to have been the crud many assumed they were.

    A lot of renditions skip over this part, dismissing AIG's pre-crash mortgage activities as "reckless," thereby making a mystery of how the refinancing of AIG could be paying off so handsomely for taxpayers. Taxpayers are making out because they bought valuable assets on the cheap.

    This is as it should be. But let's remember how AIG got in trouble. It wrote insurance to guarantee the very senior portions of securities derived from underlying mortgages—that is, the portions already designed to withstand a sizeable increase in defaults.

    AIG failed not because of the failure of these securities to keep paying as expected, but because of its own promise to fork up cash collateral if the market price of these securities fell or if the rating agencies downgraded what they had previously rated Triple-A.

    In the systemic panic that climaxed with the Lehman failure, both things happened in spades, even as AIG itself no longer could raise the cash to make good on its commitments. Some now claim AIG could have waved off the collateral calls, citing exceptional circumstances. But even that wouldn't have changed the fact that, because of the panic, AIG itself was no longer trusted despite being chock-full of good assets.

    We'll never know if the company might have finessed its way out of its jam (quite possibly its counterparties, including Goldman Sachs, would have acted to keep AIG afloat if the alternative of a government bailout weren't available). Instead AIG turned to taxpayers to finance the collateral calls it couldn't finance itself, and taxpayers took advantage.

    For all the desire to name villains and blame bad incentives for the financial crisis, notice that panic itself was the key player. Panic is a variable about which it's disconcertingly hard for government to do anything useful in advance.

    Panic is systemic—an uncertainty or loss of trust in how the system will behave. Here's a simple but relevant example: What happens to the market value of mortgages if investors lose confidence in the legal system to permit them to foreclose on borrowers who stop paying?

    We don't need to retread the history. Letting Lehman fail was a disaster because the rescue of Bear Stearns had conditioned the market to believe Washington wouldn't permit major institutional failures. The mixed signals sent about Fannie and Freddie only undermined the effort to recruit fresh capital to other financial institutions distressed by uncertainty over the value of mortgage securities.

    AIG is the most dramatic example of the general case. A lot of things become good or bad collateral depending on what the government is expected to do. It's not too strong to say Washington had to bail out AIG because the market was uncertain whether Washington would bail out AIG. (An additional complexity we won't go into is how the Fed's QE exercises subsequently boosted the bailout's profits.)

    Let us be careful here: A host of private and public behaviors contributed to the housing bubble and meltdown, whose losses were destined to be felt widely. Our system has no problem accommodating the failure of individual institutions, even very big ones. But systemic panic always comes to the door of government. It can't be otherwise.

    Governments can try to duck this burden, as European governments have done, only by renouncing the ability to print money and so soiling their own credit that substituting their own credit for the financial system's is no longer an option. Make no mistake: This would be a real cure for too-big-to-fail if the Europeans were inclined to let the chips fall. They're not. Instead the self-disabling governments want Germany to supply the bailout.

    Continued in article

    Lesson One: What Really Lies Behind the Financial Crisis?
    According to Siegel: Financial firms bought, held and insured large quantities of risky, mortgage-related assets on borrowed money. The irony is that these financial giants had little need to hold these securities; they were already making enormous profits simply from creating, bundling and selling them. 'During dot-com IPOs of the early 1990s, the firms that underwrote the stock offerings did not hold on to those stocks,' Siegel says. 'They flipped them. But in the case of mortgage-backed securities, the financial firms decided these were good assets to hold. That was their fatal flaw.'
    "Lesson One: What Really Lies Behind the Financial Crisis?" Knowledge@Wharton, January 21, 2009 ---
    http://knowledge.wharton.upenn.edu/article.cfm?articleid=2148
    Jensen Comment
    Lesson Two of what lies behind the financial crisis is that investment banks and others like AIG wrote credit derivatives on the on the CDO collateralized debt obligations that used mortgage backed securities as collateral. The companies that wrote these derivatives did not have the insurance reserves to cover the melt down of those CDOs. To avoid bankruptcy of giants such as AIG, the U.S. treasury gave billions in bailout funds to cover the credit derivatives.
    See Appendix E --- http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
    I think there was a hidden agenda with respect to why Hank Paulson's first billions in bailout funds went to cover the credit derivative obligations.
    See Appendix Y --- http://www.trinity.edu/rjensen/2008Bailout.htm#HiddenAgendaDetails

    Bob Jensen's threads on the bailout ---
    http://www.trinity.edu/rjensen/2008Bailout.htm


    This does not tell college graduates something that they don't already know:  Temporary and Low Wages
    "Majority of New Jobs Pay Low Wages, Study Finds," by Catherine Rampell, The New York Times, August 30, 2012 ---
    http://www.nytimes.com/2012/08/31/business/majority-of-new-jobs-pay-low-wages-study-finds.html?_r=1

    While a majority of jobs lost during the downturn were in the middle range of wages, a majority of those added during the recovery have been low paying, according to a new report from the National Employment Law Project.

    The disappearance of midwage, midskill jobs is part of a longer-term trend that some refer to as a hollowing out of the work force, though it has probably been accelerated by government layoffs.

    “The overarching message here is we don’t just have a jobs deficit; we have a ‘good jobs’ deficit,” said Annette Bernhardt, the report’s author and a policy co-director at the National Employment Law Project, a liberal research and advocacy group.

    The report looked at 366 occupations tracked by the Labor Department and clumped them into three equal groups by wage, with each representing a third of American employment in 2008. The middle third — occupations in fields like construction, manufacturing and information, with median hourly wages of $13.84 to $21.13 — accounted for 60 percent of job losses from the beginning of 2008 to early 2010.

    The job market has turned around since then, but those fields have represented only 22 percent of total job growth. Higher-wage occupations — those with a median wage of $21.14 to $54.55 — represented 19 percent of job losses when employment was falling, and 20 percent of job gains when employment began growing again.

    Lower-wage occupations, with median hourly wages of $7.69 to $13.83, accounted for 21 percent of job losses during the retraction.

    Continued in article

    Bob Jensen's threads on the stalled recovery ---
    http://www.trinity.edu/rjensen/2008Bailout.htm


    "U.S. Firms Move Abroad to Cut Taxes:  Despite '04 Law, Companies Reincorporate Overseas, Saving Big Sums on Taxes," by John D. Mckinnon and Scott Thurm, The Wall Street Journal, August 28, 2012 ---
    http://professional.wsj.com/article/SB10000872396390444230504577615232602107536.html?mod=WSJPRO_hpp_LEFTTopStories

    More big U.S. companies are reincorporating abroad despite a 2004 federal law that sought to curb the practice. One big reason: Taxes.

    Companies cite various reasons for moving, including expanding their operations and their geographic reach. But tax bills remain a primary concern. A few cite worries that U.S. taxes will rise in the future, especially if Washington revamps the tax code next year to shrink the federal budget deficit.

    "We want to be closer to where our clients are," says David Prosperi, a spokesman for risk manager Aon AON +0.19% plc, which relocated to the U.K. in April.

    Aon has told analysts it expects to reduce its tax rate, which averaged 28% over the past five years, by five percentage points over time, which could boost profits by about $100 million annually.

    Since 2009, at least 10 U.S. public companies have moved their incorporation address abroad or announced plans to do so, including six in the last year or so, according to a Wall Street Journal analysis of company filings and statements. That's up from just a handful from 2004 through 2008.

    The companies that have moved recently include manufacturer Eaton Corp., ETN -0.37% oil firms Ensco International Inc. ESV -2.04% and Rowan Cos., RDC +0.47% as well as a spinoff of Sara Lee Corp. called D.E. Master Blenders 1753.

    Eaton, a 101-year-old Cleveland-based maker of components and electrical equipment, announced in May that it would acquire Cooper Industries PLC, another electrical-equipment maker that had moved to Bermuda in 2002 and then to Ireland in 2009. It plans to maintain factories, offices and other operations in the U.S. while moving its place of incorporation—for now—to the office of an Irish law firm in downtown Dublin.

    When Eaton announced the deal, it emphasized the synergies the two companies would generate. It also told analysts that the tax benefits would save the company about $160 million a year, beginning next year.

    Eaton's chief executive, Alexander Cutler, has been a vocal critic of the corporate tax code. "We have too high a domestic rate and we have a thoroughly uncompetitive international tax regime," Mr. Cutler said on CNBC in January. "Let's not wait for the next presidential election" to change the rules.

    The moves by Ensco and Rowan, which operate offshore oil rigs, show how one company's effort to lower its tax rate can spur other shifts.

    In moving from Dallas to the U.K. in 2009, Ensco followed rivals such as Transocean Ltd., RIG -1.47% Noble Corp. and Weatherford International Ltd. WFT -2.10% that had relocated outside the U.S. The company said the move would help it achieve "a tax rate comparable to that of some of Ensco's global competitors."

    In fact, Ensco's tax rate has declined. In the second quarter, the company said its "effective tax rate" was 10.5%, down from 19% in 2009. The savings: more than $100 million a year.

    Around the time of Ensco's move, Rowan executives fielded questions from investors and analysts about their own tax rate. In February, Rowan answered the questions, announcing plans to move to the U.K. from Houston. "We're able to be competitive, with a low effective rate," says Suzanne Spera, the firm's director of investor relations.

    Fear of such moves is what prompted Congress to pass the 2004 law, which was backed by Democrats and some Republicans and included exceptions that some firms and advisers have sought to exploit.

    In June, the Internal Revenue Service tightened an exception that had allowed companies to move to countries in which they have substantial business activities. It will not prevent moves through a merger, such as Eaton's.

    Lawmakers of both parties have said the U.S. corporate tax code needs a rewrite and they are aiming to try next year. One shared source of concern is the top corporate tax rate of 35%—the highest among developed economies. By comparison, Ireland's rate is 12.5%.

    The Obama administration has proposed lowering the rate to 28%, while Republican rival Mitt Romney has proposed 25%.

    Continued in article

    Jensen Comment
    Only one of the Big Four accounting firms (Deloitte) is headquartered in the United States. Accenture has a sham headquarters in Bermuda.


    Teaching case from The Wall Street Journal Accounting Weekly Review on September 1, 2012

    Industry Seeks Tax Fix
    by: James R. Hagerty
    Aug 28, 2012
    Click here to view the full article on WSJ.com
     

    TOPICS: Accounting, Corporate Taxes, Manufacturing, Tax Accounting, Tax Law, Taxes

    SUMMARY: Manufacturing is back in vogue as part of the solution to America's job shortage. After years of decline, factory employment has been edging up for the past two years, and some production has trickled back to the U.S. from Asia. So look for political candidates this fall to talk about how to spur investment in factories. Manufacturing jobs aren't the whole answer to the job shortage, of course. They account for about 9% of all non-farm jobs, but each factory position created tends to support several more in support services. While politicians have offered ideas, ranging from more federal support for research to creation of a national manufacturing strategy, many manufacturers wish Washington would concentrate on what they see as the fundamentals: lower and simpler taxes, improved roads and other infrastructure, and better education.

    CLASSROOM APPLICATION: This article is a nice example of potential ripple effects of tax law. We can use this article to show students how to be better accountants and business professionals by knowing the laws, but also seeing the impact the laws have on business strategy. It can help our students to see the difference between being a tax return preparer and a tax planner - looking at the details, as well as strategizing.

    QUESTIONS: 
    1. (Introductory) The article is entitled "Manufacturers Seek Tax Overhaul." What reasons does the reporter give for manufacturers requesting tax changes? What changes are they requesting?

    2. (Advanced) How has manufacturing been hampered by tax law in the past? What factors, other than tax law, have negatively impacted manufacturing?

    3. (Advanced) How would the requested changes impact manufacturing and other types of business? How is tax law used to encourage some behaviors and discourage other behaviors? Please give some answers mentioned in the article, as well as others not mentioned.

    4. (Advanced) How do the tax laws in other countries affect these types of issues faced by American manufacturers? Should the U.S. consider foreign tax rates and other factors when enacting tax law and regulations in the U.S.? Why or why not? How might the laws in other countries impact U.S. businesses?

    5. (Advanced) What steps, other than tax law changes, could be taken to decrease factors hampering manufacturing in the U.S.?
     

    Reviewed By: Linda Christiansen, Indiana University Southeast

     

    "Industry Seeks Tax Fix," by: James R. Hagerty, The Wall Street Journal, August 28, 2012 ---
    http://professional.wsj.com/article/SB10000872396390443324404577593050498878564.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

    Manufacturing is back in vogue as part of the solution to America's job shortage. After years of decline, factory employment has been edging up for the past two years, and some production has trickled back to the U.S. from Asia. So look for political candidates this fall to talk about how to spur investment in factories.

    Manufacturing jobs aren't the whole answer to the job shortage, of course. They account for about 9% of all nonfarm jobs, but each factory position created tends to support several more in support services.

    While politicians have offered ideas, ranging from more federal support for research to creation of a national manufacturing strategy, many manufacturers wish Washington would concentrate on what they see as the fundamentals: lower and simpler taxes, improved roads and other infrastructure, and better education.

    Enlarge Image image image Bloomberg

    In his most recent State of the Union address, President Barack Obama mentioned manufacturing 15 times. Among other things, the president is pushing for tax incentives for making products, especially high-tech ones, in the U.S. He also wants more focused federal research programs, including funds for new privately run institutes to study advanced manufacturing techniques.

    Mitt Romney, the likely Republican candidate for president, has promised to spark "a revival in American manufacturing." His program includes repealing "excessive" regulation in such areas as environmental protection. He also wants to require secret ballots for union-certification votes, which might make it harder for organized labor to win.

    Sen. Debbie Stabenow (D., Mich.) has offered legislation that would give tax breaks to help companies cover the cost of moving production back to the U.S. and ban tax deductions for the expenses of moving operations abroad. Rep. David Cicilline (D., R.I.) favors federal grants to help companies upgrade equipment and retrain workers.

    All those ideas have their supporters in the business world, but manufacturers tend to see overhauling the tax code as a far bigger priority. "It all sort of starts and stops right there," with corporate tax rates, says Keith Wandell, chief executive of Harley Davidson Inc., HOG -1.08% a Milwaukee-based maker of motorcycles. "We need to be more competitive [with other nations] in that respect."

    Stephen Gold, CEO of the Manufacturers Alliance for Productivity and Innovation, an Arlington, Va., research organization funded by industrial firms, says lower corporate tax rates could at least partly be paid for through eliminating many credits and deductions. For instance, he says, some members of his alliance would be willing to give up energy tax credits if they could get a lower corporate tax rate.

    A recent ranking by the University of Calgary's School of Public Policy found the U.S. had the highest effective corporate tax rate of the 34 countries belonging to the Organization for Economic Cooperation and Development. The typical marginal effective tax rate for U.S. manufacturers in 2012 was 33.9%, the study found. That includes income and several other types of taxes faced by corporations at the federal and state level but excludes property taxes and temporary or narrowly targeted tax breaks.

    Many business leaders want the U.S. to adopt a so-called territorial tax regime, in which companies would pay U.S. taxes only on their domestic, rather than world-wide, income. That would bring the U.S. in line with most other rich countries. While Mr. Romney favors such a shift, the Obama administration has argued that a territorial system would encourage more U.S. companies to shift operations abroad. But Martin Regalia, chief economist at the U.S. Chamber of Commerce, says it would make U.S.-based companies more competitive globally. "To the extent that U.S. firms are more competitive in world markets, they will likely create more jobs in total, both here and abroad," he says.

    Continued in article


    "Theory Of Spain's Political Class," by Cesar Molinas, The Browser, September 12, 2012 --- Click Here
    http://thebrowser.com/articles/theory-spains-political-class?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+BestOfTheMoment+%28The+Browser%29&utm_content=Google+Reader
    Direct Link --- http://elpais.com/elpais/2012/09/12/inenglish/1347449744_053124.html

    In this article I propose a theory of Spain's political class to make a case for the urgent, imperious need to change our voting system and adopt a majority system. A good theory of Spain's political class should at least explain the following issues:

    1. How is it possible that five years after the crisis began, no political party has a coherent diagnosis of what is going on in Spain?

    2. How is it possible that no political party has a credible long-term plan or strategy to pull Spain out of the crisis? How is it possible that Spain's political class seems genetically incapable of planning?

    3. How is it possible that Spain's political class is incapable of setting an example? How is it possible that nobody - except the king and for personal motives at that - has ever apologized for anything?

    4. How is it possible the most obvious strategy for a better future - improving education, encouraging innovation, development and entrepreneurship, and supporting research - is not just being ignored, but downright massacred with spending cuts by the majority parties?

    In the following lines I posit that over the last few decades, Spain's political class has developed its own particular interest above the general interest of the nation, which it sustains through a system of rent-seeking. In this sense it is an extractive elite, to use the term popularized by Acemoglu and Robinson. Spanish politicians are the main culprits of the real estate bubble, of the savings banks collapse, of the renewable energy bubble and of the unnecessary infrastructure bubble. These processes have put Spain in the position of requiring European bailouts, a move which our political class has resisted to the bitter end because it forces them to implement reforms that erode their own particular sphere of interest. A legal reform that enforced a majority voting system would make elected officials accountable to their voters instead of to their party leaders; it would mark a very positive turn for Spanish democracy and it would make the structural reforms easier. THE HISTORY

    The politicians who participated in the transition process from Franco's regime to democracy came from very diverse backgrounds: some had worked for Franco, others had been in exile and yet others were part of the illegal opposition within national borders. They had neither a collective spirit nor a particular group interest. These individuals made two major decisions that shaped the political class that followed them. The first was to adopt a proportional representation voting system with closed, blocked lists. The goal was to consolidate the party system by strengthening the internal power of their leaders, which sounded reasonable in a fledgling democracy. The second decision was to strongly decentralize the state with many devolved powers for regional governments. The evident dangers of excessive decentralization were to be conjured by the cohesive role of the great national parties and their strong leaderships. It seemed like a sensible plan.

    But four imponderables resulted in the young Spanish democracy acquiring a professional political class that quickly grew dysfunctional and monstrous. The first was the proportional system with its closed lists. For a long time now, members of party youth groups get themselves on the voting lists on the sole merit of loyalty to their leaders. This system has turned parties into closed rooms full of people where nobody dares open the windows despite the stifling atmosphere. The air does not flow, ideas do not flow, and almost nobody in the room has personal direct knowledge of civil society or the real economy. Politics has become a way of life that alternates official positions with arbitrarily awarded jobs at corporations, foundations and public agencies, as well as sinecures at private regulated companies that depend on the government to prosper.

    Secondly, the decentralization of the state, which began in the early 1980s, went much further than was imaginable when the Constitution was approved. As Enric Juliana notes in his recent book Modesta España (or, Modest Spain), the controlled top-down decentralization was quicky overtaken by a bottom-up movement led by local elites to the cry of "We want no less!" As a result, there emerged 17 regional governments, 17 regional parliaments and literally thousands of new regional companies and agencies whose ultimate goal in many cases was simply to extend paychecks and bonuses. In the absence of established procedures for selecting staff, politicians simply appointed friends and relatives, which led to a politicized patronage system. The new political class had created a rent-seeking system - that is to say, a system that does not create new wealth but appropriates existing wealth - whose sewers were a channel for party financing.

    Thirdly, political parties' internal power was decentralized even faster than the public administration. The notion that the Spain of the Regions could be managed by the two majority parties (the conservative Popular Party and the Socialists) fell apart when the regional "barons" accumulated power and, like the Earl of Warwick, became kingmakers within their own parties. This accelerated the decentralization and loss of control over the regional savings banks. Regional governments quickly passed laws to take over the cajas de ahorros, then filled the boards with politicians, unionists, friends and cronies. Under their leadership, the savings banks financed or created yet more businesses, agencies and affiliated foundations with no clear goal other than to provide yet more jobs for people with the right connections.

    Additionally, Spain's political class has colonized areas that are not the preserve of politics, such as the Constitutional Court, the General Council of the Judiciary (the legal watchdog), the Bank of Spain and the CNMV (the market watchdog). Their politicized nature has strangled their independence and deeply delegitimized them, severely deteriorating our political system. But there's more. While it invaded new terrain, the Spanish political class abandoned its natural environment: parliament. Congress is not just the place where laws are made; it is also the institution that must demand accountability. This essential role completely disappeared in Spain many years ago. The downfall of Bankia, played out grotesquely in last July's parliamentary appearances, is just the latest in a long series of cases that Congress has decided to treat as though they were natural disasters, like an earthquake, which has victims but no culprits. THE BUBBLES

    These processes created a political system in which institutions are excessively politicized and where nobody feels responsible for their actions because nobody is held accountable. Nobody within the system questions the rent-seeking that conforms the particular interest of Spain's political class. This is the background for the real estate bubble and the failure of most savings banks, as well as other "natural disasters" and "acts of God" that our politicians are so good at creating. And they do so not so much out of ignorance or incompetence but because all these acts generate rent.

    The Spanish real estate bubble was, in relative terms, the largest of the three that are at the origin of today's global crisis, the US bubble and the Irish bubble being the other two. There is no doubt that, like the others, it fed on low interest rates and macroeconomic imbalances on a global scale. But unlike the US, in Spain decisions regarding what gets built where are taken at the political level. In Spain, the political class inflated the real estate bubble through direct action, not omission or oversight. City planning is born out of complex, opaque negotiations which, besides creating new buildings, also give rise to party financing and many personal fortunes, both among the owners of rezoned land and those doing the rezoning. As if this power were not enough, by transferring control of the savings banks to regional governments the politicians also had power of decision over who received money to build. This represented a quantum leap in the Spanish political class' capacity for rent-seeking. Five years on, the situation could not be more bleak. The Spanish economy will not grow for many years to come. The savings banks have disappeared, mostly due to bankruptcy.

    The other two bubbles I will mention are a result of the peculiar symbiosis between our political class and Spanish capitalists who live off government favors. At a recent meeting, a well-known foreign investor called it "an incestuous relationship" while a Spanish investor talked about "a collusion against consumers and taxpayers." Be that as it may, let us first discuss the renewable energy bubble. Spain represents two percent of world GDP yet it is paying 15 percent of the global total of renewable energy subsidies. This absurd situation, which was sold to the public as a move that would put Spain on the forefront of the fight against climate change, creates lots of fraud and corruption, and naturally captured rent, too. In order to finance these subsidies, Spanish households and businesses pay the highest electricity rates in all of Europe, which seriously undermines the competitiveness of our economy. Despite these exaggerated prices, the Spanish power system debt is several million euros a year, with an accumulated debt of over 24 billion euros that nobody knows how to pay.

    The last bubble I will discuss concerns the countless unnecessary infrastructure projects built in the last two decades at an astronomical cost, benefiting the builders and hurting the taxpayers. One of the most scandalous cases is the spoke highways into and out of Madrid. Meant to improve traffic flows into the capital, the radiales were built with no thought given to important principles of prudence and good management. First, rash forecasts were made regarding the potential traffic on these roads (currently it is 30 percent of expectations and not because of the crisis; there was no traffic in boom times, either.) The government allowed the builders and the concessionaires to be essentially the same people. This is madness, because when builders disguised themselves as license holders through companies with very little capital and huge debt, builders basically got money from the concessionaires to build the highways, and when there was no traffic, they threatened to let the latter go broke. The main creditors were - surprise! - the savings banks. So nobody knows how to pay the more than three billion euros in debt, which will ultimately fall on the taxpayers' shoulders. THE THEORY

    The principle is very simple. Spain's political class has not only turned itself into a special interest group, like air traffic controllers for example; it has taken a step further and formed an extractive elite in the sense given to this term by Acemoglu and Robinson in their recent and already famous book Why Nations Fail. An extractive elite is defined by:

    "Having a rent-seeking system which allows, without creating new wealth, for the extraction of rent from a majority of the population for one's own benefit."

    "Having enough power to prevent an inclusive institutional system - in other words, a system that distributes political and economic power broadly, that respects the rule of law and free market rules."

    Abominating the 'creative destruction' that characterizes the most dynamic forms of capitalism. In Schumpeter's words, "creative destruction is the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one." Innovation tends to create new centers of power, and that's why it is detested.

    What does this simple theory have to say about the four questions set forth at the beginning of this article? Let us see:

    1. Spain's political class, as an extractive elite, cannot effect a reasonable diagnosis of the crisis. It was their rent-seeking mechanisms that provoked it, but obviously they cannot say that. The Spanish political class needs to defend, as it is indeed doing to a man, that the crisis is an act of God, something that comes from the outside, unpredictable by nature, and in the face of which we can only show resignation.

    2. Spain's political class, as an extractive elite, cannot have any exit strategy other than waiting for the storm to pass. Any credible long-term plan must include the dismantling of the rent-seeking mechanisms that the political class benefits from. And this is not an option.

    3. Nobody apologizes for defending their particular interests. Air traffic controllers didn't, and neither will our politicians.

    4. Just as the theory of extractive elites states, Spanish political parties share a great contempt for education, innovation and entrepreneurship, and a deep-seated hostility towards science and research. The loud arguments over the civics education course Educación para la Ciudadanía are in stark contrast with the thick silence regarding the truly relevant problems of our education system. Meanwhile, innovation and entrepreneurship languish in the midst of regulatory deterrents and punitive fiscal measures. And spending on scientific research is viewed as a luxury that politicians cut back savagely on, given half a chance.

     

    Continued in article


    Teaching Case for CVP Analysis (Especially for middle tier restaurants where demand is highly price elastic)

    From The Wall Street Journal Accounting Weekly Review on September 1, 2012

    Soaring Food Prices Put Restaurants in a Bind
    by: Julie Jargon
    Aug 29, 2012
    Click here to view the full article on WSJ.com
     

    TOPICS: Accounting, Business Segments, Managerial Accounting, Profit Margin, Segmented Income Statements

    SUMMARY: Restaurant chains are in a pickle, caught between soaring ingredient costs and fears that raising prices will turn off their budget-conscious customers, who generally remain pessimistic about the economy. Companies like McDonald's Corp., Buffalo Wild Wings Inc. and Chipotle Mexican Grill Inc. are taking different approaches to the dilemma. Some are trying to pass on rising costs to customers to avoid squeezing their profit margins. Others are holding the line on prices or emphasizing their existing low-cost menu items to keep consumers coming through the door. Research has shown that diners are ordering more "value" items and fewer premium-priced entrees and appetizers, indicating they are trying to manage the size of their restaurant bills more than we've seen in a while.

    CLASSROOM APPLICATION: This article offers a nice bridge between managerial and financial accounting. We can use this article to discuss how management is using segmented income statements to manage profit margins in this tight economy. The companies are also carefully managing fixed and variable costs as raw material prices of food increase in the face of low consumer confidence. This is a great opportunity to show how the information and tools we teach in class directly relate to management decisions, strategy, and profitability.

    QUESTIONS: 
    1. (Introductory) What challenges are restaurants facing? How are they impacted both on the expense side and sales side?

    2. (Advanced) How are fast food restaurants analyzing the situation using segmented income statements to address these challenging times? How does segmenting the business's product lines and customers help with the company's overall profit margins?

    3. (Advanced) What segment of the fast food business is most successful? How is McDonald's management approaching each segment to make it more profitable? How does a segmented income statement and budgeting aid in this analysis?

    4. (Advanced) In the restaurant business, which types of costs are easiest to control? Which are more difficult? Are these costs more likely to be fixed, variable, or mixed costs? How can management work with each of these types of costs to survive and perhaps thrive in these kinds of economic times?

    5. (Advanced) How are different types of restaurants (fast food, mid-range, fine dining) being affected differently under these conditions? How can each type of restaurant use managerial accounting concepts to improve profitability?

    6. (Advanced) How would a contribution format income statement help management to make these decisions?
     

    Reviewed By: Linda Christiansen, Indiana University Southeast

     

    "Soaring Food Prices Put Restaurants in a Bind," by: Julie Jargon, The Wall Street Journal, August 29, 2012 ---
    http://professional.wsj.com/article/SB10000872396390444082904577606983275066266.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

    Restaurant chains are in a pickle, caught between soaring ingredient costs and fears that raising prices will turn off their budget-conscious customers, who generally remain pessimistic about the economy.

    Companies like McDonald's Corp., MCD +0.89% Buffalo Wild Wings Inc. BWLD -1.94% and Chipotle Mexican Grill Inc. CMG -0.48% are taking different approaches to the dilemma. Some are trying to pass on rising costs to customers to avoid squeezing their profit margins. Others are holding the line on prices or emphasizing their existing low-cost menu items to keep consumers coming through the door.

    The worst drought in decades has driven up prices for foods including corn, chicken and beef this summer. Further complicating matters for restaurants and other retailers, consumer confidence in August fell to its lowest level since November 2011, the Conference Board said Tuesday.

    Earlier this month McDonald's attributed flat global same-store sales in July to waning consumer sentiment, and market-research firm NPD Group predicted that restaurant traffic would be flat for the next two years, dialing back its previous forecast of a 1% gain.

    "Restaurant operators are in a position where they don't have much of a choice but to raise prices because they operate on such thin margins," said Darren Tristano, executive vice president of restaurant consulting firm Technomic Inc.

    The pressure is greater on some chains than others. Fine and causal-dining restaurants can better stomach commodity-cost increases because of their higher-priced menus and ability to adjust portion sizes. "But when you're McDonald's, a lot of your products are priced to be 'value' offerings, so there's not a lot of room to absorb cost increases," Mr. Tristano added.

    "I'd probably order more from the value menu if prices go up," said 33-year-old Norma Rangel-Aponte, who was eating a snack-size McFlurry ice-cream dessert at a Chicago McDonald's recently. To save money, she said, she sometimes orders a side salad and tops it with the chicken from a snack wrap, rather than ordering a more-expensive chicken salad.

    Restaurant chains were in similar straits a few years ago. Food costs were high during parts of the recession because of rising global protein demand. Some chains reacted by heavily discounting their dishes to keep customers coming back, but their profit margins suffered.

    Others boosted prices modestly on inexpensive menu items, hoping that consumers would swallow the increases without much resistance. In January 2009 McDonald's raised the price of a double cheeseburger, a fixture of its Dollar Menu, to $1.19 to help defray higher beef and cheese costs. A spokeswoman said Tuesday that the double cheeseburger remains on the regular McDonald's menu at a suggested retail price of $1.19 to $1.29, depending on location.

    RBC Capital Markets analyst Larry Miller said his research has shown that diners are ordering more "value" items and fewer premium-priced entrees and appetizers, indicating they are trying to manage the size of their restaurant bills more "than we've seen in a while." The potential for weak or flat sales growth combined with rising costs is "downright scary to us," he added.

    Some chains are once again stressing cheaper menu items, offering promotions to help bring customers back more often and testing the water with small price increases. McDonald's recently created an "Extra Value Menu" featuring such items as a 20-piece Chicken McNuggets for $4.99. Starbucks Corp. SBUX -0.20% reintroduced "treat receipts" that give morning customers a discount if they return in the afternoon.

    Continued in article

    Jensen Comment
    Meanwhile increases in food and fuel do not affect inflation indices since the government now deceives us about the inflationary spiral for food and fuel prices by ignoring prices increases in food and fuel when adjusting for inflation.

    Government accounting is all done with smoke and mirrors ---
    http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting

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


    Joseph Hémard --- http://en.wikipedia.org/wiki/Joseph_H%C3%A9mard

    Joseph Hémard, a popular French book illustrator, was born in Les Mureaux, France, a small town on the Seine, northwest of Paris, on August 2, 1880, and died on August 9, 1961, in Paris.[He was a prolific artist. During the early years of the 20th century he published cartoons and comics in illustrated newspapers like Le Pêle-mêle or Le Bon Vivant. He also designed costumes and sets for several operas, patterns for printed textiles, bookbindings, posters and even a facade for a bar in the 1925 Paris Exposition of Decorative Art. His lasting fame, however, lies in his book illustrations — always distinctly French in character and often erotic — which he produced for a great number of titles including many classics of French literature such as Le Malade Imaginaire (1920), Gargantua et Pantagruel (1922), Jacques Le Fataliste (1923), Cyrano de Bergerac (1927), and Aucassin et Nicolette (1936).

    Hémard also provided illustrations — typically humorous cartoon-like drawings — for many unlikely non-fiction works including a variety of technical and reference books. These included drawings for Le Formulaire Magistral, a technical pharmacological manual with formulas for preparing medications, as well as a French grammar and an arithmetic textbook, both of which he also authored, all published in 1927. The following year he published books he wrote and illustrated on French history and geography.

    Hémard also published a number of humorously illustrated law codes, including the family law provisions of Le Code Civil, published in 1925, the Code Pénal published in about 1929, and, in 1944, he published a lengthy, illustrated tax code of France, the Code Général des Impôts Directs et Taxes Assimilées, all published in Paris.

    The illustrations in these three works, along with many others of Hémard's, were printed in color using the "pochoir" (French for stencil) method in which stencils for each color to be printed are hand cut, typically out of celluloid or plastic, and the colors painted on using special brushes. Pochoir produces intensely colored prints with a distinct fresh look and is best known for its use in French Art Nouveau and Art Deco prints in the early 20th Century.

    Hémard wrote a brief autobiographical essay, published by Babou and Kahane in French in 1928 and in English translation in 1929, which is largely devoid of factual detail. For example, after a random history of several "Hémards", purportedly his ancestors, ending with his birth and two paragraphs on his childhood, he states, "And then I drew for books." Hémard said that he spent four and a half years as a prisoner of war in Germany during World War I, and must have been captured shortly after the war began. Hémard had his most prolific period of book illustrations in the 1920s and 1930s. Although he remained in Paris and continued to work as an illustrator during the War, his anti-Nazi sentiments were expressed in illustrations and stories he contributed to a collection of humorous stories about the Occupation. Hémard continued his work at a reduced level after the War. In 1947, for example, he illustrated an edition of Brillat-Savarin's classic work on gastronomy, Physiologie du Goût ("Physiology of Taste")

    Continued in article

    Yale Law Library - Rare Books Blog  (I don't think this can be viewed online)
    http://blogs.law.yale.edu/blogs/rarebooks/default.aspx
    New exhibit: "The Comic Art of Joseph Hémard"
    Posted Monday, September 17, 2012 4:59 PM by Mike Widener
    http://blogs.law.yale.edu/blogs/rarebooks/archive/2012/09/17/new-exhibit-quot-the-comic-art-of-joseph-h-233-mard-quot.aspx 
    Thank you Paul Caron for the heads up

    It would take a genius to illustrate one of the most boring books imaginable, a code of tax laws, and create a comic tour-de-force. That genius was Joseph Hémard (1880-1961), who in his lifetime was probably France's most prolific book illustrator. His illustrations are the focus of the latest exhibit in the Yale Law Library, "'And then I drew for books': The Comic Art of Joseph Hémard."

    The exhibit, on display until December 15, is curated by Farley P. Katz and Michael Widener. Katz, a tax attorney from San Antonio, has built one of the world's finest collections of Hémard's works. Widener is the Rare Book Librarian at the Lillian Goldman Law Library.

    Hémard's illustrations have a distinctly French character, usually comic, and often mildly erotic. Many of his illustrations were executed in pochoir, a hand stenciling process producing intense, gorgeous colors still vibrant after three-quarters of a century.

    The exhibit showcases eight of the 183 illustrations in Hémard's Tax Code, donated to the Yale Law Library by Katz, along with two of the other three law books on display from the library's Rare Book Collection.

    The other 19 titles on view are all from Katz's personal collection. They include children's books and some of the many classics of French literature that Hémard illustrated, such as works by Balzac and Anatole France. Items on war include Hémard's own pictorial account of his time as a German prisoner in World War I, and a set of anti-Hitler postcards. Hémard even illustrated a pharmacy manual and a pamphlet on the prostate.

    The exhibition's title comes from Hémard's tongue-in-cheek autobiography. Following a long, rambling description of supposed ancestors, he devotes two paragraphs to his early life, and finishes with: "And then I drew for books."

    The exhibit is open to the public, 9am-10pm daily, September 15 - December 15, 2012 in the Lillian Goldman Law Library, Yale Law School. It will also go online here in the Yale Law Library Rare Books Blog.

    On October 5, Katz will give an exhibit talk at 1:00 p.m. in Room 128 of the Yale Law School. The talk is also open to the public.

    MIKE WIDENER
    Rare Book Librarian


    When government internal controls are a sick joke
    "Wisconsin: 3 relatives suspected of cashing dead mother's Social Security checks for 30 years," by Dinesh Ramde, TwinCities.com, September 25, 2012 ---
    http://www.twincities.com/wisconsin/ci_21627111/wisconsin-checks-still-cashed-dead-mom

    Three Portage County residents are accused of cashing Social Security checks of a relative who has been missing for 30 years and is presumed dead, and authorities are investigating to see whether her remains are buried on her wooded property.

    If Marie Jost is still alive she'd be 100 years old. But authorities now suspect she died in about 1982, and they're accusing her son, daughter and son-in-law of continuing to cash her government checks in her absence.

    Investigators believe Jost might be buried on her Amherst property. Sheriff's Capt. Dale O'Kray said Tuesday that cadaver dogs have hit upon the scent of human remains, and authorities are using heavy machinery to explore the property and dig for evidence.

    "There's no indication she's been seen in the last 25 years and we have to have a starting point for where she might be," O'Kray said.

    Charles T. Jost, 66; Delores M. Disher, 69; and Ronald Disher, 71, each face four felony charges including being party to the crimes of theft and mail fraud. The charges carry a maximum combined penalty of 68 years in prison and a $310,000 fine.

    The Social Security Administration had sent three letters to Jost's home to verify she was still alive. After the third letter was sent, a man who identified himself as her son called to say Jost wasn't available.

    The agency then contacted Portage County authorities last month asking that deputies check on her. Deputies went to her property where Charles Jost allegedly told them Marie Jost and his 74-year-old brother Theodore "were riding in a vehicle someplace," according to the criminal complaint.

    When a deputy asked for permission to search the property, Charles Jost allegedly grew agitated and asked them to leave. The deputy then asked whether Marie Jost was still alive, and Charles Jost said he would talk to his lawyer and ended the conversation, the complaint said.

    Authorities obtained a search warrant and gathered evidence, but they haven't found anything to indicate whether Marie Jost is alive or dead, O'Kray said.

    There's not a real house on the 3-acre property. Charles Jost lives in a tarp-covered shack there, and four to five sheds are filled with years' worth of garbage, O'Kray said.

    "It's basically a 'Hoarders' episode gone bad," he said. "We have about 400 garbage bags of junk we had to remove to search the living areas."

    During an initial court appearance Monday a judge ordered that Charles Jost undergo a competency evaluation. A message left for Jost's defense attorney Tuesday was not immediately returned.

    Neighbors told authorities they had never seen an elderly woman at Charles Jost's home.

    A Social Security agent said Marie Jost had not used her Medicare benefits since 1980 when she had a stroke. The agent said Jost had been sent Social Security payments of more than $175,000 since she had made a Medicaid claim.

    Prosecutors say the Social Security checks were endorsed with an X, along with the printed names of Charles and Theodore Jost.

    Continued in article

    Jensen Comment
    I wonder if she also voted over the past 30 years?

    The Sad State of Governmental Accounting and Accountability ---
    http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting


    Teaching Case from The Wall Street Journal Accounting Weekly Review on September 20, 2012

    Carbon Trading Heating Up
    by: Katy Burne and Cassandra Sweet
    Sep 15, 2012
    Click here to view the full article on WSJ.com
     

    TOPICS: Derivatives, emissions trading schemes, Intangible Assets

    SUMMARY: Carbon-emission credit markets in California are becoming active after failure of a lawsuit and a referendum vote designed to block the cap-and-trade system that is becoming effective on January 1, 2013. Energy companies operating in California such as Constellation, a unit of Exelon, and NRG Energy, Inc., are trading in the market.

    CLASSROOM APPLICATION: The article may be used in any financial or managerial accounting class to introduce the topic of carbon credits and their trading. Question 4 asks students to consider accounting practices; they might conclude that the expenditure for an emission allowances purchases an asset that is either an intangible or a derivative. There are no financial reporting standards on this topic in U.S. GAAP and the FASB has idled a project it once began on the subject. Issues faced in Europe on this subject are well summarized in the following article Jan Bebbington & Carlos Larrinaga-González (2008): Carbon Trading: Accounting and Reporting Issues, European Accounting Review, 17:4, 697-717 (available online at http://dx.doi.org/10.1080/09638180802489162)

    QUESTIONS: 
    1. (Advanced) How do carbon emissions allowances work? In your answer, explain the statement in the article that "California's cap on statewide emissions drops every year, likely raising demand for allowances."

    2. (Advanced) What is a carbon emissions allowances trading market?

    3. (Introductory) Why have carbon markets in California seen renewed interest in 2012?

    4. (Advanced) Suppose you are an accountant for a California based power plant, which has recently purchased carbon credits to meet its required limit on total carbon emissions. How would you account for the purchase of these credits? When would the benefit of these allowances be used up?
     

    Reviewed By: Judy Beckman, University of Rhode Island

    "Carbon Trading Heating Up," by Katy Burne and Cassandra Sweet, The Wall Street Journal, September 15, 2012 ---
    http://professional.wsj.com/article/SB10000872396390443779404577643592149738280.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

    After a series of false starts, the market for trading carbon-emission credits is showing new signs of life in California.

    Trading volumes for these carbon credits—which allow holders to emit as many greenhouse-gas emissions as they want, provided they acquire enough of them—are at a nine-month high. Prices are up 1% since the start of this year, even as prices on carbon allowances elsewhere in the world are plumbing lows.

    While federal efforts to regulate carbon-dioxide pollution collapsed in 2010—and other carbon markets have run into trouble—California is now on track to implement its own laws capping heat-trapping gases that scientists believe contribute to climate change. As the Jan. 1, 2013, start date for the new rules approaches and as opponents of the rules run out of time to mount new legal challenges, operators of power plants, oil refineries and other facilities are wading in to purchase credits.

    The spurt of activity has been a score for a small group of traders and other investors who had wagered that California officials would prevail in a lawsuit and a referendum that sought to block the cap on carbon-dioxide emissions. They say they see more opportunity to stock up on credits, ahead of an expected spike in demand next year.

    Enlarge Image image image

    "What's changed is we are really at a phase now where [California is] in implementation mode," said Greg Arnold, president at CE2 Carbon Capital, a fund backed by private-equity firm Energy Capital Partners that owns carbon contracts, expecting prices to rise.

    California's cap on statewide emissions drops every year, likely raising demand for allowances.

    It is mostly power producers and other companies that will need credits in the market today. But that could change as volume picks up, traders say, as investors come in to speculate on the direction of prices.

    "Once we get going, the hedge funds will be there," said Randall Lack, founder of Element Markets in Houston, an asset manager that helps clients hedge in carbon markets.

    A state appeals court in June upheld California's cap-and-trade program and dismissed a lawsuit filed by some community groups that had argued the program wouldn't reduce emissions.

    Trading picked up in carbon credits, or allowances, soon after. More than 1,000 contracts traded on the IntercontinentalExchange in August, up from 246 in May, the month before the lawsuit was dismissed. Prices for contracts promising the delivery of 1,000 California carbon allowances in December 2013 hit an 11-month high of $20.10 a metric ton on July 24 on the ICE.

    But the market turned again in August, after regulators said they would reconsider the way they plan to enforce a ban on shuffling out-of-state energy purchases to claim an emissions reduction. Any changes made to the rules might affect the number of credits California power producers need to buy. Credits settled at $15.65 a ton on Friday.

    Some still think the carbon market is too risky. "We are supposed to be getting off the starting blocks soon, but California has made it clear if there are any issues, possible further delays are not off the table," said Francisco Padua, manager of environmental commodities at brokerage firm Amerex Brokers LLC.

    The cap-and-trade program is proceeding on schedule and there are no proposed rule changes pending, said Air Resources Board spokesman Dave Clegern.

    Continued in article

    Accounting for Carbon Credits, by Rob Derivaux and Dave Nichols, AAA Commons, May 2, 2009 ---
    http://commons.aaahq.org/posts/78699eceed?commentId=18146#18146

    The thesis concerns the search for a converged International Financial Reporting Standard (IFRS) and U. S. GAAP standard to account for carbon credit trading schemes. Many nations, including those in the European Union, have adopted carbon credit trading schemes in order to reduce carbon emissions. Carbon emissions trading schemes present many accounting challenges, including the exact nature of the credits and how to measure the obligation to which credits will be applied. However, there is not a standard to address these accounting issues. The short-lived former standard was withdrawn because of extensive shortcomings. Currently, participating companies use a variety of approaches to account for carbon credits, and this creates comparability issues in the financial statements. A survey was conducted of graduate accounting students and accounting professionals to solicit input on the possible ways to account for carbon credits. The survey contained a scenario of a company’s carbon activity for the year. Five distinct approaches were gathered from the surveys and were scrutinized using existing accounting standards and frameworks promulgated by IFRS and US GAAP. The conclusion was reached that carbon credits granted by the government are not actually a government grant; they should be netted out by an allowance for granted credits. It was also concluded that a liability should be measured as the estimated excess of carbon emissions over held credits both at interim and year-end reporting dates. It was also concluded that the research was limited by the lack of a converged IFRS/US GAAP framework, the small size of the survey, and the lack of development of carbon credit trading schemes to date.

    Bob Jensen's accounting theory tutorials are at the following two sites:
    Part 1 --- http://www.trinity.edu/rjensen/Theory01.htm
    Part 2 --- http://www.trinity.edu/rjensen/Theory02.htm

     


     

    "Three Weeks Down," by Joe Hoyle, Teaching Blog, September 23, 2012 ---
    http://joehoyle-teaching.blogspot.com/2012/09/three-weeks-down.html




    Forwarded by Gene and Joan

    Mayonnaise Jar & Two Beers

    When things in your life seem almost too much to handle, when 24 hours in a day are not enough, remember the mayonnaise jar and the 2 Beers.

    A professor stood before his philosophy class and had some items in front of him.

    When the class began, he wordlessly picked up a very large and empty mayonnaise jar and proceeded to fill it with golf balls.

    He then asked the students if the jar was full.

    They agreed that it was.

    The professor then picked up a box of pebbles and poured them into the jar. He shook the jar lightly.

    The pebbles rolled into the open areas between the golf balls.

    He then asked the students again if the jar was full.

    They agreed it was.

    The professor next picked up a box of sand and poured it into the jar.

    Of course, the sand filled up everything else.

    He asked once more if the jar was full..

    The students responded with a unanimous 'yes.'

    The professor then produced two Beers from under the table and poured the entire contents into the jar effectively filling the empty space between the sand.

    The students laughed..

    'Now,' said the professor as the laughter subsided, 'I want you to recognize that this jar represents your life.

    The golf balls are the important things - your family, your children, your health, your friends and your favorite passions - and if everything else was lost and only they remained, your life would still be full.

    The pebbles are the other things that matter like your job, your house and your car..

    The sand is everything else - the small stuff.

    'If you put the sand into the jar first,' he continued, 'there is no room for the pebbles or the golf balls.

    The same goes for life.

    If you spend all your time and energy on the small stuff you will never have room for the things that are important to you.

    Pay attention to the things that are critical to your happiness.

    Spend time with your children.

    Spend time with your parents.

    Visit with grandparents. Visit with your Aunts.

    Take your spouse out to dinner.

    Play another 18.

    There will always be time to clean the house and fix the disposal.

    Take care of the golf balls first - the things that really matter.

    Set your priorities.

    The rest is just sand.

    One of the students raised her hand and inquired what the Beer represented.

    The professor smiled and said, 'I'm glad you asked.'

    The Beer just shows you that no matter how full your life may seem, there's always room for a couple of Beers with a friend.

     




     

    Humor September 1-30, 2012

    Seinfeld, Louis C.K., Chris Rock, and Ricky Gervais Dissect the Craft of Comedy (NSFW) --- Click Here
    http://www.openculture.com/2012/09/seinfeld_louis_ck_chris_rock_and_ricky_gervais_dissect_the_craft_of_comedy_nsfw.html

    2012 Ig Nobel Prizes --- http://www.improbable.com/ig/winners/

    The Darwin Awards --- http://www.darwinawards.com/

    You may remember Steve Bridges as the guy who imitated George Bush so well on the Jay Leno Show. He has now started imitating Obama and REALLY does it really well --- http://www.youtube.com/watch_popup?feature=player_embedded&v=WH_a0cGVRmI

    Husband and Wife Comedy Team (The Jovers, 1980) ---
    http://biggeekdad.com/2012/05/the-jovers/

    Why did I walk into this room (Toon)?  ---
    http://link.brightcove.com/services/player/bcpid67524056001?bckey=AQ~~%2cAAAAAjHM3KE~%2cue6IyhgccnQfCR9niUq7SpiGuvtClfZX&bclid=0&bctid=1799012627001

    CFO = Chief Finalizing Officer
    "CFO Accused of Murder-for-Hire on His Employer's Dime," by Teresa Ambord, AccountingWeb, September 18, 2012 ---
    http://www.accountingweb.com/article/cfo-accused-murder-hire-his-employers-dime/219868?source=education

     


    Forwarded by Auntie Bev

    GETTING OLDER 
     
     
    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...."
     
    (I LOVE IT!)
     
    ~~~~~~~~~~~~~~~~~
     
    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.
     
     
     
    -------------------------------
     
    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 aroundWal-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 old guy says,"Doesn't matter,
     
    --- let's look for yours."
     
    (ADORABLE)
     
     
     
    *********************
     
    (And this final one especially for me,)
     
    "Lord,
    keep Your arm around my shoulder
     
    and Your hand over my mouth!"
     
     


    Forwarded by Auntie Bev

    If God wanted us to vote, he would have given us candidates. ~ Jay Leno

     

    The problem with political jokes is they get elected. ~ Henry Cate, VII

     

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

     

    If we got one-tenth of what was promised to us in these State of the Union speeches, there wouldn't be any inducement to go to heaven. ~ Will Rogers

     

    One of the penalties of not participating in politics is that you will be governed by your inferiors. ~ Plato

     

    Politicians are the same all over. They promise to build a bridge even where there is no river. ~ Nikita Khrushchev

     

    When I was a boy I was told that anybody could become President; I'm beginning to believe it. ~ Clarence Darrow

     

    Why pay money to have your family tree traced; go into politics and your opponents will do it for you. ~ Author unknown

     

    Politicians are people who, when they see light at the end of the tunnel, go out and buy some more tunnel. ~ John Quinton

     

    Politics is the gentle art of getting votes from the poor and campaign funds from the rich, by promising to protect each from  the other. ~ Oscar Ameringer

     

    The Democrats are the party that try to make you believe more government involvement will make you smarter, taller, richer, and remove the crabgrass on your lawn.  The Republicans are the party that say government doesn't work and then, they get elected and prove it.  ~ P.J. O'Rourke

     

    I offer my opponents a bargain: if they will stop telling lies about us, I will stop telling the truth about them. ~ Adlai Stevenson, campaign speech, 1952

     

    A politician is a fellow who will lay down your life for his country.  ~ Tex Guinan

     

    Any American who is prepared to run for president should automatically, by definition, be disqualified from ever doing so. ~ Gore Vidal

     

    I have come to the conclusion that politics is too serious a matter to be left to the politicians. ~ Charles de Gaulle

     

    Instead of giving a politician the keys to the city, it might be better to change the locks. ~ Doug Larson

     

    Don't vote; it only encourages them. ~ Author unknown

     

    There ought to be one day -- just one -- when there is open season on senators. ~ Will Rogers


    Autie Bev forwarded the findings of a sex position survey.

    It has been determined that the most used sexual position for married couples is as follows:

    The husband sits up and begs.

    The wife rolls over and plays dead!


    Forwarded by Auntie Bev

    2012 Democratic National Convention Schedule -- Charlotte , N.C.

    4:00 PM – Opening Flag Burning Ceremony – sponsored by CNN
    4:05 PM – Singing of "God Damn America " led by Rev. Jeremiah Wright
    4:10 PM – Pledge of Allegiance to Obama

    4:15 PM – Ceremonial 'I hate America' led by Michelle Obama
    4:30 PM – Tips on “How to keep your man trustworthy & true to you while you travel the world” – Hillary Clinton
    4:45 PM –Al Sharpton / Jesse Jackson seminar “How to have a successful career without having a job.”

    5:00 PM – “Great Vacations I’ve Taken on the Taxpayer’s Dime Travel Log” -Michelle Obama
    5:30 PM – Eliot Spitzer Speaks on "Family Values" via Satellite
    5:45 PM – Tribute to All 57 States – Nancy Pelosi

    6:00 PM – Sen. Harry Reid - 90-minute speech expressing the Democrat’s appreciation of the Occupy Wall Street movement, and George Soros for sparing no expense, for all that they have accomplished to unify the country, improve employment and to boost the economy.

    8:30 PM – Airing of Grievances by the Clintons
    9:00 PM – “Bias in Media – How we can make it work for you” Tutorial – sponsored by CBS, NBC, ABC, CNN, the Washington Post and the New York Times

    9:15 PM – Tribute Film to Brave Freedom Fighters incarcerated at GITMO –Michael Moore
    9:45 PM – Personal Finance Seminar - Charlie Rangle
    10:00 PM – Denunciation of Bitter Gun Owners and Bible readers
    ,
    10:30 PM – Ceremonial Waving of White Flag for IRAQ , & Afghanistan
    11:00 PM – Obama Energy Plan Symposium / Tire Gauge Demonstration / You too can get rich with Green Investment bankruptcies
    11:15 PM – Free Gov. Blagovich rally

    11:30 PM – Obama Accepts Oscar, Tony and Latin Grammy Awards
    11:45 PM – Feeding of the Delegates with 5 Loaves and 2 Fish – Obama Presiding
    12:00 AM – Official Nomination of Obama by Bill Maher and ChrisHe sends a thrill up my legMatthews

    12:01 AM – Obama Accepts Nomination as Lord and Savior
    12:05 AM – Celestial Choirs Sing
    3:00 AM – Biden Delivers Acceptance Speech


    Forwarded by David Fordham

    Compiled from various sources and embellished a little:

     "As a tenured faculty member, you are long overdue for retirement if you can check off more than five of the following:"

    You have to refer to the campus map to find the new library they built in 2002.

    While trying to figure out how to get the ceiling projector to work, you long for your overhead on the cart -- the one with the rolled mylar, where all you did was flip the switch and it came on.

    Your research papers never cite any works since 2004, because you can't figure out how to use the library's new on-line database search software.

    You haven't taught a junior or senior level class in more than five years.   The department chair relegates you to small graduate seminars where he only has to listen to five or ten students complain per semester, or 150-seat freshman introductory classes where no one pays any attention anyway.

    Your office still has a complete shelf taken up with back issues of a hardcopy periodical.

    Your email signature still contains a caustic quote from someone who has been dead more than 100 years.

    You go to the library, and are amazed to discover that, of the eight floors in the building, only one actually still holds books.

    You write letters to the editor of the campus newspaper criticizing the Administration, and sign your OWN name.

    Everyone who signed your diploma has been dead ... more than 10 years.

    You can name more than three Greek philosophers, even though your field is not Greek philosophy.

    You even know what one of those Greek philosophers was famous for.

    Although you learned a long time ago what the AAUP really is, you still go to their meetings anyway.

    Your alma mater is now naming buildings after your classmates.

    You are invited to sit on the stand at convocation even though you aren't a dean.

    You used to go to university-wide faculty meetings to see your old friends from the other side of campus.  Now you go to the hospital to see them.

    You still have a hand-held calculator... one that is just a calculator, and ISN'T also a phone, a camera, a GPS device, etc.

    You use words like "ergo", "vis-a-vis", and "et cetera" in your ORAL communication.

    You tell the accreditation team that you've "integrated critical thinking into the curriculum", because you find it easier to write "B-... needs more supporting details" on the cover sheet of a student's paper than to make -- and then grade -- a real exam.

    You still believe that bright students come to a university to "become enlightened citizens" rather than to "get a decent job".

    You can remember when psychedelic colors applied to clothing rather than hair.  And when the boys had all the tattoo's and the girls had all the piercings.

    You've never experienced the thrill of REALLY, SERIOUSLY cursing a recent computer software upgrade  ... during your classroom presentation.

    You are no longer sure what your department's tenure requirements are.

    You still have a box under your desk containing your dissertation data.   And while you threw out the punched cards years ago, you still have the reports printed on green-bar fan-fold paper.

    Your file cabinet has folders containing mylar transparencies, even though your institution has not had an overhead projector in a classroom for over a decade.

    You think you are using "modern classroom presentation technology" because you own a laser pointer and know how to work it.

    You still have a bottle of White-Out in your desk.

    You can remember the clickety-clickety-clickety sound of a running 16mm film projector.

    You still believe the faculty should be in control of curriculum matters.

    You still believe the faculty ARE in control of curriculum matters.

    In class one day, you are startled to discover that the young lady in the second row with the perennial zit has actually been wearing a pearl nose stud all this time.

    You now complain more about the administration than you do about the campus parking situation.

    You still believe faculty should spend more time in a classroom than they spend in committee meetings arguing with each other about “vision statements”, “assessment rubrics”, and “outcome-based learning objectives”.

    You tell junior faculty, "back when I was on the Faculty Senate, we were a positive force on the academy", and your memory is so bad you actually believe it.

    You attend your discipline’s annual national meeting, even though you aren’t presenting a paper.

    You are a male, and: (1) have a ponytail even though your hair is gray; (2) your sportscoats all have elbow patches; (3) wear sandals (with or without socks) and/or (4) own more than one bow-tie.

    You are a female and:  (1) have never worn pants to class; (2) wear nylons that don't go higher than your knees; (3) don't see a need for "Women's Studies" as a major degree program; and/or (4) aren’t sure what a “glass ceiling” is.

    No student has ever bothered asking you to put a pro-LGBT sticker on your door.

    You aren't even sure what LGBT means.

    One of your former students is the main commencement speaker.

    The library moved the textbook that you authored from the general stacks to "compact shelving".

    You have never given an on-line exam.  And don't even know how to make one.

    You've never made a Camtasia video.  Or used Centra Symposium.  Or performed a Captivate screen capture.  And aren't even sure what these things are.

    You actually remember seeing, at least once in your lifetime, and smelling, a quiz that was "run off" on a "purple plague" spirit duplicator.

    It surprises you to learn that there are more than three times as many "support" buildings on campus as there are academic buildings.

    Your syllabus does not contain any rules addressing the use of laptops, iPads, or smartphones in class.

    You still believe that holding a Ph.D. is a status symbol in the eyes of the general public.

    You do not have a Facebook account.  Or a Twitter account.  Or a MySpace account.  Or a Blog.  And you aren't sure how to go about getting one.

    You still have floppy disks in your office.  Somewhere.

    Regardless of the dozens and dozens of mandatory faculty seminars and training sessions you've been forced to sit through addressing the Cleary Act, FERPA, and the ADA's reasonable accommodations requirements, you still aren't sure what all these things are.

    While calling roll on the first day of class, you get to “Quentin Merriwether Calabrisi, Jr.,” and the name seems familiar, except for the “junior” part.

    You can remember when faculty could find a place to park within five minutes of arriving on campus, regardless of the time of day.

    You know what a “chalk chuck” is.  In fact, you actually HAVE a chalk chuck in your desk drawer.

    You know what the word “Duotang” refers to.  And you have actually seen a filmstrip projector.  With or without the record player.

    You actually owned a dot-matrix printer.  And still have it.  Somewhere.

    You know the origin of the term “Carriage Return”.

    You know how to change the ribbon in a typewriter.   And remember owning a typewriter once.   At least you think you did... perhaps... maybe....

     


    Forwarded by Jim Kirk

    WHY MEN ARE NEVER DEPRESSED:
    Men Are Just Happier People --
    What do you expect from such simple creatures?
    Your last name stays put.
    The garage is all yours.
    Wedding plans take care of themselves.
    Chocolate is just another snack...
    You can be President.
    You can never be pregnant.
    You can wear a white T-shirt to a water park.
    You can wear NO shirt to a water park.
    Car mechanics tell you the truth.
    The world is your urinal.
    You never have to drive to another gas station restroom because this one is just too icky.
    You don't have to stop and think of which way to turn a nut on a bolt.
    Same work, more pay.
    Wrinkles add character.
    Wedding dress $5000. Tux rental-$100.
    People never stare at your chest when you're talking to them.
    New shoes don't cut, blister, or mangle your feet.
    One mood all the time.
    Phone conversations are over in 30 seconds flat.
    You know stuff about tanks.
    A five-day vacation requires only one suitcase.
    You can open all your own jars.
    You get extra credit for the slightest act of thoughtfulness.
    If someone forgets to invite you,
    He or she can still be your friend.
    Your underwear is $8.95 for a three-pack.
    Three pairs of shoes are more than enough..
    You almost never have strap problems in public.
    You are unable to see wrinkles in your clothes..
    Everything on your face stays its original color.
    The same hairstyle lasts for years, even decades.
    You only have to shave your face and neck.
    You can play with toys all your life.
    One wallet and one pair of shoes -- one color for all seasons.
    You can wear shorts no matter how your legs look.
    You can 'do' your nails with a pocket knife.
    You have freedom of choice concerning growing a mustache.
    You can do Christmas shopping for 25 relatives
    On December 24 in 25 minutes.

     


    Forwarded by Auntie Bev

    One day, a local rancher driving down a country road noticed a man using his hand to drink water from the rancher's stock pond.

    The rancher rolled down the window and shouted: "Sehr angenehm! Trink das Wasser nicht. Die kuehe haben darein geschissen."

    (Which means: "Glad to meet you! Don't drink the water. The cows have shit in it.")

    The man shouted back: "I'm from New York and just down here campaigning for Obama. I can't understand you. Please speak in English."

    The rancher replied: "I said you need to use both hands."


    Forwarded by Gene and Joan

    Annie, 6 years old, gets home from school. She had her first family planning lesson at school. Her mother, very interested, asks;" How did it go?"

    "I died of shame!" She answers! “Why?” Her Mother asked.

    Annie said, “Kristi from down the road, says that the stork brings babies. Sally next door said you can buy babies at the orphanage. Pete in my class says you can buy babies at the hospital.”

    Her mother answers laughingly “But that’s no reason to be ashamed?”

    “It is too!!! I can’t tell them that we were so poor that you and daddy had to make me yourselves!”


    Forwarded by Paula

    Please excuse the four-letter words toward the end of the following story.

    I would have deleted them, but the story wouldn't be the same.

    THE JEWISH NEWLYWEDS

    A young Jewish couple got married and went on their honeymoon.

    When they got back, the bride immediately called her mother.

    "Well", said her mother, "so how was the honeymoon?"

    "Oh mama", she replied, "the honeymoon was wonderful!

    So romantic"... Suddenly she burst out crying.

    "But, mama, as soon as we returned,

    Sam started using the most horrible language -- things

    I'd never heard before!

    I mean, all these awful four-letter words!

    You've got to take me home!!

    PLEASE MAMA"

    "Sarah, Sarah", her mother said, "calm down!

    You need to stay with your husband and work this out.

    Now, tell me, what could be so awful?

    WHAT four-letter words?"

    "Please don't make me tell you, mama," wept the daughter.

    "I'm so embarrassed, they're just too awful!

    COME GET ME, PLEASE"

    "Darling, baby, you must tell me what has you so upset.

    Tell your mother these horrible four-letter words"

    Sobbing, the bride said,

    "Oh, Mama..., he used words like:

    "DUST, WASH , IRON, and COOK ...

    "I'll pick you up in twenty minutes," said her mother.


    Forwarded by Auntie Bev

    After the eighty-three year old lady finished her annual physical examination, the doctor said, "You are in fine shape for your age, Maxine, but tell me, do you still have intercourse?"

    "Just a minute, I'll have to ask my husband," she said.

    She stepped out into the crowded reception room and yelled out loud: "Henry, do we still have intercourse?"

    And there was a hush...You could hear a pin drop.

    He answered impatiently, "If I told you once, Maxine, I told you a hundred times... What we have is... Blue Cross!


     





     

    Humor Between October 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q4.htm#Humor103112

    Humor Between September 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q3.htm#Humor093012

    Humor Between August 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q3.htm#Humor083112

    Humor Between July 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q3.htm#Humor073112

    Humor Between June 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q2.htm#Humor063012

    Humor Between May 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q2.htm#Humor053112  

    Humor Between April 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q2.htm#Humor043012

    Humor Between March 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q1.htm#Humor033112  

    Humor Between February 1-29, 2012 --- http://www.trinity.edu/rjensen/book12q1.htm#Humor022912 

    Humor Between January 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q1.htm#Humor013112  

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

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

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

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

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

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

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

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

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

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




    And that's the way it was on September 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/


     

    For an elaboration on the reasons you should join a ListServ (usually for free) go to   http://www.trinity.edu/rjensen/ListServRoles.htm

    AECM (Accounting Educators)  http://listserv.aaahq.org/cgi-bin/wa.exe?HOME
    The AECM is an email Listserv list which started out as an accounting education technology Listserv. It has mushroomed into the largest global Listserv of accounting education topics of all types, including accounting theory, learning, assessment, cheating, and education topics in general. At the same time it provides a forum for discussions of all hardware and software which can be useful in any way for accounting education at the college/university level. Hardware includes all platforms and peripherals. Software includes spreadsheets, practice sets, multimedia authoring and presentation packages, data base programs, tax packages, World Wide Web applications, etc

    Roles of a ListServ --- http://www.trinity.edu/rjensen/ListServRoles.htm
     

    CPAS-L (Practitioners) http://pacioli.loyola.edu/cpas-l/  (closed down)
    CPAS-L provides a forum for discussions of all aspects of the practice of accounting. It provides an unmoderated environment where issues, questions, comments, ideas, etc. related to accounting can be freely discussed. Members are welcome to take an active role by posting to CPAS-L or an inactive role by just monitoring the list. You qualify for a free subscription if you are either a CPA or a professional accountant in public accounting, private industry, government or education. Others will be denied access.

    Yahoo (Practitioners)  http://groups.yahoo.com/group/xyztalk
    This forum is for CPAs to discuss the activities of the AICPA. This can be anything  from the CPA2BIZ portal to the XYZ initiative or anything else that relates to the AICPA.

    AccountantsWorld  http://accountantsworld.com/forums/default.asp?scope=1 
    This site hosts various discussion groups on such topics as accounting software, consulting, financial planning, fixed assets, payroll, human resources, profit on the Internet, and taxation.

    Business Valuation Group BusValGroup-subscribe@topica.com 
    This discussion group is headed by Randy Schostag [RSchostag@BUSVALGROUP.COM

     


     

    Concerns That Academic Accounting Research is Out of Touch With Reality

    I think leading academic researchers avoid applied research for the profession because making seminal and creative discoveries that practitioners have not already discovered is enormously difficult. Accounting academe is threatened by the twin dangers of fossilization and scholasticism (of three types: tedium, high tech, and radical chic)
    From http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
     

    “Knowledge and competence increasingly developed out of the internal dynamics of esoteric disciplines rather than within the context of shared perceptions of public needs,” writes Bender. “This is not to say that professionalized disciplines or the modern service professions that imitated them became socially irresponsible. But their contributions to society began to flow from their own self-definitions rather than from a reciprocal engagement with general public discourse.”

     

    Now, there is a definite note of sadness in Bender’s narrative – as there always tends to be in accounts of the shift from Gemeinschaft to Gesellschaft. Yet it is also clear that the transformation from civic to disciplinary professionalism was necessary.

     

    “The new disciplines offered relatively precise subject matter and procedures,” Bender concedes, “at a time when both were greatly confused. The new professionalism also promised guarantees of competence — certification — in an era when criteria of intellectual authority were vague and professional performance was unreliable.”

    But in the epilogue to Intellect and Public Life, Bender suggests that the process eventually went too far. “The risk now is precisely the opposite,” he writes. “Academe is threatened by the twin dangers of fossilization and scholasticism (of three types: tedium, high tech, and radical chic). The agenda for the next decade, at least as I see it, ought to be the opening up of the disciplines, the ventilating of professional communities that have come to share too much and that have become too self-referential.”

     

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

     

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

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

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

    Free (updated) Basic Accounting Textbook --- search for Hoyle at
    http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks

    CPA Examination --- http://en.wikipedia.org/wiki/Cpa_examination
    Free CPA Examination Review Course Courtesy of Joe Hoyle --- http://cpareviewforfree.com/
     


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

     

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

     

     

     

     

    August 31, 2012

    Bob Jensen's New Bookmarks August 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 
     

    Links to IFRS Resources (including IFRS Cases) for Educators ---
    http://www.iasplus.com/en/binary/resource/0808aaaifrsresources.pdf
    Prepared by Paul Pacter: ppacter@iasb.org

    Message from Barry Rice on July 17, 2012
    There are some great flash mob videos of accounting practitioners (including the Maryland Association of CPAs) and accounting students at https://www.google.com/search?sourceid=navclient&aq=f&oq=%22flash+mob%22+accountants&ie=UTF-8&rlz=1T4LENP_en___US481&q=%22flash+mob%22+accountants&gs_upl=0l0l0l27342lllllllllll0#q=%22flash+mob%22+accountants&hl=en&safe=off&rlz=1T4LENP_en___US481&prmd=imvns&source=univ&tbm=vid&tbo=u&sa=X&ei=rZgFUKLFCY-KrQGt_4jICA&ved=0CGAQqwQ&bav=on.2,or.r_gc.r_pw.r_qf.,cf.osb&fp=960fd2c1c95a1532&biw=1013&bih=459. I Goggled “’flash mob’ accountants” to find them. If practicing accountants can have a “flash mob,” surely ACADEMIC accountants can do so.

    IFRS in Your Pocket (contact a Deloitte Office for a Copy) 
    IAS Plus, August 22, 2012
    http://www.iasplus.com/en/news/2012/august/ifrss-in-your-pocket-2012

    We have published the eleventh edition of our popular guide to IFRSs — 'IFRSs In Your Pocket 2012'. This publication provides an update of developments in IFRSs through the second quarter of 2012.

    This 136-page guide includes information about:
    • The IASB organisation — its structure, membership, due process, contact information, and a chronology
    • Use of IFRSs around the world, including updates on Europe, United States, Canada and elsewhere in the Americas, and Asia-Pacific
    • Recent pronouncements — those which are effective and those which can be early adopted
    • Summaries of current Standards and related Interpretations, as well as the Conceptual Framework for Financial Reporting and the Preface to IFRSs
    • IASB agenda projects and active research topics
    • IFRS Interpretations Committee current agenda topics
    • Other useful IASB-related information

    Please contact your local Deloitte practice office to request a printed copy.

    Jensen Comment
    I don't know of any FASB ACS in Your Pocket counterpart for domestic standards.

    It would be great if Wild West Accountants of 2012 could have a two-holster belt for fast drawing each In-Your-Pocket Guide.

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

    American Accounting Association  Past Presidents are listed at
    http://www.cs.trinity.edu/~rjensen/temp/PastPresidentsAAA.htm 





     

    August 19, 2012 message from David Albrecht

    Marsha Huber, a close friend to me and many on this list, has just heard of this terrific good news.

    David Albrecht

    August 17, 2013
     
    Dr. Marsha Huber
    Youngtown State University
     
     
    Dear Dr.Huber:
     
    Congratulations! You have been selected as the winner for the George Krull/Grant Thornton 2012 Teaching Innovation Award for your submission of “Out of the Box Learning for Tax Class: Students Create Models, Pamphlets, and a Shoebox Case.” This award recognizes successful innovative practices in the teaching of junior and senior-level accounting courses transferable to other institutions in terms of resources and instructor skills and connections, which enhances leaning of traditionally difficult topics and effectively filters students who should enter the CPA profession. An AICPA Task Force has selected the winner for the award from the accepted submissions to the Effective Learning Strategies Forums at the AAA (American Accounting Association) Annual Meeting.
     
    We hope you will present your work at a breakout session at the CTLA (Conference on Teaching and Learning in Accounting) and AAA Annual Meeting in Anaheim, CA, August 3-7, 2013. Grant Thornton will provide you with a stipend of up to $2,500 that will cover all expenses, including the registration fee for the conference. The award will be presented at CTLA Conference luncheon (tentative date August 3
    rd
    ).
     
    We will also invite anyone who receives honorable mention to represent their work at a session at the 2013 CTLA.
     
    If you have any questions contact me by email or by phone at
    512.245.2566. The Task Force looks forward to your presentation at the 2013 CTLA.
     
    Sincerely,
     
     
    AICPA Teaching Award Task Force
    Roselyn E. Morris, Chair

     


    The AAA's Pathways Commission Accounting Education Initiatives Make National News
    Accountics Scientists Should Especially Note the First Recommendation

    "Accounting for Innovation," by Elise Young, Inside Higher Ed, July 31, 2012 ---
    http://www.insidehighered.com/news/2012/07/31/updating-accounting-curriculums-expanding-and-diversifying-field

    Accounting programs should promote curricular flexibility to capture a new generation of students who are more technologically savvy, less patient with traditional teaching methods, and more wary of the career opportunities in accounting, according to a report released today by the Pathways Commission, which studies the future of higher education for accounting.

    In 2008, the U.S. Treasury Department's  Advisory Committee on the Auditing Profession recommended that the American Accounting Association and the American Institute of Certified Public Accountants form a commission to study the future structure and content of accounting education, and the Pathways Commission was formed to fulfill this recommendation and establish a national higher education strategy for accounting.

    In the report, the commission acknowledges that some sporadic changes have been adopted, but it seeks to put in place a structure for much more regular and ambitious changes.

    The report includes seven recommendations:

    According to the report, its two sponsoring organizations -- the American Accounting Association and the American Institute of Certified Public Accountants -- will support the effort to carry out the report's recommendations, and they are finalizing a strategy for conducting this effort.

    Hsihui Chang, a professor and head of Drexel University’s accounting department, said colleges must prepare students for the accounting field by encouraging three qualities: integrity, analytical skills and a global viewpoint.

    “You need to look at things in a global scope,” he said. “One thing we’re always thinking about is how can we attract students from diverse groups?” Chang said the department’s faculty comprises members from several different countries, and the university also has four student organizations dedicated to accounting -- including one for Asian students and one for Hispanic students.

    He said the university hosts guest speakers and accounting career days to provide information to prospective accounting students about career options: “They find out, ‘Hey, this seems to be quite exciting.’ ”

    Jimmy Ye, a professor and chair of the accounting department at Baruch College of the City University of New York, wrote in an email to Inside Higher Ed that his department is already fulfilling some of the report’s recommendations by inviting professionals from accounting firms into classrooms and bringing in research staff from accounting firms to interact with faculty members and Ph.D. students.

    Ye also said the AICPA should collect and analyze supply and demand trends in the accounting profession -- but not just in the short term. “Higher education does not just train students for getting their first jobs,” he wrote. “I would like to see some study on the career tracks of college accounting graduates.”

    Mohamed Hussein, a professor and head of the accounting department at the University of Connecticut, also offered ways for the commission to expand its recommendations. He said the recommendations can’t be fully put into practice with the current structure of accounting education.

    “There are two parts to this: one part is being able to have an innovative curriculum that will include changes in technology, changes in the economics of the firm, including risk, international issues and regulation,” he said. “And the other part is making sure that the students will take advantage of all this innovation.”

    The university offers courses on some of these issues as electives, but it can’t fit all of the information in those courses into the major’s required courses, he said.

    Continued in article

    Jensen Comment
    This is one of the most important initiatives to emerge from the AAA in recent years.

    I would like to be optimistic, but change will be very slow. President Wilson, who was also an PhD professor, once remarked that it's easier to move a cemetery than to change a university.

    It is easier to move a cemetery than to affect a change in curriculum.
    Woodrow Wilson

    President of Princeton University 1902-1910
    President of the United States 1913-1921

    And in the 21st Century you can imagine the lawsuits that would clog the courts if a town tried to move a cemetery.

    Bob Jensen's threads on Higher Education Controversies and Need for Change ---
    http://www.trinity.edu/rjensen/HigherEdControversies.htm

    The sad state of accountancy doctoral programs ---
    http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

    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 

    July 31, 2012 reply from Paul Williams

    Bob, A good place to start is to jettison pretenses of accounting being a science. As Anthony Hopwood noted in his presidential address, accounting is a practice. The tools of science are certainly useful, but using those tools to investigate accounting problems is quite a different matter than claiming that accounting is a science. Teleology doesn't enter the picture in the sciences -- nature is governed by laws, not purposes. Accounting is nothing but a purposeful activity and must (as Jagdish has eloquently noted here and in his Critical Perspectives on Accounting article) deal with values, law and ethics. As Einstein said, "In nature there are no rewards or punishments, only consequences." For a social practice like accounting to pretend there are only consequences (as if economics was a science that deals only with "natural kinds) has been a major failing of the academy in fulfilling its responsibilities to a discipline that also claims to be a profession. In spite of a "professional economist's" claims made here that economics is a science, there is quite some controversy over that even within the economic community. Ha-Joon Chang, another professional economist at Cambridge U. had this to say about the economics discipline: "Recognizing that the boundaries of the market are ambiguous and cannot be determined in an objective way lets us realize that economics is not a science like physics or chemistry, but a political exercise. Free-market economists may want you to believe that the correct boundaries of the market can be scientifically determined, but this is incorrect. If the boundaries of what you are studying cannot be scientifically determined what you are doing is not a science (23 Things They Don't Tell You About Capitalism, p. 10)." The silly persistence of professional accountants in asserting that accounting is apolitical and aethical may be a rationalization they require, but for academics to harbor the same beliefs seems to be a decidedly unscientific posture to take. In one of Ed Arrington's articles published some time ago, he argued that accounting's pretenses of being scientific are risible. As he said (as near as I can recall): "Watching the positive accounting show, Einstein's gods must be rolling in the aisles."


    August 23, 2012 message from Bob Jensen
    Hi Steve,

    No I cannot take up your challenge, because you've defined research relevant to practitioners in such a way that that does not create a subset of "developmental research" that sets it aside from accountics basic and applied research in general. Accountics research is accounting research containing mathematical equations and/or statistical inference tables (and contains the word accounting).
    Your definitional criterion is of "accounting research relevant to practitioners" reads as follows"

     
    "Any accounting research that "helps those who rely on the producers of accounting information to gain a better understanding of the nature and consequences of that reliance."

     

    In the eyes of accountics researchers, all of their findings help producers of accounting information to gain a better understanding" such that it would be impossible to find any accountics research publication that does not meet your definition.


    If you want me to to take up your challenge, you will have to be more specific along the lines of accounting research that separates developmental research from basic and applied research. .

    The Frascati Manual --- http://en.wikipedia.org/wiki/Frascati_Manual
    This Frascati Manual outlines three forms of research. These are basic research, applied research and experimental development:

    • Basic research is experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundation of phenomena and observable facts, without any particular application or use in view.

       
    • Applied research is also original investigation undertaken in order to acquire new knowledge. It is, however, directed primarily towards a specific practical aim or objective.

       
    • Experimental development is systematic work, drawing on existing knowledge gained from research and/or practical experience, which is directed to producing new materials, products or devices, to installing new processes, systems and services, or to improving substantially those already produced or installed.

    I think the "allied research" definition above is too vague for academic accounting research except possibly in the realm of AIS and related research such as in XBRL.

    If you allow me to define the accounting research intended to be relevant to practitioners as being "experimental development" (where experimental can be a sample of one, two, or a few) as defined above in actual companies, then I can take up your challenge.


    I would rather, however, that you list five accountics research studies that meet the "experimental development" definition above as applied in actual companies.

    One non-accountics illustration that at one time was in the "experimental development" stage was the Balanced Score Card model. Since this model is now used by over half the large corporations in the U.S. (according to Tom Klammer), I think this model moved beyond the experimental stage. Other examples, include the various early experiments with ABC costing in companies, many of which were written up in practitioner journals.

    On the accountics side, we might include the various models that are employed in industry to value financial instruments and derivative financial instruments. For example, even though it is often unsuited for option valuing applications, the Black-Scholes model met the test of actually being experimented with at the company level ---
    http://www.cpa-connecticut.com/sfas123r.html
    This summary is written by a practitioner.

    I think a better practical model is as follows:
    "How to “Excel” at Options Valuation," by Charles P. Baril, Luis Betancourt, and John W. Briggs, Journal of Accountancy, December 2005 --- http://www.aicpa.org/pubs/jofa/dec2005/baril.htm
    This is one of the best articles for accounting educators on issues of option valuation!


    Conclusion
    I await your list five other accountics research studies that meet the "experimental development" definition above. I know you have one in mind that is an actual application of branstorming in a real-world accounting firm. How about four others?

    Then I will follow up by listing five accounting research studies that do not meet the "experimental development" definition above.

    Respectfully,
    Bob Jensen

    August 23, 2012 message from David Johnstone

     

    Dear all, I feel that Steve is right that practitioners in accounting are naturally ambivalent, if not tacitly defensive or even hostile, to research. Accounting practitioners make a lot of money for their firms and clients by producing answers that someone holding the purse strings likes. The Chicago economist George Stigler who won a Nobel prize described economists as having a role as hired guns. Their fee attracting ability is to reason backwards to assumptions upon which the desired conclusion stands up. Accountants have more of this in their role. If you are an engineer and you want to please the boss by designing a more efficient structure, you really want sophisticated engineering research. But if you are an accountant and you want to produce a certain valuation of a firm or a certain income number, ignorance of restrictive research findings can often be of great assistance. Positivist research that casts the profession in a poor light (e.g. by predicting certain self-interested professional behaviours) will definitely not be welcome reading.

    If “true income” existed in a physical sense in the way that relevant variables in say engineering or medicine exist (e.g. true weight or true existence of infection) then there would have to be more interest from the profession into research. But when notions like “income” and “value” are so indefinite and non-existent in anything resembling a physical sense, it is little wonder that the profession enjoys its ability to work freely and often quite mechanically.

    The dependence of so many accounting tasks, such as valuation, on forecasts of future events (sales, costs, economy, asset prices, etc.) would seem to make forecasting models and research of real interest to accountants. But again, these might produce results that don’t suit the desired conclusion, and then there is the underlying issue that forecasts of such events are not in general anywhere near the sophistication or accuracy of weather forecasts (i.e. forecasts in a physical rather than social domain. And then there are some who would say that forecasting is “not accounting” (as if any discipline has defined borders).

     

    David

     

    Hi David,

    So should we just ignore the Pathways Commission initiatives and have more parades for the accountics science researchers who publish articles in TAR, JAR, and JAE? Or should we try to conduct developmental research that might interest the practicing profession in our research? I think accountics researchers are so enjoying their high salaries and status that they see no need to take up the Pathways Commission initiatives. This is sad!

    We only have to look at the entire program of plenary sessions at the 2012 AAA Annual Meetings to see that accountics researchers have little interest in developmental research for the profession.  Not one plenary session was devoted to developmental research or the accounting profession in general.

    Your conclusion, David, in a way defies the history of the American Accounting Association. For the first 40 or so years of its life there were more practitioner members than accounting professor members in the AAA. Practitioners published frequently in The Accounting Review and had very, very close ties with accounting professors on developmental research issues. Normative research was king of the hill --- “An Analysis of the Evolution of Research Contributions by The Accounting Review: 1926-2005,” by Jean Heck and Robert E. Jensen, Accounting Historians Journal,, Volume 34, No. 2, December 2007, pp. 109-142

    In the 1960s, accountics scientists took over the AAA and commenced calling normative research bullshit. More importantly, prestigious accountics researchers no longer associated much with practitioners. Accordingly practitioner membership in the AAA plummeted. The Accounting Review and the emerging JAR and JAE would not publish developmental research. Accountics researhers literally took over all accounting doctoral  programs. To have any prestige at all, accounting research publications had to have equations and/or statistical inference tables even when the samples really were not random samples.

    At the 2012 AAA Annual Meetings the large accounting firms did have concurrent session presentations on developmental research that they would like to see academic accounting researchers address.

    I was told that accountics researchers showed very little interest in those developmental research idea sessions, although I have to admit that I also had conflicts that prevented me from attending. I had to return a day early and did not attend any of the Wednesday sessions.  If the TAR, JAR, and JAE had sections in their journals  for experimental developmental research, I suspect there would've been more interest in those AAA sessions sponsored by the large firms.

    I do think that, if accounting researchers commenced communications with the firms about developmental research and if the accounting doctoral programs had developmental research tracks (including Case Method tracks), interest in experimental development research in corporations and accounting firms might pick up.

    Accounting firms themselves will probably be cooperative, especially if some of this research was coordinated in some way through the AAA. The AICPA funded the AAA Notable Contributions to the Accounting Literature Award in part to stimulate developmental research but, unfortunately, did not make developmental research a condition for granting the award. Sadly, nearly all the awards then went to accountics researchers who did not do developmental research in companies and CPA firms.

    One of the more successful initiatives linking professors with practitioners over the years are the Trueblood Case Seminars funded by Deloitte where accounting professors meet (usually in Scottsdale) in teams with practitioners to develop cases drawn from accounting practice. These cases, however, were mostly teaching cases that would not qualify under the heading developmental research.

    Another effort was the AICPA's case competitions where at least one author had to be a professor and one author had to be a practitioner. I and my partners (Bruce Sidlinger and John Howland) were winners of the 1998 AICPA's Academic/Practitioner Case Competition.  On the first round the case was one of 12 in the nation accepted for Publication by the AICPA.  It was then selected as one of six to be presented at the AICPA's Accounting Educators Conference in McLean, Virginia, November 7, 1998.

    But TAR, JAR, or JAE most likely would've refused to even send those AICPA Case Competition winners out for review. As a result, our AICPA publication counted much less in my performance reviews at Trinity University (not that I'm complaining about how well Trinity overpaid me during 24 years).

    I was a part of the accountics science takeover from get go in the 1960s. Every article I ever published in TAR or JAR had equations. Years and years later I was a late comer in realizing how separated accountics researchers became from the practitioner world and how limited our research findings were for developmental progress in the accounting profession.

    Granof and Zeff state the history better than me.


     

    "Research on Accounting Should Learn From the Past"
    by Michael H. Granof and Stephen A. Zeff
    Chronicle of Higher
    Education, March 21, 2008

    Starting in the 1960s, academic research on accounting became methodologically supercharged — far more quantitative and analytical than in previous decades. The results, however, have been paradoxical. The new paradigms have greatly increased our understanding of how financial information affects the decisions of investors as well as managers. At the same time, those models have crowded out other forms of investigation. The result is that professors of accounting have contributed little to the establishment of new practices and standards, have failed to perform a needed role as a watchdog of the profession, and have created a disconnect between their teaching and their research.

    Before the 1960s, accounting research was primarily descriptive. Researchers described existing standards and practices and suggested ways in which they could be improved. Their findings were taken seriously by standard-setting boards, CPA's, and corporate officers.

    A confluence of developments in the 1960s markedly changed the nature of research — and, as a consequence, its impact on practice. First, computers emerged as a means of collecting and analyzing vast amounts of information, especially stock prices and data drawn from corporate financial statements. Second, academic accountants themselves recognized the limitations of their methodologies. Argument, they realized, was no substitute for empirical evidence. Third, owing to criticism that their research was decidedly second rate because it was insufficiently analytical, business faculties sought academic respectability by employing the methods of disciplines like econometrics, psychology, statistics, and mathematics.

    In response to those developments, professors of accounting not only established new journals that were restricted to metric-based research, but they limited existing academic publications to that type of inquiry. The most influential of the new journals was the Journal of Accounting Research, first published in 1963 and sponsored by the University of Chicago Graduate School of Business.

    Acknowledging the primacy of the journals, business-school chairmen and deans increasingly confined the rewards of publication exclusively to those publications' contributors. That policy was applied initially at the business schools at private colleges that had the strongest M.B.A. programs. Then ambitious business schools at public institutions followed the lead of the private schools, even when the public schools had strong undergraduate and master's programs in accounting with successful traditions of practice-oriented research.

    The unintended consequence has been that interesting and researchable questions in accounting are essentially being ignored. By confining the major thrust in research to phenomena that can be mathematically modeled or derived from electronic databases, academic accountants have failed to advance the profession in ways that are expected of them and of which they are capable.

    Academic research has unquestionably broadened the views of standards setters as to the role of accounting information and how it affects the decisions of individual investors as well as the capital markets. Nevertheless, it has had scant influence on the standards themselves.

    The research is hamstrung by restrictive and sometimes artificial assumptions. For example, researchers may construct mathematical models of optimum compensation contracts between an owner and a manager. But contrary to all that we know about human behavior, the models typically posit each of the parties to the arrangement as a "rational" economic being — one devoid of motivations other than to maximize pecuniary returns.

    Moreover, research is limited to the homogenized content of electronic databases, which tell us, for example, the prices at which shares were traded but give no insight into the decision processes of either the buyers or the sellers. The research is thus unable to capture the essence of the human behavior that is of interest to accountants and standard setters.

    Further, accounting researchers usually look backward rather than forward. They examine the impact of a standard only after it has been issued. And once a rule-making authority issues a standard, that authority seldom modifies it. Accounting is probably the only profession in which academic journals will publish empirical studies only if they have statistical validity. Medical journals, for example, routinely report on promising new procedures that have not yet withstood rigorous statistical scrutiny.

    Floyd Norris, the chief financial correspondent of The New York Times, titled a 2006 speech to the American Accounting Association "Where Is the Next Abe Briloff?" Abe Briloff is a rare academic accountant. He has devoted his career to examining the financial statements of publicly traded companies and censuring firms that he believes have engaged in abusive accounting practices. Most of his work has been published in Barron's and in several books — almost none in academic journals. An accounting gadfly in the mold of Ralph Nader, he has criticized existing accounting practices in a way that has not only embarrassed the miscreants but has caused the rule-making authorities to issue new and more-rigorous standards. As Norris correctly suggested in his talk, if the academic community had produced more Abe Briloffs, there would have been fewer corporate accounting meltdowns.

    The narrow focus of today's research has also resulted in a disconnect between research and teaching. Because of the difficulty of conducting publishable research in certain areas — such as taxation, managerial accounting, government accounting, and auditing — Ph.D. candidates avoid choosing them as specialties. Thus, even though those areas are central to any degree program in accounting, there is a shortage of faculty members sufficiently knowledgeable to teach them.

    To be sure, some accounting research, particularly that pertaining to the efficiency of capital markets, has found its way into both the classroom and textbooks — but mainly in select M.B.A. programs and the textbooks used in those courses. There is little evidence that the research has had more than a marginal influence on what is taught in mainstream accounting courses.

    What needs to be done? First, and most significantly, journal editors, department chairs, business-school deans, and promotion-and-tenure committees need to rethink the criteria for what constitutes appropriate accounting research. That is not to suggest that they should diminish the importance of the currently accepted modes or that they should lower their standards. But they need to expand the set of research methods to encompass those that, in other disciplines, are respected for their scientific standing. The methods include historical and field studies, policy analysis, surveys, and international comparisons when, as with empirical and analytical research, they otherwise meet the tests of sound scholarship.

    Second, chairmen, deans, and promotion and merit-review committees must expand the criteria they use in assessing the research component of faculty performance.

    They must have the courage to establish criteria for what constitutes meritorious research that are consistent with their own institutions' unique characters and comparative advantages, rather than imitating the norms believed to be used in schools ranked higher in magazine and newspaper polls. In this regard, they must acknowledge that accounting departments, unlike other business disciplines such as finance and marketing, are associated with a well-defined and recognized profession. Accounting faculties, therefore, have a special obligation to conduct research that is of interest and relevance to the profession. The current accounting model was designed mainly for the industrial era, when property, plant, and equipment were companies' major assets. Today, intangibles such as brand values and intellectual capital are of overwhelming importance as assets, yet they are largely absent from company balance sheets. Academics must play a role in reforming the accounting model to fit the new postindustrial environment.
     

    Third, Ph.D. programs must ensure that young accounting researchers are conversant with the fundamental issues that have arisen in the accounting discipline and with a broad range of research methodologies. The accounting literature did not begin in the second half of the 1960s. The books and articles written by accounting scholars from the 1920s through the 1960s can help to frame and put into perspective the questions that researchers are now studying.

    For example, W.A. Paton and A.C. Littleton's 1940 monograph, An Introduction to Corporate Accounting Standards, profoundly shaped the debates of the day and greatly influenced how accounting was taught at universities. Today, however, many, if not most, accounting academics are ignorant of that literature. What they know of it is mainly from textbooks, which themselves evince little knowledge of the path-breaking work of earlier years. All of that leads to superficiality in teaching and to research without a connection to the past.

    We fervently hope that the research pendulum will soon swing back from the narrow lines of inquiry that dominate today's leading journals to a rediscovery of the richness of what accounting research can be. For that to occur, deans and the current generation of academic accountants must give it a push.

    Michael H. Granof is a professor of accounting at the McCombs School of Business at the University of Texas at Austin. Stephen A. Zeff is a professor of accounting at the Jesse H. Jones Graduate School of Management at Rice University.

    March 18, 2008 reply from Paul Williams [Paul_Williams@NCSU.EDU]


    Steve Zeff has been saying this since his stint as editor of The Accounting Review (TAR); nobody has listened. Zeff famously wrote at least two editorials published in TAR over 30 years ago that lamented the colonization of the accounting academy by the intellectually unwashed. He and Bill Cooper wrote a comment on Kinney's tutorial on how to do accounting research and it was rudely rejected by TAR. It gained a new life only when Tony Tinker published it as part of an issue of Critical Perspectives in Accounting devoted to the problem of dogma in accounting research.

    It has only been since less subdued voices have been raised (outright rudeness has been the hallmark of those who transformed accounting into the empirical sub-discipline of a sub-discipline for which empirical work is irrelevant) that any movement has occurred. Judy Rayburn's diversity initiative and her invitation for Anthony Hopwood to give the Presidential address at the D.C. AAA meeting came only after many years of persistent unsubdued pointing out of things that were uncomfortable for the comfortable to confront.

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

     

     

    Jensen Comment
    I predict that once again efforts motivate top accountics scientists to leave campus to collect data in companies and focus on developmental issues will fail big time. It's not that accountics science is a bad thing. Many of the papers published in TAR, JAR, and JAE are outstanding. But these are basic and applied research findings that have little or nothing to do with developmental research in the accounting profession.

    Accountics scientists just don't care about developmental research ---
    http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm
    And the accounting profession just does not care about accountics science research.
    Efforts to bridge the gap are still failing.

    In 16 years as a professor of accounting at the University of Georgia, Denny Beresford was invited one time to speak to an audience of accountics science faculty and doctoral students. He was probably not invited at any other time because he would probably talk about accounting. Talking about accounting in an accountics research seminar is about the same thing as talking in Swahili.

    We only have to look at the entire program of plenary sessions at the 2012 AAA Annual Meetings to see this.  Not one plenary session was devoted to developmental research or the accounting profession in general.

    Respectfully,
    Bob Jensen

     


    Reflections on the 2012 AAA Annual Meetings: Diversity

    I did not make a recent study of AAA Membership, but the last time I did study the membership the practitioner membership declined dramatically from the 1950s when there were more practitioner members than academic members. The few practitioner members who remain in the AAA are mostly recruiters for large CPA firms and PR personnel.

    My anecdotal experience from the 2012 AAA Annual Meetings suggests that the international membership is continuing to explode.  This is a very good thing suggesting that perhaps we should even have a name change similar to the name change of the AACSB.

    My anecdotal experience in the past few AAA Annual Meetings that I've attended is that the number of Asian-background registrants keeps rising dramatically. This is most certainly a good thing from a globalization and diversity standpoint, but the increased number of Asians relative to blacks and Hispanics seems to be very dramatic and makes me pause to reflect on the 2012 Pathways Report..

    This also begs the question in terms of how many Asian-background registrants were from Asian universities versus how many are now affiliated with North American Universities.

    Here's my quick and dirty non-random sampling this morning from the 2012 "List of Participants"  at the 2012 Annual Meetings:

    16 Registrants named Smith
    10 Registrants named Jones
    37 Registrants named Chen

    Among the 37 registrants named Chen, 18 are affiliated with North American Universities, and most of those universities are R1 research universities. This seems to also be the case for other Asian names such as Chang, Cheng, Chiu, Cho, Choi, Chou, Chua, Chui, Chung, Dong, Dow, etc. in the 2012 List of Participants.

    The increasing proportion of Asians affiliated with North American Universities, in my viewpoint, is largely due to the emphasis of mathematics and statistics in our accountics-science-only accounting doctoral programs in North America. Knowledge of mathematics and statistics is much more of a prerequisite for our doctoral programs than knowledge of accounting, auditing, and tax ---
    http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms

    I wonder how many African Americans and Hispanics who run the formidable gauntlet to become CPAs are later discouraged by the maximal mathematics focus of accounting doctoral programs and minimal focus on accountancy? This has to be, in my viewpoint, an enormous reason why we do not have a dramatic rise in African Americans and Hispanics to accompany the dramatic rise in Asians in North American accounting education programs.

    This in turn leads me to support  the proposed initiatives in the 2012 Pathways Report.
     

    The AAA's Pathways Commission Accounting Education Initiatives Make National News
    Accountics Scientists Should Especially Note the First Recommendation

    "Accounting for Innovation," by Elise Young, Inside Higher Ed, July 31, 2012 ---
    http://www.insidehighered.com/news/2012/07/31/updating-accounting-curriculums-expanding-and-diversifying-field

    Accounting programs should promote curricular flexibility to capture a new generation of students who are more technologically savvy, less patient with traditional teaching methods, and more wary of the career opportunities in accounting, according to a report released today by the Pathways Commission, which studies the future of higher education for accounting.

    In 2008, the U.S. Treasury Department's  Advisory Committee on the Auditing Profession recommended that the American Accounting Association and the American Institute of Certified Public Accountants form a commission to study the future structure and content of accounting education, and the Pathways Commission was formed to fulfill this recommendation and establish a national higher education strategy for accounting.

    In the report, the commission acknowledges that some sporadic changes have been adopted, but it seeks to put in place a structure for much more regular and ambitious changes.

    The report includes seven recommendations:

    • Integrate accounting research, education and practice for students, practitioners and educators by bringing professionally oriented faculty more fully into education programs.

       
    • Promote accessibility of doctoral education by allowing for flexible content and structure in doctoral programs and developing multiple pathways for degrees. The current path to an accounting Ph.D. includes lengthy, full-time residential programs and research training that is for the most part confined to quantitative rather than qualitative methods. More flexible programs -- that might be part-time, focus on applied research and emphasize training in teaching methods and curriculum development -- would appeal to graduate students with professional experience and candidates with families, according to the report.

       
    • Increase recognition and support for high-quality teaching and connect faculty review, promotion and tenure processes with teaching quality so that teaching is respected as a critical component in achieving each institution's mission. According to the report, accounting programs must balance recognition for work and accomplishments -- fed by increasing competition among institutions and programs -- along with recognition for teaching excellence.

       
    • Develop curriculum models, engaging learning resources and mechanisms to easily share them, as well as enhancing faculty development opportunities to sustain a robust curriculum that addresses a new generation of students who are more at home with technology and less patient with traditional teaching methods.


       
    • Improve the ability to attract high-potential, diverse entrants into the profession.

       
    • Create mechanisms for collecting, analyzing and disseminating information about the market needs by establishing a national committee on information needs, projecting future supply and demand for accounting professionals and faculty, and enhancing the benefits of a high school accounting educatio
       

    •  
    • Establish an implementation process to address these and future recommendations by creating structures and mechanisms to support a continuous, sustainable change process.
       

     

    According to the report, its two sponsoring organizations -- the American Accounting Association and the American Institute of Certified Public Accountants -- will support the effort to carry out the report's recommendations, and they are finalizing a strategy for conducting this effort.

    Hsihui Chang, a professor and head of Drexel University’s accounting department, said colleges must prepare students for the accounting field by encouraging three qualities: integrity, analytical skills and a global viewpoint.

    “You need to look at things in a global scope,” he said. “One thing we’re always thinking about is how can we attract students from diverse groups?” Chang said the department’s faculty comprises members from several different countries, and the university also has four student organizations dedicated to accounting -- including one for Asian students and one for Hispanic students.

    He said the university hosts guest speakers and accounting career days to provide information to prospective accounting students about career options: “They find out, ‘Hey, this seems to be quite exciting.’ ”

    Jimmy Ye, a professor and chair of the accounting department at Baruch College of the City University of New York, wrote in an email to Inside Higher Ed that his department is already fulfilling some of the report’s recommendations by inviting professionals from accounting firms into classrooms and bringing in research staff from accounting firms to interact with faculty members and Ph.D. students.

    Ye also said the AICPA should collect and analyze supply and demand trends in the accounting profession -- but not just in the short term. “Higher education does not just train students for getting their first jobs,” he wrote. “I would like to see some study on the career tracks of college accounting graduates.”

    Mohamed Hussein, a professor and head of the accounting department at the University of Connecticut, also offered ways for the commission to expand its recommendations. He said the recommendations can’t be fully put into practice with the current structure of accounting education.

    “There are two parts to this: one part is being able to have an innovative curriculum that will include changes in technology, changes in the economics of the firm, including risk, international issues and regulation,” he said. “And the other part is making sure that the students will take advantage of all this innovation.”

    The university offers courses on some of these issues as electives, but it can’t fit all of the information in those courses into the major’s required courses, he said.

    Continued in article

    Jensen Conclusion
    The last thing I want to recommend is slowing down the flow of Asians into the accountics science tracks of our North American accounting doctoral programs. But I do recommend that we stop making accountics science the only track in our doctoral programs. Therefore, I strongly support the Pathways Commission's recommendations to create more diversity in terms of research methods and curricula in our doctoral programs.

    August 11, 2012 reply from Chuck Pier

    Hi Bob.

    I didn't get the chance to attend the AAA meeting this year, but what you noticed corresponds to something that I noticed just last week.

    I ordered a new edition of Hasselback's Accounting Faculty Directory. When it came last week I spent the better part of an evening "browsing" through it. (An aside: For those of you old enough and nerdish enough to relate, when the new Hasselback comes out I become somewhat giddy and excited to look through it. Everytime I do it reminds me of how excited I was as a kid when the new telephone books came out. The loss of excitement of the new phone book is another thing the digital age has robbed me of since we rarely get new phone books anymore.)

    As I was browsing, (flipping the pages from the back), page 416 jumped out at me. On that page were the alphabetical listings for "Zhang" among others. What struck me however, was not the name, but the "Rank" column. Almost all of the Zhang's are listed as "Asst" which would indicate younger and newer faculty. Not that this is surprising given the growth of the international, particularly Asian, students in doctoral programs. I looked further and found the same occurrence(a greater preponderance of Asst), sometimes to a greater and sometimes to a lesser extent with the following names:

    Chen (page 245) Huang (page 296) Li (pages 321-322) Liu (page 324) Wang (pages 403-404) Xie and Xi (page 413) Yu (page 415)

    I did not notice the same preponderance of Asst in the following large groups of Asian names: Kim (page 309) Lee (page 319) Lin (page 323) Park (page 352) Wong (page 411)

    This preponderance of Asst was also not noted in the groupings of the more common traditional American surnames: Anderson (page 220) Brown (page 236) Jones (pages 303-304) Smith (pages 382-383) Thomas/Thompson (page 394) Williams (pages 408-409)

    What I notice in the difference between the two Asian groups is that the one where there are more Asst's listed is that the names are more generally Chinese; while the other Asian group has Korean names. I can only surmise this is because there is a more recent influx of Chinese students in recent years.

    There is obviously some kind of paper in this information waiting to be written. If I could only find what it is!

    Chuck Pier, Ph.D.
    Associate Professor
    Department of Accounting, Economics and Finance
    Angelo State University
    ASU Station #10908
    San Angelo, Texas 76909

     


    Accounting Doctoral Programs:  The Only Thing Missing is Accounting

    August 18, 2012 message from Dennis Beresford

    During the AAA annual conference I mentioned to someone that I enjoyed going to the research workshops held at my University even though I don't have the background to evaluate all of the formulas, etc. However, I've found that more and more of the papers presented by visitors seem to be far from what I would consider "accounting related." The person I was talking to at the time challenged me and suggested my background in public accounting and at the FASB narrowed my thinking on this too much. But I said that I had developed a personal policy of attending only workshops that I felt had something to do with accounting, however I might interpret that.

    Our first School of Accounting research workshop for the fall semester is in two weeks. The paper being presented is titled, "Voice Pitch Predicts Labor Market Success Among Male Chief Executive Officers." I do not plan to attend.

    Denny Beresford
    (Narrow minded accounting lecturer)

    August 18, 2012 reply from Bob Jensen

    Hi Denny,

    I really miss the Golden Fleece Awards that used to be given out by Senator Proxmire --- http://en.wikipedia.org/wiki/Golden_Fleece_Award
    Many of these awards were for laughable research studies funded by government.

    Of course we now have the Journal of Irrelevant Research ---
    http://journalofirrelevantresearch.blogspot.com/ 
    But this journal misses a whole lot of irrelevant findings

    Jagdish Gangolly reminded me of  the Journal of Irreproducible Results ---
    http://www.jir.com/ 

    I may have to seek out a term to replace "accountics" if we get further and further away from accounting-based research in accounting programs. Maybe we should have a contest on the AECM, The condition is that the last three letters have to be "tics."

    Bob Jensen


    "How a design project bred a blueprint for innovation," by Harvey Schachter, Globe and Mail, August 298, 2012 ---
    http://www.theglobeandmail.com/report-on-business/careers/management/how-a-design-project-bred-a-blueprint-for-innovation/article4505420/

    In 2005, Procter & Gamble, eager to accelerate its innovation, decided to try to institutionalize throughout the company the new, fuzzy notion of design thinking. It turned to Roger Martin, dean of the University of Toronto’s Rotman School of Management, one of the leading exponents of integrative and design thinking. He in turn gathered help from colleagues at Stanford University and the Illinois Institute of Technology.

    Their efforts proved so successful that it led to the creation of a DesignWorks studio at Rotman, led by executive director Heather Fraser, where they refined their methodology while working with companies such as Nestlé, Pfizer, Medtronic and Frito-Lay, as well as public institutions and government teams.

    Ms. Fraser now shares those ideas in Design Works, which argues that business design brings out the creative side of individuals in a workplace without compromising the rigour needed to have a meaningful impact on the market.

    “This approach has proven to get to bigger ideas faster, by engaging more minds in a common ambition, with the buy-in and traction required to make important things happen in a strategic and productive manner,” she writes.

    The approach revolves around three gears to get your innovation motor running:

    Gear 1: Empathy and understanding

    To understand the opportunity that might exist, you must start with empathy for others and an understanding of what matters to people. Usually, we rely on market reports and surveys to get a handle on potential customers. But she says that while that gives you a good measure of the customer characteristics, habits, and values that you believe to be important, it often does not contribute to a deeper understanding of their underlying motivations and unmet needs.

    “Understanding them more holistically entails understanding them more completely as individuals apart from the direct consumption or use of your current product or service,” she points out. “Considering the wider activity surrounding your products and services expands your perspective on opportunities to create value in new ways.”

    Gear 2: Concept visualization

    With that understanding, the hunt can begin in earnest for the breakthrough idea. You now have licence and ambition to explore new possibilities, including some that would have been considered beyond your operating scope, rather than limiting yourself to the familiar and obviously doable.

    You will pick from a variety of tools to generate ideas, design new and ideal experiences, develop multiple prototypes to test your ideas, and create with your potential customers the best possible offering.

    It will be vital, however, to stay focused on the user rather than becoming diverted at this stage by the organizational impact.

    Gear 3: Strategic business design

    Now you can move on to consider the organizational side of things, developing a strategy to deliver the vision. Ms. Fraser warns that this will take the same rigour and ingenuity required to develop your new breakthrough proposal. Often things can fall apart here, as organizations find themselves with lots of promising ideas but don’t know how to fit them with other ideas and programs into a formidable strategy.

    “Gear 3 … calls for a healthy dose of both creativity and analysis at appropriate points,” she notes. You’ll require solid collaboration from your team, detailed prototyping, and a plan that maps out some quick wins to keep enthusiasm high. She warns that this step is often the missing link in many innovation projects and why the initiatives fail to provide a solid return of investment.

    Prototyping is increasingly important to understanding whether ideas have possibilities. She urges you to keep the first efforts low-cost, and reveals that the DesignWorks studio generally limits itself in the early stages to $20, using cardboard, markers and Popsicle sticks. The idea is to communicate intent, not to resemble the final product. You’ll be less invested in it if you put the prototype together quickly with little money; and the people who test it will be able to give you more advice if they can use their imagination to fill in missing pieces.

    The first half of the book, about the three-gears process, is somewhat stilted despite the case studies woven in; it’s certainly not as absorbing as Designing for Growth, by Jeanne Liedtka and Tim Ogilvie. (And the horrendous choice of typeface – pretty, but sans-serif and very thin – added to my reading struggle, as it was physically hard to focus on the words. The irony of poor design choices in a book about design was not lost on me.)

    But the book’s second half – essentially a series of fast-paced, practical tips for implementing the ideas – was more enjoyable, and would be valuable to anyone interested in the business design path.

    Continued in article

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


    Hi Tom,

    Yes I think measuring earnings should be of primary index for all companies, because a good measure of earnings with realistic bad debt estimates may be a more important indicator of failures to come. Much of the S&L crisis was caused by phony real estate fair value estimates and speculation coupled with phony bad debt estimates. . I think the S&L crisis is a very poor basis for promoting fair value accounting --- it's the phony real estate fair value measurements that got us into trouble.


    Recall that I'm also recommending a side-by-side dual column model for presenting fair values. Analysts have a choice, which is why I like the  Harold Shroeder comment letter that I actually find commendable --- Click Here
    http://www.fasb.org/cs/BlobServer?blobkey=id&blobwhere=1175821399483&blobheader=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs 
    I liked this letter and thank you for pointing it out to me. I could've really used this letter in my accounting theory course.


    The importance of net income is illustrated somewhat in the Roaring 1990s tech bubble where companies with big losses were trying to inflate stock prices in every which way when reported losses were among the best predictors of their ultimate demise.


    In any case I am not talking about choosing one optimal reporting model. The fair value model should be shown alongside the traditional model along with information model on the degree of attestation. It's not like we must choose one model and hide the other model. What's important is how reliable the numbers are in all of the presentation models.

    Respectfully,
    Bob Jensen


    Bisk CPA Examination Review
    http://www.cpaexam.com/cpa-review-courses

    Bisk Awards for Accounting Resources in 2012 --- http://www.cpaexam.com/top-accounting-resources-2012  

    cfo-coach.com - Helping CFO's Repackage, Position, and Land!

    Dr.DavidKass - Commentary on Warren Buffett and Berkshire Hathaway.

    360taxes.org -360 Degrees of Taxes is a public service site, designed by Certified Public Accountants and sponsored by the AICPA, offering tips and checklists to help you during tax season and with year-round tax planning.

    accountingcoach.com - Changing the way people learn accounting.

    BobJensenatrinity.edu - Daily entries, fraud updates, and insightful conclusions ( http://www.trinity.edu/rjensen/ )

    financial-market-commentary.com - Financial commentary you can trust.

     


    "Highly scrutinised SEC conflict mineral regs. include new audit requirement," by Ken Tysiac, CGMA Magazine, August 23, 2012 ---
    http://www.cgma.org/Magazine/News/Pages/20126307.aspx

    The US Securities and Exchange Commission (SEC) on Wednesday approved disclosure rules designed to increase transparency around companies’ use of so-called “conflict minerals” and payments to governments for access to natural resources.

    The rules, advocated by certain human rights groups, will implement two sections of the US Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, P.L. 111-203.

    But they contain disclosure provisions that divided the SEC commissioners’ votes and have been criticised by some business groups as being unworkable, in the case of conflict minerals, and likely to put US companies at a competitive disadvantage, in the case of the natural resource payment reporting requirements.

    Section 1502 of the Dodd-Frank Act requires yearly reporting on whether US public companies use conflict minerals originating in the Democratic Republic of the Congo (DRC) or neighbouring countries. Section 1504 requires US public companies that extract resources to disclose in an annual report how much they pay the US and foreign governments around the world for access to oil, natural gas and minerals.

    The conflict minerals statute was included in the Dodd-Frank Act with the intent of cutting off funding for warlords in the DRC. Armed groups there are accused of atrocities against local populations and funding their activities by using forced labour to mine for gold and other minerals used in products ranging from jewellery to cell phones.

    By requiring companies that use conflict minerals to document their chain of custody, the statute aims to choke off the market for raw materials produced in mines using forced labour. The regulation intends to use transparency to prompt companies to shun conflict minerals.

    Human rights groups had encouraged the regulation. In a comment letter, seven human rights groups said the rule has “enormous potential” to transform the conflict.

    “While the DRC government must take up its responsibilities to protect civilians and establish governance and infrastructure, U.S.-based companies and consumers also have a crucial role,” the groups wrote. “We are all connected to the conflict through the minerals we use in so many everyday items.”

    Business groups disappointed

    But some business groups say requiring companies to audit their supply chains and monitor those of their vendors is unreasonable because of the complexity of the supply chains. In an opinion piece for The Hill, Tom Quaadman, vice president of the Center for Capital Markets Competitiveness at the US Chamber of Commerce, said the rule will create an unworkable regulatory regime that will be exploited by bad actors and difficult for honest market participants to implement.

    The rule passed on a 3–2 vote. Dissenting commissioners Troy Paredes and Daniel Gallagher said the implementation of the rule did not fit the SEC’s mission of protecting investors. Gallagher said it was unclear whether the rule would have the unintended consequence of harming the populations it aimed to protect because it could create what amounts to an economic embargo of the DRC and other nations as US issuers pull their business from the region altogether in an abundance of caution.

    Businesses will be required to determine if the products they manufacture or contract to manufacture contain conflict minerals. If they use such minerals, they will need to determine whether they financed armed groups in the DRC or its adjoining countries.

    Continued in argument


    "WHAT IS ZYNGA’S “REAL” GROWTH RATE?" by Anthony H. Catanach and J. Edward Ketz, Grumpy Old Accountants Blog, August 27, 2012 ---
    http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/746

    "Groupon, Zynga and Krugman's Frothy Valuations," by Jeff Carter, Townhall, September 2011 ---
    http://finance.townhall.com/columnists/jeffcarter/2011/09/13/groupon,_zynga_and_krugmans_frothy_valuations

    Jensen Comment
    In the 1990s, high tech companies resorted to various accounting gimmicks to increase the price and demand for their equity shares ---
    http://www.trinity.edu/rjensen/ecommerce/eitf01.htm

    Bob Jensen's threads about cooking the books ---
    http://www.trinity.edu/rjensen/Theory02.htm#Manipulation


    "U.S. Firms Move Abroad to Cut Taxes:  Despite '04 Law, Companies Reincorporate Overseas, Saving Big Sums on Taxes," by John D. Mckinnon and Scott Thurm, The Wall Street Journal, August 28, 2012 ---
    http://professional.wsj.com/article/SB10000872396390444230504577615232602107536.html?mod=WSJPRO_hpp_LEFTTopStories

    More big U.S. companies are reincorporating abroad despite a 2004 federal law that sought to curb the practice. One big reason: Taxes.

    Companies cite various reasons for moving, including expanding their operations and their geographic reach. But tax bills remain a primary concern. A few cite worries that U.S. taxes will rise in the future, especially if Washington revamps the tax code next year to shrink the federal budget deficit.

    "We want to be closer to where our clients are," says David Prosperi, a spokesman for risk manager Aon AON +0.19% plc, which relocated to the U.K. in April.

    Aon has told analysts it expects to reduce its tax rate, which averaged 28% over the past five years, by five percentage points over time, which could boost profits by about $100 million annually.

    Since 2009, at least 10 U.S. public companies have moved their incorporation address abroad or announced plans to do so, including six in the last year or so, according to a Wall Street Journal analysis of company filings and statements. That's up from just a handful from 2004 through 2008.

    The companies that have moved recently include manufacturer Eaton Corp., ETN -0.37% oil firms Ensco International Inc. ESV -2.04% and Rowan Cos., RDC +0.47% as well as a spinoff of Sara Lee Corp. called D.E. Master Blenders 1753.

    Eaton, a 101-year-old Cleveland-based maker of components and electrical equipment, announced in May that it would acquire Cooper Industries PLC, another electrical-equipment maker that had moved to Bermuda in 2002 and then to Ireland in 2009. It plans to maintain factories, offices and other operations in the U.S. while moving its place of incorporation—for now—to the office of an Irish law firm in downtown Dublin.

    When Eaton announced the deal, it emphasized the synergies the two companies would generate. It also told analysts that the tax benefits would save the company about $160 million a year, beginning next year.

    Eaton's chief executive, Alexander Cutler, has been a vocal critic of the corporate tax code. "We have too high a domestic rate and we have a thoroughly uncompetitive international tax regime," Mr. Cutler said on CNBC in January. "Let's not wait for the next presidential election" to change the rules.

    The moves by Ensco and Rowan, which operate offshore oil rigs, show how one company's effort to lower its tax rate can spur other shifts.

    In moving from Dallas to the U.K. in 2009, Ensco followed rivals such as Transocean Ltd., RIG -1.47% Noble Corp. and Weatherford International Ltd. WFT -2.10% that had relocated outside the U.S. The company said the move would help it achieve "a tax rate comparable to that of some of Ensco's global competitors."

    In fact, Ensco's tax rate has declined. In the second quarter, the company said its "effective tax rate" was 10.5%, down from 19% in 2009. The savings: more than $100 million a year.

    Around the time of Ensco's move, Rowan executives fielded questions from investors and analysts about their own tax rate. In February, Rowan answered the questions, announcing plans to move to the U.K. from Houston. "We're able to be competitive, with a low effective rate," says Suzanne Spera, the firm's director of investor relations.

    Fear of such moves is what prompted Congress to pass the 2004 law, which was backed by Democrats and some Republicans and included exceptions that some firms and advisers have sought to exploit.

    In June, the Internal Revenue Service tightened an exception that had allowed companies to move to countries in which they have substantial business activities. It will not prevent moves through a merger, such as Eaton's.

    Lawmakers of both parties have said the U.S. corporate tax code needs a rewrite and they are aiming to try next year. One shared source of concern is the top corporate tax rate of 35%—the highest among developed economies. By comparison, Ireland's rate is 12.5%.

    The Obama administration has proposed lowering the rate to 28%, while Republican rival Mitt Romney has proposed 25%.

    Continued in article

    Jensen Comment
    Only one of the Big Four accounting firms (Deloitte) is headquartered in the United States. Accenture has a sham headquarters in Bermuda.


    From The Wall Street Journal Accounting Weekly Review on September 1, 2012

    Industry Seeks Tax Fix
    by: James R. Hagerty
    Aug 28, 2012
    Click here to view the full article on WSJ.com
     

    TOPICS: Accounting, Corporate Taxes, Manufacturing, Tax Accounting, Tax Law, Taxes

    SUMMARY: Manufacturing is back in vogue as part of the solution to America's job shortage. After years of decline, factory employment has been edging up for the past two years, and some production has trickled back to the U.S. from Asia. So look for political candidates this fall to talk about how to spur investment in factories. Manufacturing jobs aren't the whole answer to the job shortage, of course. They account for about 9% of all non-farm jobs, but each factory position created tends to support several more in support services. While politicians have offered ideas, ranging from more federal support for research to creation of a national manufacturing strategy, many manufacturers wish Washington would concentrate on what they see as the fundamentals: lower and simpler taxes, improved roads and other infrastructure, and better education.

    CLASSROOM APPLICATION: This article is a nice example of potential ripple effects of tax law. We can use this article to show students how to be better accountants and business professionals by knowing the laws, but also seeing the impact the laws have on business strategy. It can help our students to see the difference between being a tax return preparer and a tax planner - looking at the details, as well as strategizing.

    QUESTIONS: 
    1. (Introductory) The article is entitled "Manufacturers Seek Tax Overhaul." What reasons does the reporter give for manufacturers requesting tax changes? What changes are they requesting?

    2. (Advanced) How has manufacturing been hampered by tax law in the past? What factors, other than tax law, have negatively impacted manufacturing?

    3. (Advanced) How would the requested changes impact manufacturing and other types of business? How is tax law used to encourage some behaviors and discourage other behaviors? Please give some answers mentioned in the article, as well as others not mentioned.

    4. (Advanced) How do the tax laws in other countries affect these types of issues faced by American manufacturers? Should the U.S. consider foreign tax rates and other factors when enacting tax law and regulations in the U.S.? Why or why not? How might the laws in other countries impact U.S. businesses?

    5. (Advanced) What steps, other than tax law changes, could be taken to decrease factors hampering manufacturing in the U.S.?
     

    Reviewed By: Linda Christiansen, Indiana University Southeast

     

    "Industry Seeks Tax Fix," by: James R. Hagerty, The Wall Street Journal, August 28, 2012 ---
    http://professional.wsj.com/article/SB10000872396390443324404577593050498878564.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

    Manufacturing is back in vogue as part of the solution to America's job shortage. After years of decline, factory employment has been edging up for the past two years, and some production has trickled back to the U.S. from Asia. So look for political candidates this fall to talk about how to spur investment in factories.

    Manufacturing jobs aren't the whole answer to the job shortage, of course. They account for about 9% of all nonfarm jobs, but each factory position created tends to support several more in support services.

    While politicians have offered ideas, ranging from more federal support for research to creation of a national manufacturing strategy, many manufacturers wish Washington would concentrate on what they see as the fundamentals: lower and simpler taxes, improved roads and other infrastructure, and better education.

    Enlarge Image image image Bloomberg

    In his most recent State of the Union address, President Barack Obama mentioned manufacturing 15 times. Among other things, the president is pushing for tax incentives for making products, especially high-tech ones, in the U.S. He also wants more focused federal research programs, including funds for new privately run institutes to study advanced manufacturing techniques.

    Mitt Romney, the likely Republican candidate for president, has promised to spark "a revival in American manufacturing." His program includes repealing "excessive" regulation in such areas as environmental protection. He also wants to require secret ballots for union-certification votes, which might make it harder for organized labor to win.

    Sen. Debbie Stabenow (D., Mich.) has offered legislation that would give tax breaks to help companies cover the cost of moving production back to the U.S. and ban tax deductions for the expenses of moving operations abroad. Rep. David Cicilline (D., R.I.) favors federal grants to help companies upgrade equipment and retrain workers.

    All those ideas have their supporters in the business world, but manufacturers tend to see overhauling the tax code as a far bigger priority. "It all sort of starts and stops right there," with corporate tax rates, says Keith Wandell, chief executive of Harley Davidson Inc., HOG -1.08% a Milwaukee-based maker of motorcycles. "We need to be more competitive [with other nations] in that respect."

    Stephen Gold, CEO of the Manufacturers Alliance for Productivity and Innovation, an Arlington, Va., research organization funded by industrial firms, says lower corporate tax rates could at least partly be paid for through eliminating many credits and deductions. For instance, he says, some members of his alliance would be willing to give up energy tax credits if they could get a lower corporate tax rate.

    A recent ranking by the University of Calgary's School of Public Policy found the U.S. had the highest effective corporate tax rate of the 34 countries belonging to the Organization for Economic Cooperation and Development. The typical marginal effective tax rate for U.S. manufacturers in 2012 was 33.9%, the study found. That includes income and several other types of taxes faced by corporations at the federal and state level but excludes property taxes and temporary or narrowly targeted tax breaks.

    Many business leaders want the U.S. to adopt a so-called territorial tax regime, in which companies would pay U.S. taxes only on their domestic, rather than world-wide, income. That would bring the U.S. in line with most other rich countries. While Mr. Romney favors such a shift, the Obama administration has argued that a territorial system would encourage more U.S. companies to shift operations abroad. But Martin Regalia, chief economist at the U.S. Chamber of Commerce, says it would make U.S.-based companies more competitive globally. "To the extent that U.S. firms are more competitive in world markets, they will likely create more jobs in total, both here and abroad," he says.

    Continued in article

     

     


    Yet another example of a professional athlete who cannot handle money.
    Would it have helped to have take a required financial literacy course in college?
    "Bills QB Young owes loan company $1.7 million," by John Wawrow, Yahoo News, August 16, 2012 ---
    http://sports.yahoo.com/news/bills-qb-young-owes-loan-201322354--nfl.html

    Quarterback Vince Young has been ordered to pay a loan company nearly $1.7 million after missing a payment in late May, shortly after signing with the Buffalo Bills.

    The ruling against Young was made in New York State Supreme Court in Manhattan on July 2, according to court documents.

    Young took out a high-risk loan from Pro Player Funding for $1.877 million during the NFL lockout in May 2011, while he was still under contract with the Tennessee Titans. The loan - plus $619,000 in interest - was due to be paid back in January 2013 at an annual interest rate of 20 percent. That rate jumped another 10 percent if Young missed a payment.

    A ruling in the lending company's favor was made because Young agreed he understood the terms by signing what's called an affidavit of confession of judgment upon taking out the loan. The affidavit is regarded as proof and could be used at any time by the lender in the event a client defaults on the loan.

    TMZ.com first reported the ruling against Young last week.

    Young was unavailable for comment Thursday because he was traveling with the Bills to Minnesota for their preseason game on Friday. Messages left seeking comment from both the player's agent and publicist were not returned.

    Continued in article

    Ray Williams --- http://en.wikipedia.org/wiki/Ray_Williams_(basketball)
    "Nobody wnats you when you're down and out" --- http://www.youtube.com/watch?v=MsrA2fMn0sk&feature=fvst

    A Sad, Sad Case That Might Be Used When Teaching Personal Finance:  Another Joe Lewis Example
    "Desperate times:  Ex-Celtic Williams, once a top scorer, is now looking for an assist," by Bob Hohler, Boston Globe, July 2, 2010 ---
    http://www.boston.com/sports/basketball/celtics/articles/2010/07/02/desperate_times/

    Every night at bedtime, former Celtic Ray Williams locks the doors of his home: a broken-down 1992 Buick, rusting on a back street where he ran out of everything.

    The 10-year NBA veteran formerly known as “Sugar Ray’’ leans back in the driver’s seat, drapes his legs over the center console, and rests his head on a pillow of tattered towels. He tunes his boom box to gospel music, closes his eyes, and wonders.

    Williams, a generation removed from staying in first-class hotels with Larry Bird and Co. in their drive to the 1985 NBA Finals, mostly wonders how much more he can bear. He is not new to poverty, illness, homelessness. Or quiet desperation.

    In recent weeks, he has lived on bread and water.

    “They say God won’t give you more than you can handle,’’ Williams said in his roadside sedan. “But this is wearing me out.’’

    A former top-10 NBA draft pick who once scored 52 points in a game, Williams is a face of big-time basketball’s underclass. As the NBA employs players whose average annual salaries top $5 million, Williams is among scores of retired players for whom the good life vanished not long after the final whistle.

    Dozens of NBA retirees, including Williams and his brother, Gus, a two-time All-Star, have sought bankruptcy protection.

    “Ray is like many players who invested so much of their lives in basketball,’’ said Mike Glenn, who played 10 years in the NBA, including three with Williams and the New York Knicks. “When the dividends stopped coming, the problems started escalating. It’s a cold reality.’’

    Williams, 55 and diabetic, wants the titans of today’s NBA to help take care of him and other retirees who have plenty of time to watch games but no televisions to do so. He needs food, shelter, cash for car repairs, and a job, and he believes the multibillion-dollar league and its players should treat him as if he were a teammate in distress.

    One thing Williams especially wants them to know: Unlike many troubled ex-players, he has never fallen prey to drugs, alcohol, or gambling.

    “When I played the game, they always talked about loyalty to the team,’’ Williams said. “Well, where’s the loyalty and compassion for ex-players who are hurting? We opened the door for these guys whose salaries are through the roof.’’

    Unfortunately for Williams, the NBA-related organizations best suited to help him have closed their checkbooks to him. The NBA Legends Foundation, which awarded him grants totaling more than $10,000 in 1996 and 2004, denied his recent request for help. So did the NBA Retired Players Association, which in the past year gave him two grants totaling $2,000.

    Continued in article

    Another sports hero who does not understand personal finance.
    Rule Number 1 --- Don't mess with the IRS unless you're in hiding offshore.

    Will the IRS settle for $179,435.07?
    "IRS Stabs OJ Simpson in The Wallet: You Owe us!" by Jose Lambiet, Gossip Extra, August 24, 2012 ---
    http://gossipextra.com/2012/08/24/oj-simpson-irs-taxes-1759/

    Jensen Comment
    I'll just bet that the IRS will settle for $179,435.

    Wharton Professor Olivia Mitchell on Worldwide Financial Literacy
    http://www.ssga.com/definedcontribution/docs/Olivia_Mitchell_GlobalFinancialLiteracy_SSgADC_The Participant02.pdf

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


    Victor Lustig --- http://en.wikipedia.org/wiki/Victor_Lustig

    "The Smoothest Con Man That Ever Lived," by Gilbert King, The Browser, August 22, 2012 ---
    http://thebrowser.com/articles/smoothest-con-man-ever-lived


    Performance Management Systems
    August 17, 2012 message from Jim Martin

    I am developing a new section on the MAAW web site for Performance Management Systems. This topic provides a broader, more holistic view, or extended framework of management control systems than previously presented in the literature. Although some of the books and articles with Performance Management in the title are focused on the human resource function, the main focus of MAAW's new section is on the broader view of performance management systems as a framework that can be used to describe the overall management features of an organization. For example, performance management systems include features such as mission, strategy, organizational structure, performance measures, feedback systems, and rewards.

    A number of books and papers have been published on this topic over the last ten years. From a research perspective, the best paper I have found so far is as follows: Ferreira, A. and D. Otley. 2009. The design and use of performance management systems: An extended framework for analysis. Management Accounting Research (December): 263-282. For a summary of that paper see http://maaw.info/ArticleSummaries/ArtSumFerreiraOtley2009.htm 

    There are many papers and books that examine the topic from a practice perspective. For example, the following author has written a series of papers that have appeared in Strategic Finance: Paladino, B. 2007. 5 key principles of corporate performance management: How do Balanced Scorecard Hall of Fame, Malcolm Baldrige, Sterling, Fortune 100, APQC, and Forbes award winners drive value? Strategic Finance (June): 39-45. For a note about this paper see http://maaw.info/ArticleSummaries/ArtSumPaladino2007a.htm

    To view the bibliography for Performance management systems see http://maaw.info/PerformanceManagementSystemsBibliography.htm 

    Many related papers are in the Control bibliography at http://maaw.info/ControllershipArticles.htm

     


    "CLEAN UP THE BALANCE SHEET: GET RID OF DEFERRED TAXES," by Anthony H. Catanach and J. Edward Ketz, Grumpy Old Accountants, August 13, 2012 ---
    http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/714

    Jensen Comment
    I don't always agree with the the Grumps, especially on lease accounting where they never really address really, really big issue of operating leases --- the issue of lease renewals. In the case of deferred taxes I'm inclined to agree but for a different reason. Deferred taxes constitute Reason 1,638,211 on how the accounting standard setters relegated the concept of earnings to a black hole in the universe.


    LIBOR --- http://en.wikipedia.org/wiki/Libor

    "Understanding Libor," by FT reporters, Financial Times, July 20, 2012 ---
    http://www.ft.com/intl/cms/s/0/d686dfb0-d27a-11e1-8700-00144feabdc0.html#axzz23iWx03Nh

    Jensen Comment
    A recent article in The Economist predicts that it will be really difficult for plaintiffs in the thousands of LIBOR lawsuits to get serious settlements. I can't recall the citation (late in August 2012), but one of the main arguments is that use of LIBOR was volunary and not required. Also damages are very difficult to assess since playing "what if games are very difficult when it comes to "hypothetical impacts" of different interest rates.

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


    August 14, 2012 message from Jagdish Gangolly

    Here are two very recent interesting papers that might be of interest to
    AECMers:
    1.
    The network of global corporate control
    Stefania Vitali, James B. Glattfelder, and Stefano Battiston
    http://imaginecells.org/wp-content/uploads/2011/10/who-owns-what.pdf
    2.
    `Too Interconnected To Fail' Financial Network of US
    CDS Market: Topological Fragility and Systemic Risk
    Sheri Markose, Simone Giansante, Ali Rais Shagaghi
    3.
    "Multi-Agent Financial Network (MAFN) Model of US Collateralized Debt Obligations (CDO): Regulatory Capital Arbitrage, Negative CDS Carry Trade and Systemic Risk Analysis"
    Sheri Markose , Bewaji Olewasegun and Simone Giansante
    http://www.essex.ac.uk/economics/discussion-papers/Papers-text/dp714.pdf
    Economics Department Discussion Paper, No. 714, May 2012

     


    "N.Y. Fed says municipal bond defaults higher than ratings agency counts," by Danielle Douglas, The Washington Post, August 15, 2012 --- Click Here
    http://www.washingtonpost.com/business/economy/ny-fed-says-municipal-bond-defaults-higher-than-ratings-agency-counts/2012/08/15/233bb780-e6f4-11e1-8741-940e3f6dbf48_story.html

    Defaults on municipal bonds for decades have been far higher than reported by rating agencies, bringing into question the true risk of a common investment widely considered to be safe, according to a study released Wednesday by the Federal Reserve Bank of New York.

    Economists at the agency counted 2,521 muni bond defaults since 1970, whereas ratings agency Moody’s Investors Service, for instance, reported 71.

    Muni bonds often act as an investment haven for ordinary Americans, and the new findings reveal they may be more risky than previously thought. That has been the subject of debate among lawmakers and others in the wake of a series of bankruptcy filings in California and elsewhere, as well as the collapse of several municipal projects.

    Supporters of muni bonds say that despite a few high-profile cases, government securities rarely default. Data from the New York Fed, however, suggests otherwise.

    Ratings agencies only track the behavior of the bonds they rate, presenting a fragmented picture of the entire muni bond universe. For a more comprehensive look, the New York Fed merged defaults tracked by the three major rating agencies with unrated bonds reported by Mergent and S&P Capital IQ.

    Researchers found no pattern of spikes in defaults during recessions, rather defaults appeared to be a “function of idiosyncratic factors associated with individual projects,” according to the study.

    Muni bonds are a primary way states, towns and even hospitals and ballparks finance projects. They have become popular partly because holders of these bonds don’t have to pay state taxes on any gains. Individual investors, according to the Securities and Exchange Commission, hold 75 percent of the outstanding bonds in the $3.7 trillion muni market through mutual funds and exchange-traded funds.

    General-obligation bonds, issued by municipalities, rarely fail because they are backed by tax revenue. But the Fed found bonds that finance hospitals, stadiums and nursing homes default at much higher rates because they have a narrower income stream. A sports stadium, for instance, needs to sell tickets, otherwise it may not generate enough to meet its debt obligations.

    The worst-performing bonds were “industrial development” bonds that finance projects such as alternative energy plants or pollution control facilities. These bonds, which comprise nearly two-thirds of municipal issuance, fail at a 28 percent rate.

    Some analysts contend that the study is overstating the number of defaults since these debts are repaid by corporations rather than cities or towns.

    “There’s an apples-and-oranges comparison that makes it hard to take their findings and draw any inference into the broader risks in the muni market,” said Bart Mosley, co-president Trident Municipal Research, which tracks the bond market.

    Continued in article

    Bob Jensen's threads on the slow recovery of the economy are at
    http://www.trinity.edu/rjensen/2008Bailout.htm


    "Let's Talk about Academic Integrity, Part I: BI (Before the Internet)," by Tracy Mitrano, Inside Higher Ed, August 16, 2012 ---
    http://www.insidehighered.com/blogs/law-policy-and-it/lets-talk-about-academic-integrity-part-i-bi-internet

    "Let's Talk About Academic Integrity: Part II AI (After the Internet),"  by Tracy Mitrano, Inside Higher Ed, August 21, 2012 ---
    http://www.insidehighered.com/blogs/law-policy-and-it/lets-talk-about-academic-integrity-part-ii-ai-after-internet-0 

    That the Internet is a game changer is well-known phenomenon. In fact, the word most usually associated with this phenomenon is "disruptive," and it is a good one because more times than not it is truly a neutral, descriptive term. Depending on what side of the fence you are on at the time of the disruption, you might think it either a good or bad thing.  Think content industry: bad. Think people without money who want access to content: good. Of course, life, law and technology are infinitely more complicated than those Manichaeism terms, but you get the idea. Let's see how it applies to academic integrity.

    But first let's be sure we have a foundational understanding of the concept.  Academic Integrity is larger than plagiarism, but taking other people's work without attribution and with a notion that it is your own is the lion's share.  How is it to be distinguished from copyright?  Copyright is law; academic integrity is policy.  You won't go to jail or pay a fine if you violate it, but within the community of scholars -- academic or public --  depending on a number of factors, you may lose your job or some degree of credibility.  If you are a student, also depending on a number of factors, you may have to rewrite a paper, get a failing grade in the assignment, fail the course, or even be suspended or expelled from the institution.  Copyright is not cured by attribution; in most cases, plagiarism is.  Why is it important?  Because it goes straight to the heart of academia: a community of scholars, stretched throughout all of human history, whose central dynamic is developing original work while standing on the shoulders of those who have come before us, irrespective of whether it was 10,000 years or 10 minutes ago.  It is to newcomers, i.e. students, a special community with special rules, hence the difference between law and policy.  It is an invitation to be part of the life of the mind, so long as you play by the rules.

    Now, to be sure, the exact nature and shape of the rules can change given any number of factors, some obviously larger than others.  Technology is a big one.  Cutting and pasting having become so easy suddenly makes wholesale "copying" a facile process; how that function leads a tired, insecure or intentionally violative student down the road of perdition is a factor that educators must take into account no matter whether they like or don't like the fact of the technology that allows a student to do it.  Here is why: because the best, well intentioned students are anxious that they make a mistake.  That we do not want to cause our students undue anxiety.  It is not warranted, if we pay attention to the world in which they live and help them clarify the rules to the practices, and nor is it wise for us to allow undue measure of anxiety to get in the way genuine learning.  An overly cautious student may ultimately learn as little as the too liberal student when it comes to plagiarism.  If learning is the name of the game, it behooves educators to get it right.

    So much has been written about remix that I need not go into detail here about it (Lessig's books is good start, although more focused on law than academic integrity).  Suffice it to say that remix now constitutes a very significant approach, trope and motif of contemporary culture that if we do not think hard about how we want academia to be of but not in this world, we will not serve either ourselves or our students.  Technology has made it possible, yes, but technology in this instance once again demonstrates its transfigurative powers.  That is, we see the academic dynamic -- something borrowed, something new -- more clearly than we might have seen it without technology.  We should use that insight to bridge generations of learners and the tools and methods by which they learn.

    For anyone who does not believe there is anything new under the sun worth talking about, allow me to share some personal experience.  In creating a site on digital literacy, I spent some time talking to students about academic integrity.
     <http://digitalliteracy.cornell.edu/>  I also brought Harry Lewis, former Dean of Harvard College and a good and wise man, to talk with the Cornell community about any number of related issues.  I learned probably more than anyone.  Did you know that you can find whole instructors' manuals on the campus intranet?  That means if at two in the morning you still have not gotten to that chemical engineering assignment (or name your subject), you can find the answer with a few keystrokes.  Know how we know?  Because students who plagiarize the manual turn in the same mistakes as the manual.  Even better, when anywhere from one to two thirds of class of 200+ students turn in the same assignment with the same mistake, Houston, we have a problem!  I exaggerate not.  But I have not even gotten to the most upsetting part of this story.  Do you know why you don't hear about as often as it occurs?  Because untenured professors who tend to be the ones who teach these large classes are sufficiently concerned about their teaching evaluations as to minimize the issue.  Having talked to young professors in this situation, I can report that they are very torn about it, but make their choices in the calculous of their lives and careers.  Have they worked sufficiently with chairmen, deans and provosts on this matter?  The answer to that question belongs to every institution to address, and not once but continuously.  Do young professors have the understanding of academic leadership at their institutions?  That question should be a part of the conversation.

    Continued in article

    "Let's Talk About Academic Integrity: Part III After the Internet and With the Roof Blown Open," by Tracy Mitrano, Inside Higher Ed, August 22, 2012 ---
     http://www.insidehighered.com/blogs/law-policy-and-it/lets-talk-about-academic-integrity-part-iii-after-internet-and-roof-blown

    Jensen Comment
    Bob Jensen's threads on plagiarism and cheating ---
    http://www.trinity.edu/rjensen/Plagiarism.htm

    Bob Jensen's threads on plagiarism and cheating by professors ---
    http://www.trinity.edu/rjensen/Plagiarism.htm#ProfessorsWhoPlagiari


    From The Wall Street Journal Accounting Weekly Review

    Lifting the Veil on Tax Risk
    by Jesse Drucker
    The Wall Street Journal
    May 25, 2007
    Page: C1
    Click here to view the full article on WSJ.com ---
    http://online.wsj.com/article/SB118005869184314270.html?mod=djem_jiewr_ac
     

    TOPICS: Accounting, Accounting Theory, Advanced Financial Accounting, Disclosure Requirements, Financial Accounting Standards Board, Financial Analysis, Financial Statement Analysis, Income Taxes

    SUMMARY: FIN 48, entitled Accounting for Uncertainty in Income Taxes--An Interpretation of FASB Statement No. 109, was issued in June 2006 with an effective date of fiscal years beginning after December 15, 2006. As stated on the FASB's web site, "This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition." See the summary of this interpretation at http://www.fasb.org/st/summary/finsum48.shtml  As noted in this article, "in the past, companies had to reveal little information about transactions that could face some risk in an audit by the IRS or other government entities." Further, some concern about use of deferred tax liability accounts to create so-called "cookie jar reserves" useful in smoothing income contributed to development of this interpretation's recognition, timing and disclosure requirements. The article highlights an analysis of 361 companies by Credit Suisse Group to identify those with the largest recorded liabilities as an indicator of risk of future settlement with the IRS over disputed amounts. One example given in this article is Merck's $2.3 billion settlement with the IRS in February 2007 over a Bermuda tax shelter; another is the same company's current dispute with Canadian taxing authorities over transfer pricing. Financial statement analysis procedures to compare the size of the uncertain tax liability to other financial statement components and follow up discussions with the companies showing the highest uncertain tax positions also is described.

    QUESTIONS: 
    1.) Summarize the requirements of Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes--An Interpretation of FASB Statement No. 109 (FIN 48).

    2.) In describing the FIN 48 requirements, the author of this article states that "until now, there was generally no way to know about" the accounting for reserves for uncertain tax positions. Why is that the case?

    3.) Some firms may develop "FIN 48 opinions" every time a tax position is taken that could be questioned by the IRS or other tax governing authority. Why might companies naturally want to avoid having to document these positions very clearly in their own records?

    4.) Credit Suisse analysts note that the new FIN 48 disclosures about unrecognized tax benefits provide investors with information about risks companies are undertaking. Explain how this information can be used for this purpose.

    5.) How are the absolute amounts of unrecognized tax benefits compared to other financial statement categories to provide a better frame of reference for analysis? In your answer, propose a financial statement ratio you feel is useful in assessing the risk described in answer to question 4, and support your reasons for calculating this amount.

    6.) The amount of reserves recorded by Merck for unrecognized tax benefits, tops the list from the analysis done by Credit Suisse and the one done by Professors Blouin, Gleason, Mills and Sikes. Based only on the descriptions given in the article, how did the two analyses differ in their measurements? What do you infer from the fact that Merck is at the top of both lists?

    7.) Why are transfer prices among international operations likely to develop into uncertain tax positions?
     

    Reviewed By: Judy Beckman, University of Rhode Island
     


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

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

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

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

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

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

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

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

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

    5. (Advanced) Access the Filing on Form 6-K which describes the investor briefing regarding the revision of management's forecast of consolidated results that is reported on in thie article. The filing is available at http://www.sec.gov/Archives/edgar/data/313838/000115752311003320/a6733820.htm Explain your understanding of the importance of the taxable income shown by "Sony Corporation as an unconsolidated unit and its consolidated tax filing group companies in Japan" to the loss that will be reported by Sony.

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

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

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

    Reviewed By: Judy Beckman, University of Rhode Island

    "Sony Expects Hefty Loss," by: Juro Osawa, The Wall Street Journal, May 24, 2011 ---
    http://online.wsj.com/article/SB10001424052702304520804576340750302051690.html?mod=djem_jiewr_AC_domainid

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Continued in article

    Bob Jensen's threads on FIN 48 are at
    http://www.trinity.edu/rjensen/Theory02.htm#FIN48


    "IMPROVING TRANSPARENCY IN NOTE DISCLOSURES: CAN FASB MAKE THE “HARD” DECISIONS?" by Anthony H. Catanach and J. Edward Ketz, Grumpy Old Accountants Blog, August 6, 2012 ---
    http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/719

    The Financial Accounting Standards Board (FASB) is getting around to addressing the disclosure catastrophe that has befallen our beloved financial statements.  Yes, in case you haven’t noticed, the financial statement notes (the report content that really matters) have disintegrated into a series of disorganized, generic, boilerplate text references that can at best be called tedious, and at worst uninformative and misleading.  Since the financial report implosion of 2002, today’s financial reports have doubled in size but supply only half the information.  So, FASB’s recent invitation to comment on its Disclosure Framework is a Christmas gift in July.

    But what took so long?  Maybe, the FASB schedule has opened up a bit now that IFRS adoption is dead, and financial reporting transparency can get the attention it really deserves. Still, we aren’t going to get too excited as the FASB likely won’t pass anything for years and years.

    We also wonder if the FASB is really qualified for rehabilitating financial statement note disclosures.  Why you ask?  Just read the invitation to comment.  The FASB takes an introduction and four chapters (50 pages total) to actually get to the substantive issues in Chapter 5 – Format and Organization. Wow!  Who really cares enough about note disclosure reform and transparency to wade through this verbose narrative that describes topics such as the board’s decision process and some general comments about flexibility and relevance?  The Grumpy Old Accountants of course…and we definitely have some ideas to share!

    Our very simple (and easy to implement) recommendations address issues raised in two sections of Chapter 5 in FASB’s invitation to comment: Organization (page 55) and Enhancing the Understandability of Notes (page 53).

     

    Organization

    We tend to generally favor the ordering suggestions outlined in paragraph 5.22, except that we see no need for “disclosures about transactions or events that have had or will have a broad impact on the financial statements.”  These are much too judgmental and subjective, and hence not worthy of the printed space.

    First and foremost, each financial statement line item in both the balance sheet and income statement should be supported by its own individual note disclosure.  The numbering sequence of the notes would be driven by the ordering of assets, liabilities, and stockholders’ equity in a company’s balance sheet, followed by the sequencing of specific income statement line items.  The accounting policy note would not be numbered but would precede the numbered notes under a caption titled “General Reporting Considerations”.  More details to follow below.

    Additionally, each balance sheet and income statement amount reported should exactly match the related note disclosure and any supporting schedule provided.  For example, impairment losses and restructuring costs reported in the income statement should be supported by a schedule in the related note disclosure.

    Finally, we propose elimination of the accounting policy note that we currently see “abused” in today’s financial statements.  We propose including any accounting policies for specific balance sheet and income statement components together with the specific note disclosures outlined above.  For example, as one analyzes the accounts receivable reported by an entity, the accounting policy for the item would be read first, then any detailed asset disclosures.  Why do companies make readers flip back and forth between balance sheet, policy note, and a detailed note?  Worse, why do companies make readers peruse a variety of notes on the same account?  Are companies trying to confuse or mislead?

    As to the issues raised by the FASB in paragraphs 5.27 through 5.30, our organization proposals are logical, easy to implement, meet the needs of most users, and are less subject to management manipulation.

     

    Enhancing the Understandability of Notes

     Not surprisingly we have some very strong opinions on how to improve the content of financial statement notes, thus their understandability and transparency.  First, as noted above, we recommend scrapping the accounting policy note as discussed above.  It would be replaced by a general (and unnumbered) section immediately following the last financial statement presented.  It would be labeled “General Reporting Considerations” and would include only the following items:

    •  General business description including the reporting entity’s fiscal year end and reporting period.
    • Basis of presentation (i.e., US GAAP, IFRS, liquidation, etc.)
    • Principles of consolidation and a detailed schedule of consolidated entities (ownership percentage, reason for consolidation, total assets and revenues of consolidated entity, etc.)
    • Reclassifications and restatements both of which would be supported by detailed schedules and related discussions (reasons, impact, etc.)

    More specifically, this new note would exclude the following items which would either be eliminated in entirety, or relocated to a specific financial statement note:

    Continued in article

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


    Inforgraphic:  Where Malware Comes From ---
    http://www.readwriteweb.com/archives/infographic-where-malware-comes-from.php

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


    August 3, 2012 message from Jim McKinney

    Hi Bob,

    FYI

    The link for the Academy of Accounting Historians is now aahhq.org (think aaahq but with aah not aaa)

    The material from Rutgers has been removed

    You should probably add a link to the http://www.sechistorical.org/

    Which has many historical documents related to the SEC. The site just added a 10 year retrospective interview with both Sarbanes and Oxley conducted last week (under programs). For those interested, we are doing a presentation on the site at the AAA on Monday at 4:00pm (session 3.05)

    Cheers,

    Jim McKinney, Ph.D., C.P.A.
    Accounting and Information Assurance
    Robert H. Smith School of Business
    4333G Van Munching Hall
    University of Maryland
    College Park, MD 20742-1815

    http://www.rhsmith.umd.edu

    Archive of the History of Financial Regulation --- http://www.sechistorical.org/

    Some Accounting History Sites

    Accounting History Libraries at the University of Mississippi (Ole Miss) --- http://www.olemiss.edu/depts/accountancy/libraries.html
    The above libraries include international accounting history.
    The above libraries include film and video historical collections.

    MAAW Knowledge Portal for Management and Accounting --- http://maaw.info/

    Academy of Accounting Historians and the Accounting Historians Journal ---
    http://www.accounting.rutgers.edu/raw/aah/

    Sage Accounting History --- http://ach.sagepub.com/cgi/pdf_extract/11/3/269

    A nice timeline on the development of U.S. standards and the evolution of thinking about the income statement versus the balance sheet is provided at:
    "The Evolution of U.S. GAAP: The Political Forces Behind Professional Standards (1930-1973)," by Stephen A. Zeff, CPA Journal, January 2005 --- http://www.nysscpa.org/cpajournal/2005/105/infocus/p18.htm
    Part II covering years 1974-2003 published in February 2005 --- http://www.nysscpa.org/cpajournal/2005/205/index.htm 

    A nice timeline of accounting history --- http://www.docstoc.com/docs/2187711/A-HISTORY-OF-ACCOUNTING

    From Texas A&M University
    Accounting History Outline --- http://acct.tamu.edu/giroux/history.html

    Canadian Printer and Publisher (history of various trades and industries) ---  http://link.library.utoronto.ca/cpp/
    You can search for various industry terms such as accounting, cost, bookkeeping, etc.

    Bob Jensen's timeline of derivative financial instruments and hedge accounting ---
    http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

    History of Fraud in America --- http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm
    Also see http://www.trinity.edu/rjensen/Fraud.htm

    Archive of the History of Financial Regulation --- http://www.sechistorical.org/


    "A Brief History of the Corporation: 1600 to 2100," by Venkat, RibbonFarm, June 8, 2011 ---
    http://www.ribbonfarm.com/2011/06/08/a-brief-history-of-the-corporation-1600-to-2100/

    June 23, 2011 reply from Rick Lilly

    Hi Bob,

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

    Link:  http://www.amazon.com/Life-Inc-Corporatism-Conquered-World/dp/0812978501/ref=sr_1_3?s=books&ie=UTF8&qid=1308848737&sr=1-3

    Rick Lillie, MAS, Ed.D., CPA
    Assistant Professor of Accounting
    Coordinator, Master of Science in Accountancy
    CSUSB, CBPA, Department of Accounting & Finance
    5500 University Parkway, JB-547
    San Bernardino, CA.  92407-2397

     

    June 23, 2011 reply from Bob Jensen

    A History of Entrepreneurship
    "Who Are The Entrepreneurs: The Elite or the Everyday Man? A History of Entrepreneurship," by Heather A. Haveman, Jacob Habinek, and Leo A Googman, UC Berkeley,  2011 ---
    http://www.escholarship.org/uc/item/392635v2;jsessionid=00ECE18AD2472F4956AAF2D00CC2132E#page-2
     Who Are The Entrepreneurs: The Elite or the Everyday Man? A History of Entrepreneurship

    June 23, 2011 reply from Jagdish Gangolly

    Bob,

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

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

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

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

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

    _________________________________________________

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

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

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

    Source: http://www.ourcivilisation.com/smartboard/shop/burkee/extracts/chap12.htm  ________________________________________________________________________

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

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

     

    History of Fraud in America --- 
    http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm

    "Harvard Grad Starts Math Museum Helped by Google, Hedge Funder," by Patrick Cole, Bloomberg Business Week, November 1, 2011 ---
    http://www.businessweek.com/news/2011-11-01/harvard-grad-starts-math-museum-helped-by-google-hedge-funder.html

    Bob Jensen's links to mathematics history, tutorials, videos, and free online education and research materials ---
    http://www.trinity.edu/rjensen/Bookbob2.htm#050421Mathematics

    Bob Jensen's links to history, tutorials, videos, and free online education and research materials in other disciplines---
    http://www.trinity.edu/rjensen/Bookbob2.htm

    Also see
    http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI 


    August 3, 2012 message from Jim McKinney

    Hi Bob,

    FYI

    The link for the Academy of Accounting Historians is now aahhq.org (think aaahq but with aah not aaa)

    The material from Rutgers has been removed

    You should probably add a link to the http://www.sechistorical.org/

    Which has many historical documents related to the SEC. The site just added a 10 year retrospective interview with both Sarbanes and Oxley conducted last week (under programs). For those interested, we are doing a presentation on the site at the AAA on Monday at 4:00pm (session 3.05)

    Cheers,

    Jim McKinney, Ph.D., C.P.A.
    Accounting and Information Assurance
    Robert H. Smith School of Business
    4333G Van Munching Hall
    University of Maryland
    College Park, MD 20742-1815

    http://www.rhsmith.umd.edu


    September 29, 2011 message from Barbara Scofield

    One of the 2011 MacArthur Fellows is a historian, one of whose specialties is the history of accounting:
     
    http://www.macfound.org/site/c.lkLXJ8MQKrH/b.7731011/k.1A2A/Jacob_Soll.htm
     
    For an NPR interview see http://whyy.org/cms/radiotimes/2011/09/28/a-conversation-with-2011-macarthur-fellow-jacob-soll/

     
    Barbara W. Scofield, PhD, CPA
    Chair of Graduate Business Studies
    Professor of Accounting
    The University of Texas of the Permian Basin
    4901 E. University Dr.
    Odessa, TX   79762

    Jacob Soll, European Historian --- http://www.macfound.org/site/c.lkLXJ8MQKrH/b.7731011/k.1A2A/Jacob_Soll.htm

    Jacob Soll is a historian whose meticulously researched studies of early modern Europe are shedding new light on the origins of the modern state. Drawing on intellectual, political, cultural, and institutional history, Soll explores the development of political thought and criticism in relation to governance from the sixteenth to the eighteenth centuries in Western Europe. Soll's first book, Publishing "The Prince" (2005), examines the role of commentaries, editions, and translations of Machiavelli produced by the previously little-studied figure Amelot de La Houssaye (1634-1706), who became the most influential writer on secular politics during the reign of Louis XIV. Grounded in extensive analysis of archival, manuscript, and early printed sources, Soll shows how Amelot and his publishers arranged prefaces, columns, and footnotes in a manner that transformed established works, imbuing books previously considered as supporting royal power with an alternate, even revolutionary, political message. In The Information Master (2009), he investigates the formation of a state-information gathering and classifying network by Louis XIV's chief minister, Jean-Baptiste Colbert (1619-1683), revealing that Colbert's passion for information was both a means of control and a medium for his own political advancement: his systematic and encyclopedic information collection served to strengthen and uphold Louis XIV's absolute rule. With these and other projects in progress — including an intellectual and practical history of accounting and its role in governance in the modern world and a study of the composition of library catalogues during the Enlightenment — Soll is opening up new fields of inquiry and elucidating how modern governments came into being.

    Jacob Soll received a B.A. (1991) from the University of Iowa, a D.E.A. (1993) from the École des Hautes Études en Sciences Sociales, and a Ph.D. (1998) from Magdalene College, Cambridge University. He has been affiliated with Rutgers University, Camden, since 1999, where he is currently a professor in the Department of History.

    Also see
    The information master: Jean-Baptiste Colbert's secret state intelligence system - By Jacob Soll ---
    http://ideas.repec.org/a/bla/ehsrev/v63y2010i1p261-262.html
    Or go directly to
    The Economic History Review
    Volume 63, Issue 1, pages 261–262, February 2010
    http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0289.2009.00511_20.x/full

    From Encylopedia Britannica --- http://www.britannica.com/EBchecked/topic/124928/Jean-Baptiste-Colbert
    (which in part provides early history of clawback return of gains to government, something the SEC is avoiding in the early 21st Century fraud convictions)
    Also note the stress on manufacturing regulation and quality controls.

    Colbert was born of a merchant family. After holding various administrative posts, his great opportunity came in 1651, when Cardinal Mazarin, the dominant political figure in France, was forced to leave Paris and take refuge in a provincial city—an episode in the Fronde, a period (1648–53) of struggle between the crown and the French parlement. Colbert became Mazarin’s agent in Paris, keeping him abreast of the news and looking after his personal affairs. When Mazarin returned to power, he made Colbert his personal assistant and helped him purchase profitable appointments for both himself and his family. Colbert became wealthy; he also acquired the barony of Seignelay. On his deathbed, Mazarin recommended him to Louis XIV, who soon gave Colbert his confidence. Thenceforth Colbert dedicated his enormous capacity for work to serving the King both in his private affairs and in the general administration of the kingdom.

    The struggle with Fouquet.

    For 25 years Colbert was to be concerned with the economic reconstruction of France. The first necessity was to bring order into the chaotic methods of financial administration that were then under the direction of Nicolas Fouquet, the immensely powerful surintendant des finances. Colbert destroyed Fouquet’s reputation with the King, revealing irregularities in his accounts and denouncing the financial operations by which Fouquet had enriched himself. The latter’s fate was sealed when he made the mistake of receiving the King at his magnificent chateau at Vaux-le-Vicomte; the Lucullan festivities, displaying how much wealth Fouquet had amassed at the expense of the state, infuriated Louis. The King subsequently had him arrested. The criminal proceedings against him lasted three years and excited great public interest. Colbert, without any rightful standing in the case, interfered in the trial and made it his personal affair because he wanted to succeed Fouquet as finance minister. The trial itself was a parody of justice. Fouquet was sent to prison, where he spent the remaining 15 years of his life. The surintendance was replaced by a council of finance, of which Colbert became the dominant member with the title of intendant until, in 1665, he became controller general.

    Financiers and tax farmers had made enormous profits from loansand advances to the state treasury, and Colbert established tribunals to make them give back (clawbacks) some of their gains. This was well received by public opinion, which held the financiers responsible for all difficulties; it also lightened the public debt, which was further reduced by the repudiation of some government bonds and the repayment of others without interest. Private fortunes suffered, but no disturbances ensued, and the King’s credit was restored.

    Financial and economic affairs.

    Colbert’s next efforts were directed to reforming the chaotic system of taxation, a heritage of medieval times. The King derived the major part of his revenue from a tax called the taille, levied in some districts on individuals and in other districts on land and businesses. In some districts the taille was apportioned and collected by royal officials; in others it was voted by the representatives of the province. Many persons, including clergy and nobles, were exempt from it altogether. Colbert undertook to levy the taille on all who were properly liable for it and so initiated a review of titles of nobility in order to expose those who were claiming exemption falsely; he also tried to make the tax less oppressive by a fairer distribution. He reduced the total amount of it but insisted on payment in full over a reasonable period of time. He took care to suppress many abuses of collection (confiscation of defaulters’ property, seizure of peasants’ livestock or bedding, imprisonment of collectors who had not been able to produce the due sums in time). These reforms and the close supervision of the officials concerned brought large sums into the treasury. Other taxes were increased, and the tariff system was revised in 1664 as part of a system of protection. The special dues that existed in the various provinces could not be swept away, but a measure of uniformity was obtained in central France.

    Colbert devoted endless energy to the reorganization of industry and commerce. He believed that in order to increase French power it would be essential to increase France’s share of international trade and in particular to reduce the commercial hegemony of the Dutch. This necessitated not only the production of high-quality goods that could compete with foreign products abroad but also the building up of a merchant fleet to carry them. Colbert encouraged foreign workers to bring their trade skills to France. He gave privileges to a number of private industries and foundedstate manufactures. To guarantee the standard of workmanship, he made regulations for every sort of manufacture and imposed severe punishments (fines and the pillory) for counterfeiting and shortcomings. He encouraged the formation of companies to build ships and tried to obtain monopolies for French commerce abroad through the formation of trading companies. The French East India and West India companies, founded in 1664, were followed by others for trade with the eastern Mediterranean and with northern Europe; but Colbert’s propaganda for them, though cleverly conducted, failed to attract sufficient capital, and their existence was precarious. The protection of national industry demanded tariffs against foreign produce, and other countries replied with tariffs against French goods. This tariff warfare was one of the chief causes of the Dutch War of 1672–78.

    Colbert’s system of control was resented by traders and contractors, who wanted to preserve their freedom of action and to be responsible to themselves alone. Cautious and thrifty people, moreover, still preferred the old outlets for their money (land, annuities, moneylending) to investing in industry. The period, too, was one of generally falling prices throughout the world. Colbert’s success, therefore, fell short of his expectation, but what he did achieve seems all the greater in view of the obstacles in his way: he raised the output of manufactures, expanded trade, set up new permanent industries, and developed communications by road and water across France (Canal du Midi, 1666–81).

    Continued in article

     

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


    Legg Mason Global Asset Management --- http://www.leggmason.com/

    From Simoleon Sense, August 19, 2012
    Michael Mauboussin is the CEO of Legg Mason Global Asset Management

    Michael Mauboussin’s Behavioral Economics Reading List:

    Recommended Books:

     
    1. Thinking, Fast and Slow by Daniel Kahneman (Farrar, Straus and Giroux, 2011).
    Comment: A sweeping review of the work of the greatest psychologist of the past half century.
    http://www.amazon.com/Thinking-Fast-Slow-Daniel-Kahneman/dp/0374275637/ref=sr_1_1?s=books&ie=UTF8&qid=1342100011&sr=1-1&keywords=thinking+fast+and+slow
    2. Judgment in Managerial Decision Making — Seventh Edition by Max H. Bazerman and Don Moore (John Wiley & Sons, 2008)
    Comment: A great source for heuristics and biases
    http://www.amazon.com/Judgment-Managerial-Decision-Making-Bazerman/dp/0470049456/ref=sr_1_1?s=books&ie=UTF8&qid=1342100039&sr=1-1&keywords=judgment+in+managerial+decision+making
    3. Expert Political Judgment by Philip Tetlock (Princeton University Press, 2005)
    Comment: Are you still listening to expert prognosticators? A devastating, empirical study of how bad expert predictions are in complex realms.
    http://www.amazon.com/Expert-Political-Judgment-Good-Know/dp/0691128715/ref=sr_1_1?s=books&ie=UTF8&qid=1342100070&sr=1-1&keywords=expert+political+judgment
    4. The Halo Effect by Phil Rosenzweig (Free Press, 2006)
    Comment: Lots of lessons in 175 pages–you’ll never look at the world the same way after reading this one.
    http://www.amazon.com/Halo-Effect-Business-Delusions-Managers/dp/0743291263/ref=sr_1_1?s=books&ie=UTF8&qid=1342100109&sr=1-1&keywords=the+halo+effect+by+phil+rosenzweig
    5. The Winner’s Curse by Richard Thaler (Princeton University Press, 1992)
    Comment: The contents are the foundation of what we call behavioral finance.
    http://www.amazon.com/Winners-Curse-Paradoxes-Anomalies-Economic/dp/0691019347/ref=sr_1_1?s=books&ie=UTF8&qid=1342100138&sr=1-1&keywords=the+winners+curse
    Recommended Articles:

     
    1. “On the Psychology of Prediction” by Daniel Kahneman and Amos Tversky (Psychological Review, Vol. 80, No. 4, July 1973, 237-251)
    Comment: Kahneman said this was his favorite paper. This explains the inside-outside view.
    http://psycnet.apa.org/index.cfm?fa=buy.optionToBuy&id=1974-02325-001
    2. “Prospect Theory: An Analysis of Decision Under Risk” by Daniel Kahneman and Amos Tversky (Econometrica, Vol. 72, No. 2, March 1979, 263-292)
    Comment: A clear and compelling discussion of how behavior varies from what utility theory predicts.
    http://www.hss.caltech.edu/~camerer/Ec101/ProspectTheory.pdf

     
    3. “A Survey of Behavioral Finance” by Nicholas C. Barberis and Richard H. Thaler (in George Constantinides, Milton Harris, and Rene Stulz, eds.Handbook of Economics of Finance: Volume 1B, Financial Markets and Asset Pricing, Elsevier North Holland, Chapter 18, 1053-1128)
    Comment: Exactly as advertised–what you need to know about behavioral finance in one place.
    http://faculty.som.yale.edu/nicholasbarberis/ch18_6.pdf

     
    4. “Conditions for Intuitive Expertise: A Failure to Disagree” by Daniel Kahneman and Gary Klein (American Psychologist, Vol. 64, No. 6, September 2009, 515-536)
    Comment: We overestimate the abilities of experts. But they do work in certain settings. This explains when you can trust an expert.
    http://psycnet.apa.org/journals/amp/64/6/515/

     
    5. “Hindsight ≠ Foresight: The Effect of Outcome Knowledge on Judgment Under Uncertainty” by Baruch Fischhoff (Journal of Experimental Psychology: Human Perception and Performance, Vol. 1, No. 3, August 1975, 288-299)
    Comment: Hindsight bias and creeping determinism. Big problems.
    http://www.hss.cmu.edu/departments/sds/media/pdfs/fischhoff/HindsightForesight.pdf

     

    Bob Jensen's threads on Behavioral and Cultural Economics in Finance ---
    http://www.trinity.edu/rjensen/Theory01.htm#Behavioral

     


    Mortgage Rate Calculation Tools --- http://www.mortgagerates.net/additional-resources/calculation-tools/

    Bob Jensen's threads on online calculators --- http://www.trinity.edu/rjensen/Bookbob3.htm#080512Calculators


    August 15, 2012 message from Ernst & Young

    It was great seeing you in Maryland.

    We at Ernst & Young hope you had a productive and enjoyable time at this year's AAA Annual Meeting Our Ernst & Young leaders participated in several panel discussions, and our University Relations and Foundation Team had the opportunity to connect with many of you while attending sessions. If you have not already done so, please take a moment to log onto the Ernst & Young Academic Resource Center (ARC) to review new and interesting curriculum that you will be able to incorporate into your classrooms. Access the EYARC at www.ey.com/us/arc. If you do not currently have an account, contact Catherine Banks for access.

    We are grateful for all that you do for the profession and are proud to support your efforts.

    Regards,
     


    "What You Need to Know About MOOC's," Chronicle of Higher Education, August 20, 2012 ---
    http://chronicle.com/article/What-You-Need-to-Know-About/133475/

    . . .

    Who are the major players?

    Several start-up companies are working with universities and professors to offer MOOC's. Meanwhile, some colleges are starting their own efforts, and some individual professors are offering their courses to the world. Right now four names are the ones to know:

    edX

    A nonprofit effort run jointly by MIT, Harvard, and Berkeley.

    Leaders of the group say they intend to slowly add other university partners over time. edX plans to freely give away the software platform it is building to offer the free courses, so that anyone can use it to run MOOC’s.

    Coursera

    A for-profit company founded by two computer-science professors from Stanford.

    The company’s model is to sign contracts with colleges that agree to use the platform to offer free courses and to get a percentage of any revenue. More than a dozen high-profile institutions, including Princeton and the U. of Virginia, have joined.

    Udacity

    Another for-profit company founded by a Stanford computer-science professor.

    The company, which works with individual professors rather than institutions, has attracted a range of well-known scholars. Unlike other providers of MOOC’s, it has said it will focus all of its courses on computer science and related fields.

    Udemy

    A for-profit platform that lets anyone set up a course.

    The company encourages its instructors to charge a small fee, with the revenue split between instructor and company. Authors themselves, more than a few of them with no academic affiliation, teach many of the courses.

    "The Future Is Now?" by Joe Hoyle, Teaching Blog, August 13, 2012 ---
    http://joehoyle-teaching.blogspot.com/2012/08/the-future-is-now.html

    Bob Jensen's threads on MOOCs, MITx, and Courses from Prestigious Universities ---
    http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI

    Bob Jensen's threads on distance education and training alternatives in general ---
    http://www.trinity.edu/rjensen/Crossborder.htm

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


    Note that PwC does Romney's tax returns and most likely is his main source regarding global tax planning.
    "In Superrich, Clues to What Might Be in Romney’s Returns," by James B. Steward, The New York Times, August 10. 2012 ---
    http://www.nytimes.com/2012/08/11/business/in-the-superrich-clues-to-romneys-tax-returns-common-sense.html?_r=3&ref=business

    On the face of it, Senator Harry Reid’s explosive but flimsily sourced claim that Mitt Romney paid no income tax seems preposterous. Mr. Romney has denied it, and without his returns no one can say for sure. But for someone who makes millions of dollars a year, would it even be possible?

    Evidently it is.

    It so happens that this summer the Internal Revenue Service released data from the 400 individual income tax returns reporting the highest adjusted gross income. This elite ultrarich group earned on average $202 million in 2009, the latest year available. And buried in the data is the startling disclosure that six of the 400 paid no federal income tax.

    The I.R.S. has never before disclosed that last fact.

    Not even Mr. Romney, with reported 2010 income of $21.7 million, qualifies for membership in this select group of 400. But the data provides a window into the financial lives and tax rates of the superrich. Since the I.R.S. doesn’t release data for the tiny percentage of Americans at Mr. Romney’s income level, the 400 are the closest proxy.

    And that data demonstrates that many of the ultrarich can and do reduce their tax liability to very low levels, even zero. Besides the six who paid no federal income tax, the I.R.S. reported that 27 paid from zero to 10 percent of their adjusted gross incomes and another 89 paid between 10 and 15 percent, which is close to the 13.9 percent rate that Mr. Romney disclosed that he paid in 2010. (At the other end of the spectrum, 82 paid 30 to 35 percent. None paid more than 35 percent.) So more than a quarter of the people earning an average of over $200 million in 2009 paid less than 15 percent of their adjusted gross income in taxes.

    How do they do it?

    The data show that the ultrarich typically pay low tax rates every year, but 2009 was a special case. In 2008, people with large stock portfolios and other less liquid assets were disproportionately hit with large losses on paper. One of the oddities of the tax code is that capital gains taxes are discretionary, since they must be paid only when gains are realized. And they can be offset by losses. The silver lining in a bad year like 2008 for wealthy people is that they can “harvest” losses by selling assets, then use those losses to offset any gains. They can also carry forward the losses to offset gains in future years.

    There’s ample evidence that happened in 2009 among the richest taxpayers. Their average income, $202 million, dropped from $270 million in 2008 and was the lowest since 2004. Like Mr. Romney in 2010, for the richest taxpayers most income comes from capital gains and other investment income. Their net capital gains (the data doesn’t include gross gains and losses) dropped by nearly 40 percent, from an average of $154 million in 2008 to $93 million in 2009, which accounts for nearly all of their drop in total income. Even with these lower gains, these 400 taxpayers, a minuscule fraction of the population at large, still managed to account for 16 percent of all capital gains. That is the highest percentage since the data was first released for 1992, when that percentage was less than 6 percent.

    Tax experts I consulted said these results almost certainly reflected aggressive use of tax-loss carry-forwards from 2008, since the stock market bottomed in March 2009 and rallied strongly during the rest of the year.

    The superrich also accounted for a disproportionate amount of dividend income, which averaged over $26 million for the top 400, or over 6 percent of total dividend income, also a record. Capital gains and dividends are both taxed at a maximum rate of 15 percent, as opposed to the maximum rate on earned income of 35 percent, which helps explain why so many of the superrich pay a relatively low rate. Still, that preferential rate doesn’t get them anywhere near zero, or even 10 percent.

    Edward Kleinbard, professor of law at the Gould School of Law at the University of Southern California, explained it this way, “You start with income dominated by tax-preferred income — capital gains and qualified dividends. That gets you to 15 percent. Then you use charitable contributions of appreciated securities to reduce ordinary income. But the charitable contribution deduction is capped at 50 percent of adjusted gross income. Now you’re way down, but you’re not at zero.”

    Continued in article

    Jensen Comment
    Note that in many instances what we call a "tax savings" is not a net savings. For example, when a taxpayer has millions of dollars invested in tax-exempt bonds of towns, cities, counties, states, and schools (the so-called muni-bonds), those government entities are getting a lower cost of capital (adjusted for financial risk) than if the federal government took away those tax-exempt options in tax reforms. For example, the cost of capital for municipalities would soar much higher if their bonds were suddenly to become taxable on federal tax returns and, thereby, had to compete with lower risk corporate bonds.

    One could argue that it would be better for the government to eliminate tax exemptions for municipal bonds and then subsidize all of the towns, cities, counties, states, and school districts, but the trillions in subsidies required would clobber Federal deficits now over a trillion dollars. And shrewd high-income taxpayers would simply find other ways avoid taxation.

    Even if Congress should enact a flat tax, I'm not in favor of eliminating tax exemption for bonds of towns, cities, counties, states, and school districts. That elimination would be too much of a shock to all the Main Streets of America.

    Having said this, I think there are many things that need to be accomplished in major tax reforms for all levels of AGI.

     

    Case Studies in Gaming the Income Tax Laws ---
    http://www.cs.trinity.edu/~rjensen/temp/TaxNoTax.htm


    Teaching Case from The Wall Street Journal Weekly Accounting Review on August 17, 2012

    Digging Into Online Coupon Firms' Dealings
    by: Rolfe Winkler
    Aug 12, 2012
    Click here to view the full article on WSJ.com
    Click here to view the video on WSJ.com WSJ Video
     

    TOPICS: Revenue Recognition

    SUMMARY: Groupon, Inc reported its second quarter earnings after the close of the market on Monday, August 13, 2012. This article, written in advance of that earnings announcement, cautions investors "to dig deeply into the results....Last fall, Groupon started...to sell discounted products, in addition to its core daily deals for restaurants, spas, and [other] such [services]....Notable is how the accounting treatment of this business inflates net revenue growth...[When] Groupon takes the products into inventory [as in 75% of the first-quarter Groupon Goods deals, the company] accounts for sales on a gross basis, not a net basis....As Groupon Goods accounts for more net revenue growth, it could be masking weakness in the core daily deals business." The related article discusses the actual quarterly results that were reported and the video also was prepared after the quarterly filing.

    CLASSROOM APPLICATION: The article may be used to introduce topics in revenue recognition, particularly between sales of goods as a principal and offering services as an agent.

    QUESTIONS: 
    1. (Introductory) From your own knowledge and use of the service or from another source, describe Groupon's business model. Cite any sources you use other than your own knowledge of the business.

    2. (Introductory) What new business has Groupon recently launched?

    3. (Introductory) As described in the article, compare the accounting treatment for Groupon's newly launched business with its original one.

    4. (Advanced) In your opinion, should this difference in accounting treatment exist? Support your answer.

    5. (Advanced) Why does the author conclude that "Groupon is making it tough [for investors and other financial statement users] to understand its business"?

    6. (Introductory) Refer to the related article. What results shown in the actual financial statement filing are related to the issues discussed in the main article?

    7. (Introductory) Refer to the related video prepared after the quarterly financial statement filing. According to the interviewee--Mr. George Stahl, Dow Jones Newswires Deputy Managing Editor--what is "confusing" about the company's revenue?
     

    Reviewed By: Judy Beckman, University of Rhode Island
     

    RELATED ARTICLES: 
    The New Deal at Groupon Isn't Enough
    by Rolfe Winkler
    Aug 14, 2012
    Page: C8

    "Digging Into Online Coupon Firms' Dealings," by: Rolfe Winkler, The Wall Street Journal, August 12, 2012 ---
    http://professional.wsj.com/article/SB10000872396390444900304577581660314854018.html?mod=djem_jiewr_AC_domainid&mg=reno-wsj

    Not every dollar of Groupon's GRPN -6.40% revenue is created equal anymore. Will investors get a full explanation when the Internet coupon company reports second-quarter earnings Monday?

    Groupon reported a surprising acceleration in its North American business in the first quarter, with net revenue rising 33% from the previous quarter. That was up from the fourth quarter's 11% increase. That improvement, said Chief Executive Andrew Mason, was due to technology that targets customers with coupons they are more likely to buy. That may give investors comfort, because it suggests Groupon isn't relying just on a huge marketing budget to drive growth. Trouble is, it doesn't appear to be the whole story. Related Reading

    Groupon Staff Feel the Heat Ahead of Groupon Earnings, Investors Bet on a Big Move

    Investors will want to dig deeply into the results, which are expected to show net revenue increased 2% quarter over quarter to $573 million and earnings stayed flat at minus two cents a share. Last fall, Groupon started a business called Groupon Goods to sell discounted products, in addition to its core daily deals for restaurants, spas and such. That business took off in the first quarter, driving roughly 10% of North American gross billings, data provider Yipit says. Notable is how the accounting treatment of this business inflates net revenue growth overall. About 75% of first-quarter Groupon Goods deals were so-called first party deals, Yipit estimates. For these, Groupon takes the products into inventory and accounts for sales on a gross basis, not a net basis.

    That contrasts with regular Internet coupons in which net revenue reflects only Groupon's share of what a customer pays, typically about 40%. Analyst Ken Sena of Evercore Partners estimates that Groupon Goods accounted for a bit more than half of first-quarter net revenue growth. As Groupon Goods accounts for more net revenue growth, it could be masking weakness in the core daily deals business. Yipit data suggest Groupon's North American gross billings declined 2% in the second quarter from the first. Considering Europe's slowdown, Groupon's international business—about 60% of the total— may have slowed even more.

    Continued in article

    "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

    Multiple Teaching Cases About Accounting at Groupon

    Teaching Case on Groupon
    From The Wall Street Journal Accounting Weekly Review on April 6, 2012

    SEC Probes Groupon
    by: Shayndi Raice and Jean Eaglesham
    Apr 03, 2012
    Click here to view the full article on WSJ.com
    Click here to view the video on WSJ.com WSJ Video
     

    TOPICS: Cash Flow, Contingent Liabilities, Internal Controls, Reserves, Restatement

    SUMMARY: As described by Colin Barr in the related video, "One month after they came out with their fourth quarter numbers, '[Groupon] said--guess what-- "Oh, those were wrong..." The company reissued is report for the quarter and year ended December 31, 2011 because they had not booked a sufficient reserve for customer refunds. In the first quarter of 2012, customer refunds under the company's policy exceeded the amount that management had expected because the company faces higher refund rates when selling Groupons for higher priced goods.

    CLASSROOM APPLICATION: The article is useful in a financial reporting class to cover corrections of errors, restatements, accruals for contingent liabilities, and the difference between earnings and cash flows. The article conveys a sense of the need for confidence in financial reporting in order for investors and others to have confidence in management's abilities. Also mentioned in the article is the firm's auditor, Ernst & Young, stating that this event clearly represents a material weakness in internal control.

    QUESTIONS: 
    1. (Introductory) Based on the information in the article and the related video, what problem is Groupon now having to correct?

    2. (Advanced) Access the press release announcing the revised fourth quarter and full year 2011 results, available on the SEC web site at http://www.sec.gov/Archives/edgar/data/1490281/000110465912022869/a12-8401_3ex99d1.htm. What accounts are affected by the revision? What was the nature of the accounting problem?

    3. (Advanced) Why does first quarter 2012 activity result in accounting changes to fourth quarter 2011 results of operations?

    4. (Advanced) What accounting standards require reissuing Groupon's financial statements as the company has done under these circumstances? What disclosures must be made in these circumstances? Provide references to authoritative accounting standards for these requirements.

    5. (Advanced) As noted in the press release, there was no change to the company's previously reported operating cash flows. Why not?

    6. (Introductory) What sense is portrayed in the article and the video about Groupon's operations and the maturity of its leadership in handling a public company? How does this viewpoint stem from the accounting problems that they have faced in the first quarter of operating as a public company?

    7. (Advanced) How has the company's stock price reacted to this announcement?

    8. (Advanced) (Refer to the related article) What is a material weakness in internal control?

    9. (Advanced) (Refer to the related article) Do you think that Groupon's auditor Ernst & Young needed to perform any systems testing to make the statement about internal control that was quoted in the article? Explain your answer.
     

    Reviewed By: Judy Beckman, University of Rhode Island
     

    RELATED ARTICLES: 
    Groupon Forced to Revise Results
    by Shayndi Raice and John Letzing
    Mar 31, 2012
    Page: A1

     

    "SEC Probes Groupon," by: Shayndi Raice and Jean Eaglesham, The Wall Street Journal, April 3, 2012 ---
    http://online.wsj.com/article/SB10001424052702303816504577319870715221322.html?mod=djem_jiewr_AC_domainid

    The Securities and Exchange Commission is examining Groupon Inc.'s GRPN -2.48% revision of its first set of financial results as a public company, according to a person familiar with the situation.

    The regulator's probe into the popular online-coupon company is at a preliminary stage and the SEC hasn't yet decided whether to launch a formal investigation into the matter, the person said.

    The SEC decision to examine the circumstances surrounding Groupon's surprise revision is the start-up's latest run-in with the regulator. Groupon twice revised its finances before its November IPO. An SEC spokesperson declined to comment, as did a spokesman for Groupon.

    Groupon shares plunged Monday, ending the day down nearly 17% at $15.27, far below its $20 IPO price. The selloff came despite damage control efforts by Groupon's top two executives, Chief Executive Andrew Mason and finance chief Jason Child.

    The Chicago company also closed ranks around Mr. Child, even as accounting experts and investors criticized his performance. People familiar with the situation said Mr. Child, who joined Groupon from Amazon.com Inc. in December 2010, continues to have the support of Mr. Mason and others at the company.

    Groupon said Friday it was revising its results for the fourth quarter after discovering executives had failed to set aside enough money for customer refunds. The company had reported a loss of $37 million for its fourth quarter. The accounting changes reduced the company's revenue for the quarter by $14.3 million and widened its loss by $22.6 million.

    The revision came after an unsettling discovery in late February. That's when Groupon's chief accounting officer told Messrs. Mason and Child that many customers had returned their coupons in January, said a person familiar with the matter. Read More

    Heard: Disclosure Could Aid Groupon Therapy Deal Journal: Analysts Question Groupon Model After Groupon, Critics Wary of JOBS Act Groupon Forced to Revise Results 3/31/12

    What's worse: the four-year-old company didn't have enough money set aside in its reserves to cover those refunds, according to this person.

    The duo questioned whether this meant people weren't interested in buying daily deals anymore, according to this person: "It made [the executives] think there's got to be something [they] don't understand. A business just doesn't go sideways and go in another direction overnight." Related Video

    Groupon shares slid Monday as several Wall Street analysts questioned the stability of the company's business following a revision of its fourth-quarter results, Dan Gallagher reports on digits. Photo: AP.

    Ultimately both men got comfortable after an internal analysis found only certain types of coupons were being returned, this person said.

    The moment of crisis illustrates how deep the growing pains are at Groupon as it comes to grips with its status as a newly public Web company. In addition to revising its quarterly results, the company on Friday revealed a "material weakness in its internal controls." Insight from CFO Journal

    Investor Outreach Having Big Effect on Say-on-Pay Results Lufthansa Convertibles Monetize JetBlue Stake Multiemployer Pension Plans May Be in Hot Water

    According to people familiar with the situation, Groupon expects to address the material weakness by the time it reports its first-quarter earnings on May 14.

    Groupon has also hired a second accounting firm, KPMG, in addition to its current accountant Ernst & Young. KPMG's role is to make Groupon compliant with Sarbanes-Oxley, federal regulations around accounting and disclosures of public companies. In addition, Groupon plans to hire more accounting and finance staff, said a person familiar with the matter.

    The revision threw open the question of "whether there is any real corporate governance at Groupon whatsoever," wrote professors Anthony Catanach of Villanova University and Ed Ketz of Penn State University on their Grumpy Old Accountants blog.

    Others fingered Groupon's fast growth—its revenue was $1.62 billion last year, up from $14.5 million in 2009—as the culprit for its recent mishaps. Groupon previously had to change its accounting twice before its IPO in response to SEC concerns.

    "I view this as growing pains," said one Groupon investor who declined to be named. "This is like a high school kid who is a five-foot sophomore and becomes seven feet by the time he's a senior."

    At the heart of Groupon's most recent problem is something known as the "Groupon Promise" which allows customers to return one of its coupons. The company has no plans to change its policy, said a person familiar with the matter, since it uses it to compete with rivals like LivingSocial Inc.

    But that policy led to a meeting in late February between Mr. Child and his chief accounting officer Joe Del Preto, just a few weeks after Groupon had reported its first earnings report as a public company.

    For the month of January, Mr. Del Preto told Mr. Child the number of refunds had exceeded all previous models Groupon had built to predict its customers' behavior, said a person familiar with the matter.

    Continued in article

    "Groupon: You Must Have Fallen From The Sky," by Francine McKenna, re:TheAuditors, April 7, 2012 ---
    http://retheauditors.com/2012/04/07/groupon-you-must-have-fallen-from-the-sky/

    Bob Jensen's threads on Groupon are under Pricewaterhouse Coopers at
    http://www.trinity.edu/rjensen/Fraud001.htm


    "Is Modern Portfolio Theory Dead? Come On," by Paul Pfleiderer, TechCrunch, August 11, 2012 ---
    http://techcrunch.com/2012/08/11/is-modern-portfolio-theory-dead-come-on/

    A few weeks ago, TechCrunch published a piece arguing software is better at investing than 99% of human investment advisors. That post, titled Thankfully, Software Is Eating The Personal Investing World, pointed out the advantages of engineering-driven software solutions versus emotionally driven human judgment. Perhaps not surprisingly, some commenters (including some financial advisors) seized the moment to call into question one of the foundations of software-based investing, Modern Portfolio Theory.

    Given the doubts raised by a small but vocal chorus, it’s worth spending some time to ask if we need a new investing paradigm and if so, what it should be. Answering that question helps show why MPT still is the best investment methodology out there; it enables the automated, low-cost investment management offered by a new wave of Internet startups including Wealthfront (which I advise), Personal Capital, Future Advisor and SigFig.

    The basic questions being raised about MPT run something like this:

    • Hasn’t recent experience – i.e., the financial crisis — shown that diversification doesn’t work?
    • Shouldn’t we primarily worry about “Black Swan” events and unforeseen risk?
    • Don’t these unknown unknowns mean we must develop a new approach to investing?

    Let’s begin by briefly laying out the key insights of MPT.

    MPT is based in part on the assumption that most investors don’t like risk and need to be compensated for bearing it. That compensation comes in the form of higher average returns. Historical data strongly supports this assumption. For example, from 1926 to 2011 the average (geometric) return on U.S. Treasury Bills was 3.6%. Over the same period the average return on large company stocks was 9.8%; that on small company stocks was 11.2% ( See 2012 Ibbotson Stocks, Bonds, Bills and Inflation (SBBI) Valuation Yearbook, Morningstar, Inc., page 23. ).  Stocks, of course, are much riskier than Treasuries, so we expect them to have higher average returns — and they do.

    One of MPT’s key insights is that while investors need to be compensated to bear risk, not all risks are rewarded. The market does not reward risks that can be “diversified away” by holding a bundle of investments, instead of a single investment. By recognizing that not all risks are rewarded, MPT helped establish the idea that a diversified portfolio can help investors earn a higher return for the same amount of risk.

    To understand which risks can be diversified away, and why, consider Zynga. Zynga hit $14.69 in March and has since dropped to less than $2 per share. Based on what’s happened over the past few months, the major risks associated with Zynga’s stock are things such as delays in new game development, the fickle taste of consumers and changes on Facebook that affect users’ engagement with Zynga’s games.

    For company insiders, who have much of their wealth tied up in the company, Zynga is clearly a risky investment. Although those insiders are exposed to huge risks, they aren’t the investors who determine the “risk premium” for Zynga. (A stock’s risk premium is the extra return the stock is expected to earn that compensates for the stock’s risk.)

    Rather, institutional funds and other large investors establish the risk premium by deciding what price they’re willing to pay to hold Zynga in their diversified portfolios. If a Zynga game is delayed, and Zynga’s stock price drops, that decline has a miniscule effect on a diversified shareholder’s portfolio returns. Because of this, the market does not price in that particular risk. Even the overall turbulence in many Internet stocks won’t be problematic for investors who are well diversified in their portfolios.

    Modern Portfolio Theory focuses on constructing portfolios that avoid exposing the investor to those kinds of unrewarded risks. The main lesson is that investors should choose portfolios that lie on the Efficient Frontier, the mathematically defined curve that describes the relationship between risk and reward. To be on the frontier, a portfolio must provide the highest expected return (largest reward) among all portfolios having the same level of risk. The Internet startups construct well-diversified portfolios designed to be efficient with the right combination of risk and return for their clients.

    Now let’s ask if anything in the past five years casts doubt on these basic tenets of Modern Portfolio Theory. The answer is clearly, “No.” First and foremost, nothing has changed the fact that there are many unrewarded risks, and that investors should avoid these risks. The major risks of Zynga stock remain diversifiable risks, and unless you’re willing to trade illegally on inside information about, say, upcoming changes to Facebook’s gaming policies, you should avoid holding a concentrated position in Zynga.

    The efficient frontier is still the desirable place to be, and it makes no sense to follow a policy that puts you in a position well below that frontier.

    Most of the people who say that “diversification failed” in the financial crisis have in mind not the diversification gains associated with avoiding concentrated investments in companies like Zynga, but the diversification gains that come from investing across many different asset classes, such as domestic stocks, foreign stocks, real estate and bonds. Those critics aren’t challenging the idea of diversification in general – probably because such an effort would be nonsensical.

    True, diversification across asset classes didn’t shelter investors from 2008’s turmoil. In that year, the S&P 500 index fell 37%, the MSCI EAFE index (the index of developed markets outside North America) fell by 43%, the MSCI Emerging Market index fell by 53%, the Dow Jones Commodities Index fell by 35%, and the Lehman High Yield Bond Index fell by 26%. The historical record shows that in times of economic distress, asset class returns tend to move in the same direction and be more highly correlated. These increased correlations are no doubt due to the increased importance of macro factors driving corporate cash flows. The increased correlations limit, but do not eliminate, diversification’s value. It would be foolish to conclude from this that you should be undiversified. If a seat belt doesn’t provide perfect protection, it still makes sense to wear one. Statistics show it’s better to wear a seatbelt than to not wear one.  Similarly, statistics show diversification reduces risk, and that you are better off diversifying than not.

    Timing the market

    The obvious question to ask anyone who insists diversification across asset classes is not effective is: What is the alternative? Some say “Time the market.” Make sure you hold an asset class when it is earning good returns, but sell as soon as things are about to go south. Even better, take short positions when the outlook is negative. With a trustworthy crystal ball, this is a winning strategy. The potential gains are huge. If you had perfect foresight and could time the S&P 500 on a daily basis, you could have turned $1,000 on Jan. 1, 2000, into $120,975,000 on Dec. 31, 2009, just by going in and out of the market. If you could also short the market when appropriate, the gains would have been even more spectacular!

    Sometimes, it seems someone may have a fairly reliable crystal ball. Consider John Paulson, who in 2007 and 2008 seemed so prescient in profiting from the subprime market’s collapse. It appears, however, that Mr. Paulson’s crystal ball became less reliable after his stunning success in 2007. His Advantage Plus fund experienced more than a 50% loss in 2011. Separating luck from skill is often difficult.

    Some people try to come up with a way to time the market based on historical data. In fact a large number of strategies will work well “in the back test.” The question is whether any system is reliable enough to use for future investing.

    There are at least three reasons to be cautious about substituting a timing system for diversification.

    • First, a timing system that does not work can impose significant transaction costs (including avoidable adverse tax consequences) on the investor for no gain.
    • Second, an ill-founded timing strategy generally exposes the investor to risk that is unrewarded.  In other words, it puts the investor below the frontier, which is not a good place to be.
    • Third, a timing system’s success may create the seeds of its own destruction. If too many investors blindly follow the strategy, prices will be driven to erase any putative gains that might have been there, turning the strategy into a losing proposition. Also, a timing strategy designed to “beat the market” must involve trading into “good” positions and away from “bad” ones. That means there must be a sucker (or several suckers) available to take on the other (losing) sides. (No doubt in most cases each party to the trade thinks the sucker is on the other side.)

    Black Swans

    What about those Black Swans? Doesn’t MPT ignore the possibility that we can be surprised by the unexpected? Isn’t it impossible to measure risk when there are unknown unknowns?

    Most people recognize that financial markets are not like simple games of chance where risk can be quantified precisely. As we’ve seen (e.g., the “Black Monday” stock market crash of 1987 and the “flash crash” of 2010), the markets can produce extreme events that hardly anyone contemplated as a possibility. As opposed to poker, where we always draw from the same 52-card deck, in financial markets, asset returns are drawn from changing distributions as the world economy and financial relationships change.

    Some Black Swan events turned out to have limited effects on investors over the long term. Although the market dropped precipitously in October 1987, it was close to fully recovered in June 1988. The flash crash was confined to a single day.
    This is not to say that all “surprise” events are transitory. The Great Depression followed the stock market crash of 1929, and the effects of the financial crisis in 2007 and 2008 linger on five years later.

    The question is, how should we respond to uncertainties and Black Swans? One sensible way is to be more diligent in quantifying the risks we can see. For example, since extreme events don’t happen often, we’re likely to be misled if we base our risk assessment on what has occurred over short time periods. We shouldn’t conclude that just because housing prices haven’t gone down over 20 years that a housing decline is not a meaningful risk. In the case of natural disasters like earthquakes, tsunamis, asteroid strikes and solar storms, the long run could be very long indeed. While we can’t capture all risks by looking far back in time, taking into account long-term data means we’re less likely to be surprised.

    Some people suggest you should respond to the risk of unknown unknowns by investing very conservatively. This means allocating most of the portfolio to “safe assets” and significantly reducing exposure to risky assets, which are likely to be affected by Black Swan surprises. This response is consistent with MPT. If you worry about Black Swans, you are, for all intents and purposes, a very risk-averse investor. The MPT portfolio position for very risk-averse investors is a position on the efficient frontier that has little risk.

    The cost of investing in a low-risk position is a lower expected return (recall that historically the average return on stocks was about three times that on U.S. Treasuries), but maybe you think that’s a price worth paying. Can everyone take extremely conservative positions to avoid Black Swan risk? This clearly won’t work, because some investors must hold risky assets. If all investors try to avoid Black Swan events, the prices of those risky assets will fall to a point where the forecasted returns become too large to ignore.

    Continued in article

    Jensen Comment
    All quant theories and strategies in finance are based upon some foundational assumptions that in rare instances turn into the Achilles' heel of the entire superstructure. The classic example is the wonderful theory and arbitrage strategy of Long Term Capital Management (LTCM) formed by the best quants in finance (two with Nobel Prizes in economics). After remarkable successes one nickel at a time in a secret global arbitrage strategy based heavily on the Black-Scholes Model, LTCM placed a trillion dollar bet that failed dramatically and became the only hedge fund that nearly imploded all of Wall Street. At a heavy cost, Wall Street investment bankers pooled billions of dollars to quietly shut down LTCM ---
    http://www.trinity.edu/rjensen/FraudRotten.htm#LTCM

    So what was the Achilles heal of the arbitrage strategy of LTCM? It was an assumption that a huge portion of the global financial market would not collapse all at once. Low and behold, the Asian financial markets collapsed all at once and left LTCM naked and dangling from a speculative cliff.

    There is a tremendous (one of the best videos I've ever seen on the Black-Scholes Model) PBS Nova video called "Trillion Dollar Bet" explaining why LTCM collapsed.  Go to http://www.pbs.org/wgbh/nova/stockmarket/ 
    This video is in the media libraries on most college campuses.  I highly recommend showing this video to students.  It is extremely well done and exciting to watch.

    One of the more interesting summaries is the Report of The President’s Working Group on Financial Markets, April 1999 --- http://www.ustreas.gov/press/releases/reports/hedgfund.pdf 

    The principal policy issue arising out of the events surrounding the near collapse of LTCM is how to constrain excessive leverage. By increasing the chance that problems at one financial institution could be transmitted to other institutions, excessive leverage can increase the likelihood of a general breakdown in the functioning of financial markets. This issue is not limited to hedge funds; other financial institutions are often larger and more highly leveraged than most hedge funds.

    What went wrong at Long Term Capital Management? --- http://www.killer-essays.com/Economics/euz220.shtml 

    The video and above reports, however, do not delve into the tax shelter pushed by Myron Scholes and his other LTCM partners. A nice summary of the tax shelter case with links to other documents can be found at http://www.cambridgefinance.com/CFP-LTCM.pdf 

    The above August 27, 2004 ruling by Judge Janet Bond Arterton rounds out the "Trillion Dollar Bet."

    The classic and enormous scandal was Long Term Capital led by Nobel Prize winning Merton and Scholes (actually the blame is shared  with their devoted doctoral students).  There is a tremendous (one of the best videos I've ever seen on the Black-Scholes Model) PBS Nova video ("Trillion Dollar Bet") explaining why LTC collapsed.  Go to http://www.pbs.org/wgbh/nova/stockmarket/ 

    Another illustration of the Achilles' heel of a popular mathematical theory and strategy is the 2008 collapse mortgage-backed CDO financial risk bonds based upon David Li's Gaussian copula function of risk diversification in portfolios. The Achilles' heel was the assumption that the real estate bubble would not burst to a point where millions of subprime mortgages would all go into default at roughly the same time.

    Can the 2008 investment banking failure be traced to a math error?
    Recipe for Disaster:  The Formula That Killed Wall Street --- http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all
    Link forwarded by Jim Mahar ---
    http://financeprofessorblog.blogspot.com/2009/03/recipe-for-disaster-formula-that-killed.html 

    Some highlights:

    "For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

    His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.

    Then the model fell apart." The article goes on to show that correlations are at the heart of the problem.

    "The reason that ratings agencies and investors felt so safe with the triple-A tranches was that they believed there was no way hundreds of homeowners would all default on their loans at the same time. One person might lose his job, another might fall ill. But those are individual calamities that don't affect the mortgage pool much as a whole: Everybody else is still making their payments on time.

    But not all calamities are individual, and tranching still hadn't solved all the problems of mortgage-pool risk. Some things, like falling house prices, affect a large number of people at once. If home values in your neighborhood decline and you lose some of your equity, there's a good chance your neighbors will lose theirs as well. If, as a result, you default on your mortgage, there's a higher probability they will default, too. That's called correlation—the degree to which one variable moves in line with another—and measuring it is an important part of determining how risky mortgage bonds are."

    I would highly recommend reading the entire thing that gets much more involved with the actual formula etc.

    The “math error” might truly be have been an error or it might have simply been a gamble with what was perceived as miniscule odds of total market failure. Something similar happened in the case of the trillion-dollar disastrous 1993 collapse of Long Term Capital Management formed by Nobel Prize winning economists and their doctoral students who took similar gambles that ignored the “miniscule odds” of world market collapse -- -
    http://www.trinity.edu/rjensen/FraudRotten.htm#LTCM  

    The rhetorical question is whether the failure is ignorance in model building or risk taking using the model?

    "In Plato's Cave:  Mathematical models are a powerful way of predicting financial markets. But they are fallible" The Economist, January 24, 2009, pp. 10-14 ---
    http://www.economist.com/specialreports/displaystory.cfm?story_id=12957753

    ROBERT RUBIN was Bill Clinton’s treasury secretary. He has worked at the top of Goldman Sachs and Citigroup. But he made arguably the single most influential decision of his long career in 1983, when as head of risk arbitrage at Goldman he went to the MIT Sloan School of Management in Cambridge, Massachusetts, to hire an economist called Fischer Black.

    A decade earlier Myron Scholes, Robert Merton and Black had explained how to use share prices to calculate the value of derivatives. The Black-Scholes options-pricing model was more than a piece of geeky mathematics. It was a manifesto, part of a revolution that put an end to the anti-intellectualism of American finance and transformed financial markets from bull rings into today’s quantitative powerhouses. Yet, in a roundabout way, Black’s approach also led to some of the late boom’s most disastrous lapses.

    Derivatives markets are not new, nor are they an exclusively Western phenomenon. Mr Merton has described how Osaka’s Dojima rice market offered forward contracts in the 17th century and organised futures trading by the 18th century. However, the growth of derivatives in the 36 years since Black’s formula was published has taken them from the periphery of financial services to the core.

    In “The Partnership”, a history of Goldman Sachs, Charles Ellis records how the derivatives markets took off. The International Monetary Market opened in 1972; Congress allowed trade in commodity options in 1976; S&P 500 futures launched in 1982, and options on those futures a year later. The Chicago Board Options Exchange traded 911 contracts on April 26th 1973, its first day (and only one month before Black-Scholes appeared in print). In 2007 the CBOE’s volume of contracts reached almost 1 trillion.

    Trading has exploded partly because derivatives are useful. After America came off the gold standard in 1971, businesses wanted a way of protecting themselves against the movements in exchange rates, just as they sought protection against swings in interest rates after Paul Volcker, Mr Greenspan’s predecessor as chairman of the Fed, tackled inflation in the 1980s. Equity options enabled investors to lay off general risk so that they could concentrate on the specific types of corporate risk they wanted to trade.

    The other force behind the explosion in derivatives trading was the combination of mathematics and computing. Before Black-Scholes, option prices had been little more than educated guesses. The new model showed how to work out an option price from the known price-behaviour of a share and a bond. It is as if you had a formula for working out the price of a fruit salad from the prices of the apples and oranges that went into it, explains Emanuel Derman, a physicist who later took Black’s job at Goldman. Confidence in pricing gave buyers and sellers the courage to pile into derivatives. The better that real prices correlate with the unknown option price, the more confidently you can take on any level of risk. “In a thirsty world filled with hydrogen and oxygen,” Mr Derman has written, “someone had finally worked out how to synthesise H2O.”

    Poetry in Brownian motion Black-Scholes is just a model, not a complete description of the world. Every model makes simplifications, but some of the simplifications in Black-Scholes looked as if they would matter. For instance, the maths it uses to describe how share prices move comes from the equations in physics that describe the diffusion of heat. The idea is that share prices follow some gentle random walk away from an equilibrium, rather like motes of dust jiggling around in Brownian motion. In fact, share-price movements are more violent than that.

    Over the years the “quants” have found ways to cope with this—better ways to deal with, as it were, quirks in the prices of fruit and fruit salad. For a start, you can concentrate on the short-run volatility of prices, which in some ways tends to behave more like the Brownian motion that Black imagined. The quants can introduce sudden jumps or tweak their models to match actual share-price movements more closely. Mr Derman, who is now a professor at New York’s Columbia University and a partner at Prisma Capital Partners, a fund of hedge funds, did some of his best-known work modelling what is called the “volatility smile”—an anomaly in options markets that first appeared after the 1987 stockmarket crash when investors would pay extra for protection against another imminent fall in share prices.

    The fixes can make models complex and unwieldy, confusing traders or deterring them from taking up new ideas. There is a constant danger that behaviour in the market changes, as it did after the 1987 crash, or that liquidity suddenly dries up, as it has done in this crisis. But the quants are usually pragmatic enough to cope. They are not seeking truth or elegance, just a way of capturing the behaviour of a market and of linking an unobservable or illiquid price to prices in traded markets. The limit to the quants’ tinkering has been not mathematics but the speed, power and cost of computers. Nobody has any use for a model which takes so long to compute that the markets leave it behind.

    The idea behind quantitative finance is to manage risk. You make money by taking known risks and hedging the rest. And in this crash foreign-exchange, interest-rate and equity derivatives models have so far behaved roughly as they should.

    A muddle of mortgages Yet the idea behind modelling got garbled when pools of mortgages were bundled up into collateralised-debt obligations (CDOs). The principle is simple enough. Imagine a waterfall of mortgage payments: the AAA investors at the top catch their share, the next in line take their share from what remains, and so on. At the bottom are the “equity investors” who get nothing if people default on their mortgage payments and the money runs out.

    Despite the theory, CDOs were hopeless, at least with hindsight (doesn’t that phrase come easily?). The cash flowing from mortgage payments into a single CDO had to filter up through several layers. Assets were bundled into a pool, securitised, stuffed into a CDO, bits of that plugged into the next CDO and so on and on. Each source of a CDO had interminable pages of its own documentation and conditions, and a typical CDO might receive income from several hundred sources. It was a lawyer’s paradise.

    This baffling complexity could hardly be more different from an equity or an interest rate. It made CDOs impossible to model in anything but the most rudimentary way—all the more so because each one contained a unique combination of underlying assets. Each CDO would be sold on the basis of its own scenario, using central assumptions about the future of interest rates and defaults to “demonstrate” the payouts over, say, the next 30 years. This central scenario would then be “stress-tested” to show that the CDO was robust—though oddly the tests did not include a 20% fall in house prices.

    This was modelling at its most feeble. Derivatives model an unknown price from today’s known market prices. By contrast, modelling from history is dangerous. There was no guarantee that the future would be like the past, if only because the American housing market had never before been buoyed up by a frenzy of CDOs. In any case, there are not enough past housing data to form a rich statistical picture of the market—especially if you decide not to include the 1930s nationwide fall in house prices in your sample.

    Neither could the models take account of falling mortgage-underwriting standards. Mr Rajan of the University of Chicago says academic research suggests mortgage originators, keen to automate their procedures, stopped giving potential borrowers lengthy interviews because they could not easily quantify the firmness of someone’s handshake or the fixity of their gaze. Such things turned out to be better predictors of default than credit scores or loan-to-value ratios, but the investors at the end of a long chain of securities could not monitor lending decisions.

    The issuers of CDOs asked rating agencies to assess their quality. Although the agencies insist that they did a thorough job, a senior quant at a large bank says that the agencies’ models were even less sophisticated than the issuers’. For instance, a BBB tranche in a CDO might pay out in full if the defaults remained below 6%, and not at all once they went above 6.5%. That is an all-or-nothing sort of return, quite different from a BBB corporate bond, say. And yet, because both shared the same BBB rating, they would be modelled in the same way.

    Issuers like to have an edge over the rating agencies. By paying one for rating the CDOs, some may have laid themselves open to a conflict of interest. With help from companies like Codefarm, an outfit from Brighton in Britain that knew the agencies’ models for corporate CDOs, issuers could build securities with any risk profile they chose, including those made up from lower-quality ingredients that would nevertheless win AAA ratings. Codefarm has recently applied for administration.

    There is a saying on Wall Street that the test of a product is whether clients will buy it. Would they have bought into CDOs had it not been for the dazzling performance of the quants in foreign-exchange, interest-rate and equity derivatives? There is every sign that the issuing banks believed their own sales patter. The banks so liked CDOs that they held on to a lot of their own issues, even when the idea behind the business had been to sell them on. They also lent buyers much of the money to bid for CDOs, certain that the securities were a sound investment. With CDOs in deep trouble, the lenders are now suffering.

    Modern finance is supposed to be all about measuring risks, yet corporate and mortgage-backed CDOs were a leap in the dark. According to Mr Derman, with Black-Scholes “you know what you are assuming when you use the model, and you know exactly what has been swept out of view, and hence you can think clearly about what you may have overlooked.” By contrast, with CDOs “you don’t quite know what you are ignoring, so you don’t know how to adjust for its inadequacies.”

    Now that the world has moved far beyond any of the scenarios that the CDO issuers modelled, investors’ quantitative grasp of the payouts has fizzled into blank uncertainty. That makes it hard to put any value on them, driving away possible buyers. The trillion-dollar bet on mortgages has gone disastrously wrong. The hope is that the trillion-dollar bet on companies does not end up that way too.

    Continued in article

    Accountics Worshippers Please Take Note
    "A Nobel Lesson: Economics is Getting Messier,
    " by Justin Fox, Harvard Business Review Blog, October 11, 2010 --- Click Here
    http://blogs.hbr.org/fox/2010/10/nobel-lesson-economics-messier.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

    Closing Jensen Comment
    So is portfolio diversification theory dead? I hardly think so. But if any lesson is to be learned is that we should question those critical underlying assumptions in Plato's Cave before worldwide strategies are implemented that overlook the Achilles' heel of those critical underlying assumptions.


    Teaching Case from The Wall Street Journal Accounting Weekly Review on August 24, 2012

    New Tactics Boost Bank Profits
    by: Sara Schaefer Muñoz and Partricia Kowsmann
    Aug 13, 2012
    Click here to view the full article on WSJ.com
     

    TOPICS: Banking, Debt, Early Retirement of Debt

    SUMMARY: "European banks are buying back debt to boost their capital ratios....With the European crisis knocking down the value of banks' longer-term debt, some are taking advantage by buying back their debt from investors at a discount from the original value. Banks can book the difference in price as an accounting gain..." Analysts react to the long term implications of these maneuvers by saying that banks may be forced to go to the European Central Bank when they need funding in the future because they will have difficulty doing so from other sources. The banks quoted in the article, on the other hand, argue that "the moves haven't harmed their ability to get more funds and that they have plenty of liquidity regardless of the repurchases."

    CLASSROOM APPLICATION: The article is useful to cover debt extinguishments by banks or any type of entity.

    QUESTIONS: 
    1. (Advanced) Summarize the accounting for the transactions that are described in this article--early extinguishments of debt, also called debt buybacks or debt repurchases. You may use a journal entry format to provide this answer.

    2. (Introductory) According to the author of the article, what are the European banks' motives for undertaking these transactions?

    3. (Introductory) According to the author, how do the banks describe the business reasons for these debt repurchase transactions?

    4. (Advanced) Review the graphic entitled "Quick Fix." How large are the gains experienced by European banks on their repurchases of their own debt? Answer the question in a way that allows a relative assessment of these gains, not just in terms of absolute euro or pounds sterling amounts.

    5. (Advanced) What are the economic factors in Europe that lead to the possibility for the banks to earn gains on repurchasing their debt?

    6. (Advanced) According to the article, what are analysts' concerns about the future for these banks after making these debt repurchases?
     

    Reviewed By: Judy Beckman, University of Rhode Island

     

    "New Tactics Boost Bank Profits," by: Sara Schaefer Muñoz and Partricia Kowsmann, The Wall Street Journal, August 13, 2012 ---
    http://professional.wsj.com/article/SB10000872396390443537404577579273246425432.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

    A handful of European banks have figured out a way to boost their profit and capital ahead of new regulations: grab back their bonds.

    With the European crisis knocking down the value of banks' longer-term debt, some are taking advantage by buying back their debt from investors at a discount from the original value. Banks can book the difference in price as an accounting gain, adding to their bottom line—and their ability to withstand losses.

    Banks including Société Générale SA, GLE.FR +2.86% Commerzbank AG, CBK -1.67% Intesa Sanpaolo SpA, Banco Santander SA SAN.MC +1.94% and Banco Comercial Português SA BCP.LB +1.06% recently have taken the moves, in part because traditional ways of boosting capital, such as selling businesses or raising equity in the market, are proving difficult. Europe's debt crisis has virtually cut off many European banks from private funding because investors are wary of lending to them.

    But some analysts say that by using the maneuver, banks are killing off avenues of low-cost, long-term funding that are needed to fund loans and operations. That, in turn, could make banks more dependent on the low-cost funding lifeline from the European Central Bank.

    The wave of debt buybacks, the analysts say, is the latest illustration of European banks' quick-fix solution to capital problems, in exchange for potential funding problems down the road.

    "If you have poor access to the private markets, these [buybacks] will tend to beget further central bank usage," said Alastair Ryan, an analyst with UBS in London. "And the more central bank funding you have, the less likely you are to get private money in the future."

    The ability of banks to borrow at long-term maturities from investors appears to be getting more difficult. The total issuance of European bank debt so far this year, in durations ranging from 1½ years to more than 10 years, has been $400 billion, compared with $645 billion in the same period a year ago, according to Dealogic, a data provider.

    To be sure, as a normal course of business, banks frequently buy back and reissue debt in order to manage their funding and ensure they have a mix of short-term and long-term borrowings.

    However, European banks recently have been employing the move specifically to help infuse profits and, subsequently, capital measures. The repurchases are helping banks boost their core Tier 1 capital ratios—a key measure of a bank's loss-absorbing buffer—ahead of Basel III banking rules.

    In its half-year results reported Aug. 1, French bank Société Générale pointed to the buyback of €1.7 billion ($2.09 billion) in bonds of various maturities, some due as far out as 2025, for helping it post a pretax gain of €305 million and boosting the bank's key capital ratio by 0.06 percentage point.

    In July, the U.K. subsidiary of Banco Santander repurchased £1.87 billion of debt, some of it long term, also to boost capital. Banco Bilbao Vizcaya Argentaria SA, BBVA.MC +1.34% along with Portugal's Banco BPI SA BPI.LB +4.55% and Banco Comercial Português SA, have made similar moves.

    In some of the more-complicated transactions, banks have been able to book multiple gains. In March, Commerzbank bought back €965 million of debt securities and other capital instruments at a discount for new Commerzbank shares. The bank booked gains from the discounted price of the debt, the elimination of interest payments and the new equity issued to the buyers. Altogether, the move will provide the bank an extra €1.2 billion by 2017, said a spokesman.

    It was "an opportunistic measure and allowed Commerzbank to strengthen its core Tier 1 capital, given current market conditions," the spokesman said.

    Santander, BBVA and Société Générale said the moves haven't harmed their ability to get more funds and that they have plenty of liquidity regardless of the repurchases. A spokesman for Intesa declined to comment but pointed to a recent presentation in the bank's results that said the bank has ample funding and liquidity resources.

    Portugal's BPI said that when market conditions improve, the bank will reissue debt.

    "From a financial point of view, it makes sense for banks to buy back their bonds," said Andre Rodrigues, an analyst at Portugal's Caixa Banco de Investimento. "Of course, it is true that the banks are losing source of private funding."

    Continued in article


    "Why Do Women Still Earn Less Than Men? Analyzing the Search for High-paying Jobs," Knowledge@Wharton, August 1, 2012 ---
    http://knowledge.wharton.upenn.edu/article.cfm?articleid=3058
    This is a summary of research by Wharton professors Matthew Bidwell and Roxana Barbulescu

    Why do women continue to earn less money than men -- approximately 20% less, according to some estimates -- and what can be done about it?

    At least half the pay gap reflects the fact that women tend to work in different kinds of occupations and industries than men, a phenomenon known as "gender segregation." Understanding the causes of that gender segregation is a key part of any attempt to address the pay differential.

    Wharton management professor Matthew Bidwell and Roxana Barbulescu, a management professor at McGill University in Montreal, set out to understand the causes of gender segregation by taking a different approach than studies that typically look at variances in the kinds of jobs that men and women choose, or at the decisions made by employers during the job application process. 

    Bidwell and Barbulescu opted instead to look at job applicants themselves to determine whether the decisions they make during their job search process have a significant impact on which offer they accept. Their results are presented in a paper titled, "Do Women Choose Different Jobs from Men? Mechanisms of Application Segregation in the Market for Managerial Workers," forthcoming in the journal Organization Science.

    "Much of the debate over earnings has focused on the idea that there are barriers to women getting certain kinds of jobs, and that a big part of this is due to subtle and not so subtle discrimination on the part of employers," says Bidwell. "But most of the available data looks at the jobs women end up in, which reflects a series of decisions by both the employee and employer." The challenge was to separate out data that deal primarily with how women view the employment landscape even before starting the job application process. Do those views, for example, lead women to systematically choose different, and lower-paying, occupations than their male counterparts?

    The two researchers analyzed data on 1,255 men and women entering the job market as they were graduating from a large, elite, one-year international MBA program. Such a group is far from representative of the population at large. However, "studying MBA students is particularly valuable for exploring segregation into some of the best-paid and most influential jobs in society, which are the kinds of jobs in which women have traditionally been under-represented," the authors note in the paper.

    Barbulescu surveyed the students about their job interests at the beginning of the MBA program, and then again at the end in order to find out what kinds of jobs they applied for, where they got offers and what jobs they ultimately accepted. 

    The researchers' main finding was that women were significantly less likely to apply to Wall Street-type finance jobs, somewhat less likely to apply to consulting jobs, and more likely to apply to jobs in general management, most notably internal finance and marketing. Not coincidentally, the finance and consulting jobs that women avoided were also the ones that were most highly paid.

    No surprises there, but the researchers dug deeper to see what might explain these results. To start, they broke down the different influences on job search decisions into three different factors: applicants' preferences for specific rewards from their jobs, such as money or flexibility; the ability of applicants to identify with particular kinds of jobs, which often reflects how compatible those jobs are with other ways the applicants see themselves; and the applicants' expectations that an application could succeed.

    The researchers argue that each of those factors might be influenced by gender role socialization, which shapes our basic beliefs about the behaviors that are most appropriate for men versus women, and about the kinds of skills that accompany those behaviors. For example, if women are expected to play different roles in the workplace and at home than men, then they may also look for different rewards from their work, such as pay, intellectual challenge, flexibility, work/life balance and so forth.

    Four Nights in a Hotel

    Specifically, the researchers looked at expected work/life satisfaction with regard to 19 different job types, and found that women were significantly less likely than men to apply for jobs where work/life satisfaction ranked low. "This explained why women weren't applying for consulting jobs," says Bidwell. "The hours are not that much worse than investment banking jobs, but the expectation is that you will be staying in a hotel four nights a week. And that doesn't change. With investment banking, you might work very hard, but you usually sleep in your own bed, and the hours tend to trail off as you get more seniority." 

    The second decision factor shaping applications is how people identify with different jobs. Bidwell and Barbulescu found that women identified the least with stereotypically masculine jobs, and they tended to apply to industries that usually employ a higher proportion of women. The third decision factor is whether individuals believe their applications for certain jobs will be successful: It may not make sense for applicants to pour a lot of time and effort into applications for jobs they do not expect to get.

    Bidwell and Barbulescu found that at the beginning of the MBA program, men and women showed the same level of confidence that they would get an offer for a specific job in most of the fields they might apply to -- except investment banking. There are good reasons that women might have lower expectations of job offer success in stereotypically masculine jobs, says Bidwell, and no industry has more of a macho image than investment banking. "Women just didn't think they would get jobs there, so they didn't apply," he notes.

    Equally interesting, says Bidwell, is that when women did apply to investment banking jobs, they were just as likely to get them as the men who applied.

    "Our research shows how hard it is to bring about change," Bidwell adds." If you tell employers to stop discriminating, it doesn't mean you will end up with greater access for women to better, higher-paying jobs. Instead, it's about changing perceptions of culture. You can imagine that if you have a job that is seen as highly macho and aggressive, and you recruit those kinds of people -- mainly men -- then these perceptions and stereotypes become self-fulfilling. It's a much more insidious way in which jobs become gendered."

    The researchers emphasize in their paper that "even when there are no gender differences in the likelihood of receiving a job offer, this does not imply that employers do not influence gender segregation." Indeed, employer decisions may affect applicant behavior "in ways that we could not detect." For example, they cite the climate and recent litigation history of some of the sectors they studied, primarily finance, which may have increased the pressure on employers to hire more women, but doesn't necessarily mean they will promote them into the same senior level positions as men.

    The behavior of employers -- and the control they often exert over the workplace -- can clearly affect whether women apply for jobs with their companies. For example, the researchers write, "practices that reduce conflicts between work and family demands could reduce" segregation, and "interventions in the way that jobs are structured and role behaviors enacted to emphasize either masculine or feminine stereotypical attributes could also" lessen segregation. But that is not an easy sell. For instance, as the researchers note, "workplaces with fewer women face less pressure to adapt their working styles to accommodate family demands" -- an example of how segregation becomes self-perpetuating.

    At the same time, "addressing these deep-seated organization issues, alongside the more common question of how hiring decisions are made, could be critical for increasing female participation in some of the best-paid jobs in society," the researchers add.

    Token Gestures

    According to Bidwell, this research paper is one of the first demonstrations that much of the segregation in the job application and hiring processes "happens because of how people apply for jobs rather than because of employer behavior further down the line. And that, in turn, reflects what jobs women are able to identify with, and where they think they will be hired."

    Continued in article

    Jensen Comment
    Some of the findings are controversial, such as the question over which spouse tends to take the most advantage of having the other spouse be the primary bread winner (thereby taking advantage of having more career options such as one woman accounting professor I know whose Mr. Mom husband could then find time to write a best-selling Confederate War book). Statistically, women may take advantage of these options more frequently than their husbands, but increasingly my anecdotal experience is that women accounting professors are the primary bread winners on joint tax returns. And husbands tend to follow these women who have opportunities to relocate at higher salaries and their husbands then search for lower paying jobs after the move.

    Hypothesized reasons female doctors earn less than male physicians ---
    http://thegrindstone.com/career-management/study-female-doctors-paid-much-less-than-their-male-counterparts-991/
    What I would like to see is whether there is a significantly higher ratio of males to females in the highest paying medical careers. For example, do women tend to avoid those specialties taking the longest time to complete slave-driving residencies (such as neurosurgery)? Do women tend to avoid those specialties requiring more strength and endurance such as orthopedics? A friend who is a physician tells me this is the case, but I've not investigated the data.

    Bob Jensen's threads on gender controversies in higher education ---
    http://www.trinity.edu/rjensen/HigherEdControversies.htm#GenderSalaryDifferences


    GASB Statement No. 68
    Accounting and Financial Reporting for Pensions—an amendment of GASB Statement No. 27
    --- Click Here
    http://www.gasb.org/cs/ContentServer?site=GASB&c=Page&pagename=GASB%2FPage%2FGASBSectionPage&cid=1176160042391

    "Pension Accounting for Dummies New government reporting rules are no better than the old ones," The Wall Street Journal, July 9, 2012 ---
    http://professional.wsj.com/article/SB10001424052702304782404577488933765069576.html?mg=reno64-wsj#mod=djemEditorialPage_t

    The Government Accounting Standards Board has issued new rules that aim to crystallize government pension liabilities. It failed on that count, but it did succeed, albeit inadvertently, in making the case for defined-contribution plans.

    GASB, as it's known in the trade, sets accounting guidelines for local governments. Since the board is run mainly by former public officials, its standards are often low. The board also usually takes several years to finalize rules, so it's often behind the times. Their new rules concerning how governments discount their pension liabilities are a case in point.

    Financial economists have recommended for decades that governments calculate pension liabilities using so-called "risk-free" rates pegged to high-grade municipal bonds or long-term Treasurys. The argument goes that since pensioners are de facto secured creditors—even bankruptcy judges have been reluctant to slash retirement benefits—pensions are riskless and therefore the liabilities should be discounted at risk-free rates.

    GASB's private cousin, the Financial Accounting Standards Board (FASB), began requiring corporations to discount their pension liabilities with high-quality fixed income assets in the 1980s. However, GASB let governments stick with their desired, er, expected rate of return, which is typically about 8%. Public pension funds have returned 5.7% on average since 2000. Achieving much higher returns over the long run would require markets to perform as well as they did in the 1980s and '90s. Would that be true.

    Governments have resisted climbing down from Fantasyland because using lower discount rates would explode their liabilities. When the Financial Accounting Standards Board introduced its risk-free rate guidelines, many companies shifted workers to 401(k)s because they didn't want to report larger liabilities. Such defined-contribution plans are by definition 100% pre-funded.

    Prodded by economists and investors, GASB began considering modifying its discount rate rules a few years ago. Public pension funds, lawmakers and unions, however, pushed back hard against suggestions that governments use risk-free rates, which could more than double their liabilities. No surprise, the government troika won.

    GASB's new rules allow governments to continue discounting their liabilities at their anticipated rate of return so long as they project enough future assets to cover their obligations. At the time they forecast they'll run out of assets, they must begin discounting their liabilities with a high-grade municipal bond rate. The idea is that governments would have to issue bonds to pay retirees when their pension funds go broke.

    But few pension funds project that they'll run dry since they're hooked up to a taxpayer IV. Those in really bad shape like Chicago's will likely rig their investment and actuarial assumptions to circumvent the new rules. FASB rejected similar guidelines in the 1980s because they were too easy to dodge. The point here is that it's impossible to get governments to come clean about their pension debt, and not just because the union allies controlling pension funds have a vested interest in obfuscating the liabilities.

    In reality, nobody knows how much taxpayers will owe because so much depends on inscrutable actuarial and economic factors like interest rates 30 years from now (not even the Federal Reserve purports to be that omniscient). Slight discrepancies in assumptions can yield huge variations in estimated liabilities. One advantage of defined-contribution plans is that they don't require governments to calculate their liabilities. There are none.

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

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


    Question
    Do (or should) accounting standard setters consider "consequentialism philosophy?"

    I would argue that they do, although they probably overlook a lot of externalities. For example, do they overlook how investors are using bottom line earnings in a way that is really no longer intended by standard setters who cannot and probably never will define the bottom line "net inome" that just emerges mysteriously from accounting for the balance sheet?

    "Crank Philosophy,"  by Scott McLemee, Inside Higher Ed, August 1, 2012 ---
    http://www.insidehighered.com/views/2012/08/01/review-david-r-koepsell-and-robert-arp-breaking-bad-and-philosophy-badder-living 

    n a memorable scene from the first season of "Breaking Bad" (AMC), the protagonist sits down to do some moral bookkeeping of a fairly literal variety. He is a 50-year-old high-school chemistry teacher named Walter White. A recent trip to the doctor to check on a nagging cough has left with a diagnosis of advanced lung cancer, giving him, at most, a couple of years to live. If you’ve seen the show (and maybe even if you haven’t, since it has received extremely good press and won more awards than I feel like counting) you know that Walter has decided on a hazardous way to provide for his family after his death. He applies his lab skills to the production of crystal methamphetamine.

    The stuff he “cooks” (as the term of art goes) is exceptionally pure and powerful. The connoisseurs love it. If he can turn a profit of $737,000 in the time he has left, Walt will leave a nest egg for his wife and children and die in peace. As a middle-class family man, Walt lacks any direct knowledge of the marketing side of the meth business, and would prefer to keep it that way. His connection to the underworld is a former student named Jesse Pinkman, memorable chiefly for his bad grades. But Jesse is a gangsta wannabe, as well as a meth head, and nowhere near as street-savvy as he thinks or the job requires.

    And so it comes to pass that Walter find himself facing an unforeseen problem involving a well-connected figure from the meth supply chain – a fellow who goes by the street name of Krazy-8. It's a long story how he got there, but Krazy-8 ends up shackled by the neck to a pole in Jesse’s basement, and he is understandably, even homicidally, unhappy. Walt must now decide between two options: let Krazy-8 live or kill him.

    Being the rational sort, Walt tabulates the arguments on each side.The column headed “Let him live” fills up quickly, if redundantly: “It’s the moral thing to do. Judeo-Christian principles. You are not a murderer. He may listen to reason. Post-traumatic stress. Won’t be able to live with yourself. Murder is wrong!”

    Under “Kill him,” the camera reveals just one entry: “He’ll kill your entire family if you let him go.” So much for weighing the alternatives.

    In his method -- and ultimately in his actions -- Walt proves to be a consequentialist, as J.C. Donhauser points out in “If Walt’s Breaking Bad, Maybe We Are Too,” one of the essays in Breaking Bad and Philosophy: Badder Living Through Chemistry (Open Court). Most viewers will have surmised as much, even if they don’t have a name for it. But there is more than one metric for judging costs and benefits, and so more than one species of consequentialist. Donhauser -- an assistant instructor of philosophy at the State University of New York at Buffalo and a lecturer at Buffalo State University – uses examples from other episodes to consider the options. There’s act consequentialism, for one (the realized effect of an act determine whether it is good or bad, even if the consequences are unintended or unforeseeable), which is distinct from rule consequentialism (“actions are better or worse, not in relation to their actual consequences, but in proportion to how far afield they fall from a rule that would be best for most people if everyone followed it”).

    As for Walt, he belongs in the ranks of the agent-centered consequentialists, who “judge actions based on their consequences” but “also argue that the most important consequences are for the person carrying out the actions that produce those consequences.”

    Each stance has its limitation – quite as much as deontology does. Deontology insists that consequences are irrelevant, since an act can be judged moral if and only if it could be universalized. Murder is immoral, then, because “if everyone did it, there’d be no one around for you to murder then! The same goes for stealing, as there’d be nothing left to steal.” So Jeffrey E. Stephenson put it, with tongue in cheek, in “Walter White’s American Vice.” Ditto for lying, since a society in which everyone lied constantly would be even more irrational than the one we live in.

    Walt's list of argument for letting Krazy-8 live is not deontological by any means -- although “He may listen to reason” rests on a similar conviction that clarity and rationality are not just worthy aspirations but realizable possibilities as well. Despite his nickname and his criminal vocation, Krazy-8 is a well-spoken and seemingly pragmatic individual, with strong family ties of a sort that Walt can respect. And Walt very nearly reaches a decision on that basis.

    On the other hand, not every consequence can be put in brackets while you seek the universally right thing to do. And “He’ll kill your entire family if you let him go” is a pretty good example of that. Under the circumstances, even a deontologist would probably find a way to think of murder as obligatory.

    Breaking Bad and Philosophy, edited by David R. Koepsell and Robert Arp, is much like any other collection of essays in the Open Court series Popular Culture and Philosophy, of which it is volume 67. By the way, the publisher has registered “Popular Culture and Philosophy” as a trademark. Don't confuse it with The Blackwell Philosophy and Pop Culture Series (37 volumes at last report) or the University of Kentucky’s line called The Philosophy of Popular Culture (23 titles, not counting updated editions).

    By now, it seems as if every genre, blockbuster, videogame, superhero, hit program, or teen trend has been covered by at least one book in this niche, or will be in the foreseeable future. I picture them being produced in something akin to Walt’s methamphetamine superlab – with the important exception that Walt’s product is of famously consistent in quality. The popcult philosophy collections that I’ve sampled over the years tend to be pretty uneven, even within the same volume. The one constant is that most of the essays are clearly didactic. The implied reader for these books almost always seems to be an undergraduate, with popular culture as the candy coating on the philosophical vitamins otherwise missing from the educational diet. There is jocularity aplenty. In this volume, for example, a comparison of Breaking Bad and Augustine’s Confessions includes the information that the saint-to-be “had a rep for hooking up with the MILFs of Carthage” -- not unlike Peter Abelard, “a famous playa before his lover’s father and brother… cut off his junk and sent him packin.’”

    Continued in article

    Bob Jensen's summary of accounting theory is at http://www.trinity.edu/rjensen/Theory01.htm


    "True Lies Scam artists claim they work for the government. Not all of them do," by James Taranto, The Wall Street Journal, August 2, 2012 ---
    http://professional.wsj.com/article/SB10000872396390443866404577565173591702542.html?mod=djemEditorialPage_t&mg=reno-wsj

    "The latest scam designed to separate Missouri residents from their money involves phony letters from the State Attorney General's office, the IRS and other government agencies," St. Louis Public Radio reports.

    Attorney General Chris Koster explains how the fraud works: "I have in my hand a letter from 'the FBI.' [It] claims that, 'you have won $3.5 million, but you owe $2,600 in a winner's fee, and you need to submit it' to this address, which so far we have traced to Florida."

    We know how that is. Not long ago we received a similar letter. It purported to be from the Social Security Administration. The gist of it was that the government was promising to pay for our retirement, but only if we cough up more money now: "Without changes, by 2037 the Social Security Trust Fund will be exhausted and there will be enough money to pay only about 76 cents for each dollar of scheduled benefits. We need to resolve these issues soon."

    The letter bore the signature "Michael J. Astrue, Commissioner." We laughed and put it aside, digging it out of our files when we read about the similar letters from Missouri. We've now traced it to an address near Washington, D.C. In an unlikely twist, Michael Astrue actually is the commissioner of the Social Security Administration. Even so, we're glad we didn't send any money.

    The federal government has been making such too-good-to-be-true offers for decades--the "Social Security" game dates all the way back to 1935--but such scams seem to be multiplying of late. An example appears on the White House website under the heading "Did You Get a Check?"

    Continued in article

    Bob Jensen's threads on Fraud Reporting ---
    http://www.trinity.edu/rjensen/FraudReporting.htm


    European-Styled Avoidance of Fair Value Earnings Hits for Loan Loss Impairments

    European banks circumvented earnings hits for anticipated billions in loan losses by a number of ploys, including arguments regarding transitory price movements, "dynamic provisioning" cookie jar accounting, and spinning debt into assets with fair value adjustments "accounting alchemy."

    European banks resorted to a number of misleading ploys to avoid taking fair value adjustment hits to prevent earnings hits due to required fair value adjustments of investments that crashed such a investments in the bonds of Greece, Ireland, Spain, and Portugal.

    The Market Transitory Movements Argument
    Fair value adjustments can be avoided if they are viewed as temporary transitory market fluctuations expected to recover rather quickly. This argument was used inappropriately by European banks hold billions in the Greece, Ireland, Spain, and Portugal after the price declines could hardly be viewed as transitory. The head of the IASB at the time, David Tweedie, strongly objected to the failure to write down financial instruments to fair value. The banks, in turn, threatened to pressure the EU lawmakers to override the IFRS 9 requirement to adjust such value declines to market.

    One of the major concerns of the  is that some nations at some points in time will simply not enforce the IASB standards that these nations adopted. The biggest problem that the IASB was having with European Banks is that the IASB felt many of many (actually most) EU banks were not conforming to standards for marking financial instruments to market (fair value). But the IASB was really helpless in appealing to IFRS enforcement in this regard.

    When the realities of European bank political powers, the IASB quickly caved in as follows with a ploy that allowed European banks to lie about intent to hold to maturity. The banks would probably love to unload those loser bonds as quickly as possible before default, but they could instead claim that these investments were intended to be held to maturity --- a game of make pretend that the IASB went along with under the political circumstances.

    "New accounting rule would ease Greek pain: IASB," By Silke Koltrowitz and Huw Jones,  Reuters, July 5, 2011 ---
    http://www.reuters.com/article/2011/07/05/us-accounting-idUSTRE7643WU20110705

    European Union banks would have more breathing space from losses on Greek bonds if the bloc adopted a new international accounting rule, a top standard setter said on Tuesday.

    The International Accounting Standards Board (IASB) agreed under intense pressure during the financial crisis to soften a rule that requires banks to price traded assets at fair value or the going market rate.

    This led to huge writedowns, sparking fire sales to plug holes in regulatory capital.

    The new IFRS 9 rule would allow banks to price assets at cost if they are being held over time.

    The European Commission has yet to sign off on the new rule for it to be effective in the 27-nation bloc, saying it wants to see remaining parts of the rule finalized first.

    Continued in article

     

    Dynamic Provisioning:  The Cookie Jar Argument If Banks Had Cookies in the Jar
    European Union officials knew this and let Spain proceed with its own brand of accounting anyway.
    "The EU Smiled While Spain’s Banks Cooked the Books," by Jonathan Weil, Bloomberg, June 14, 2012 ---
    http://www.bloomberg.com/news/2012-06-14/the-eu-smiled-while-spain-s-banks-cooked-the-books.html

    Only a few years ago, Spain’s banks were seen in some policy-making circles as a model for the rest of the world. This may be hard to fathom now, considering that Spain is seeking $125 billion to bail out its ailing lenders.

    But back in 2008 and early 2009, Spanish regulators were riding high after their country’s banks seemed to have dodged the financial crisis with minimal losses. A big reason for their success, the regulators said, was an accounting technique called dynamic provisioning.

    By this, they meant that Spain’s banks had set aside rainy- day loan-loss reserves on their books during boom years. The purpose, they said, was to build up a buffer in good times for use in bad times.

    This isn’t the way accounting standards usually work. Normally the rules say companies can record losses, or provisions, only when bad loans are specifically identified. Spanish regulators said they were trying to be countercyclical, so that any declines in lending and the broader economy would be less severe.

    What’s now obvious is that Spain’s banks weren’t reporting all of their losses when they should have, dynamically or otherwise. One of the catalysts for last weekend’s bailout request was the decision last month by the Bankia (BKIA) group, Spain’s third-largest lender, to restate its 2011 results to show a 3.3 billion-euro ($4.2 billion) loss rather than a 40.9 million-euro profit. Looking back, we probably should have known Spain’s banks would end up this way, and that their reported financial results bore no relation to reality.

    Name Calling

    Dynamic provisioning is a euphemism for an old balance- sheet trick called cookie-jar accounting. The point of the technique is to understate past profits and shift them into later periods, so that companies can mask volatility and bury future losses. Spain’s banks began using the method in 2000 because their regulator, the Bank of Spain, required them to.

    “Dynamic loan loss provisions can help deal with procyclicality in banking,” Bank of Spain’s director of financial stability, Jesus Saurina, wrote in a July 2009 paper published by the World Bank. “Their anticyclical nature enhances the resilience of both individual banks and the banking system as a whole. While there is no guarantee that they will be enough to cope with all the credit losses of a downturn, dynamic provisions have proved useful in Spain during the current financial crisis.”

    The danger with the technique is it can make companies look healthy when they are actually quite ill, sometimes for years, until they finally deplete their excess reserves and crash. The practice also clashed with International Financial Reporting Standards, which Spain adopted several years ago along with the rest of Europe. European Union officials knew this and let Spain proceed with its own brand of accounting anyway.

    One of the more candid advocates of Spain’s approach was Charlie McCreevy, the EU’s commissioner for financial services from 2004 to 2010, who previously had been Ireland’s finance minister. During an April 2009 meeting of the monitoring board that oversees the International Accounting Standards Board’s trustees, McCreevy said he knew Spain’s banks were violating the board’s rules. This was fine with him, he said.

    “They didn’t implement IFRS, and our regulations said from the 1st January 2005 all publicly listed companies had to implement IFRS,” McCreevy said, according to a transcript of the meeting on the monitoring board’s website. “The Spanish regulator did not do that, and he survived this. His banks have survived this crisis better than anybody else to date.”

    Ignoring Rules

    McCreevy, who at the time was the chief enforcer of EU laws affecting banking and markets, went on: “The rules did not allow the dynamic provisioning that the Spanish banks did, and the Spanish banking regulator insisted that they still have the dynamic provisioning. And they did so, but I strictly speaking should have taken action against them.”

    Why didn’t he take action? McCreevy said he was a fan of dynamic provisioning. “Why am I like that? Well, I’m old enough to remember when I was a young student that in my country that I know best, banks weren’t allowed to publish their results in detail,” he said. “Why? Because we felt if everybody saw the reserves, etc., it would create maybe a run on the banks.”

    So to sum up this way of thinking: The best system is one that lets banks hide their financial condition from the public. Barring that, it’s perfectly acceptable for banks to violate accounting standards, if that’s what it takes to navigate a crisis. The proof is that Spain’s banks survived the financial meltdown of 2008 better than most others.

    Continued in article

    "Accounting Board Criticizes European Banks on Greek Debt," REUTERS, August 30, 2011 ---
    http://www.nytimes.com/2011/08/31/business/global/accounting-board-criticizes-european-banks-on-greek-debt.html 

    Some European financial institutions should have booked bigger losses on their Greek government bond holdings in recent results announcements, the International Accounting Standards Board said in a letter to market regulators.

    The criticism comes as Europe’s lenders face calls to shore up their balance sheets and restore confidence to investors unnerved by the euro zone debt crisis, funding market jitters and a slowing economy.

    In a letter addressed to the European Securities and Markets Authority, the I.A.S.B. — which aims to become the global benchmark for financial reporting — criticized inconsistencies in the way banks and insurers wrote down the value of their Greek sovereign debt in second-quarter earnings.

    It said “some companies” were not using market prices to calculate the fair value of their Greek bond holdings, relying instead on internal models. While some claimed this was because the market for Greek debt had become illiquid, the I.A.S.B. disagreed.

    “Although the level of trading activity in Greek government bonds has decreased, transactions are still taking place,” the board chairman Hans Hoogervorst wrote.

    The E.S.M.A. was not immediately available for comment.

    The letter, which was posted on the I.A.S.B.’s website Tuesday after being leaked to the press, did not single out particular countries or banks.

    European banks taking a €3 billion, or $4.2 billion, hit on their Greek bond holdings earlier this month employed markedly different approaches to valuing the debt.

    The writedowns disclosed in their quarterly results varied from 21 to 50 percent, showing a wide range of views on what they expect to get back from their holdings.

    A 21 percent hit refers to the “haircut” on banking sector involvement in a planned second bailout of Greece now being finalized. A 50 percent loss represented the discount markets were expecting at the end of June, the cut-off period for second-quarter results.

    Two French financial companies, the bank BNP Paribas and insurer CNP Assurances, on Tuesday defended their decision to use their own valuation models rather than market prices.

    “BNP took provisions against its Greece exposure in full agreement with its auditors and the relevant authorities, in accordance with the plan decided upon by the European Union on July 21,” a bank spokeswoman said.

    A CNP spokeswoman said the group’s Greek debt provisions had been calculated in accordance with the E.U. plan and in agreement with its auditors.

    Some investors see the issue as serious, however, even if the STOXX Europe 600 bank index was trading higher on Tuesday.

    “The Greek debt issue has been treated very lightly,” said Jacques Chahine, head of Luxembourg-based J. Chahine Capital, which manages €320 billion in assets. “And it’s not just Greek debt — all of it needs to be written down, Spain, Italy.”

    The E.S.M.A. was unable to impose a uniform Greek “haircut” across the E.U. and its guidance published at the end of July simply stressed the need for banks to tell investors clearly how they reflect Greek debt values.

    The I.A.S.B. also has no powers of enforcement in how banks book impairments but is keen to show the United States, which decides this year whether to adopt I.A.S.B. standards, that its rules are consistent and properly represent what’s happening in markets.

    Auditors warned at the time against a patchwork approach that will confuse investors and concerns over Greek haircut reporting will fuel calls for a pan-Europe auditor regulator.

    “The impact is more likely to be to further reduce investors’ confidence in buying bank debt, rather than sovereign debt,” said Tamara Burnell, head of financial institutions/sovereign research at M&G.

    Using the most aggressive markdown approach — namely marking to market all Greek sovereign holdings — would saddle 19 of the most exposed European banks with another €6.6 billion in potential writedowns, according to Citi analysts.

    BNP would take the biggest hit with €2.1 billion in remaining writedowns, followed by Dexia in Belgium with €1.9 billion and Commerzbank in Germany with €959 million, Citi said.

    The European Commission said on Monday that there was no need to recapitalize the banks over and above what had been agreed after a recent annual stress test .

    Spinning Debt Into Earnings With the Wave of a Fair Value Accounting Wand
    "Euro banks' £169bn in accounting alchemy," by: Lindsey White, Financial Times Advisor, January 19, 2009 --- Click Here

    European banks conjured more than £169bn of debt into profit on their balance sheets in the third quarter of 2008, a leaked report shows.

    Money Managementhas gained exclusive access to a report from JP Morgan, surveying 43 western European banks.

    It shows an exact breakdown of which banks increased their asset values simply by reclassifying their holdings.

    Germany is Europe's largest economy, and was the first European nation to announce that it was in recession in 2008. Based on an exchange rate of 1 Euro to £0.89, its two largest banks, Deutsche Bank and Commerzbank, reclassified £22.2bn and £39bn respectively.

    At the same exchange rate, several major UK banks also made the switch. RBS reclassified £27.1bn of assets, HBOS reclassified £13.7bn, HSBC reclassified £7.6bn and Lloyds TSB changed £3.2bn. A number of Nordic and Italian banks also switched debts to become profits.

    Banks are allowed to rearrange these staggering debts thanks to an October 2008 amendment to an International Accounting Standards law, IAS 39. Speaking to MM, IAS board member Philippe Danjou said that the amendment was passed in "record time".

    The board received special permission to bypass traditional due process, ushering through the amendment in a matter of days, in order to allow banks to apply the changes to their third quarter reports.

    However, it is unclear how much choice the board actually had in the matter.

    IASB chairman Sir David Tweedie was outspoken in his opposition to the change, publicly admitting that he nearly resigned as a result of pressure from European politicians to change the rules.

    Danjou also admitted that he had mixed views on the change, telling MM, "This is not the best way to proceed. We had to do it. It's a one off event. I'd prefer to go back to normal due process."

    While he was reluctant to point fingers at specific politicians, Danjou admitted that Europe's "largest economies" were the most insistent on passing the change.

    As at December 2008, no major French, Portuguese, Spanish, Swiss or Irish banks had used the amendment.

    BNP Paribas, Credit Agricole, Danske Bank, Natixis and Societe Generale were expected to reclassify their assets in the fourth quarter of 2008.

    The amendment was passed to shore up bank balance sheets and restore confidence in the midst of the current credit crunch. But it remains to be seen whether reclassifying major debts is an effective tactic.

    "Because the market situation was unique, events from the outside world forced us to react quickly," said Danjou. "We do not wish to do it too often. It's risky, and things can get missed."

    Jensen Comment
    European banks thus circumvented earnings hits for anticipated billions in loan losses by a number of ploys, including arguments regarding transitory price movements, "dynamic provisioning" cookie jar accounting, and spinning debt into assets with fair value adjustments "accounting alchemy."

    Bob Jensen's threads on fair value accounting are at http://www.trinity.edu/rjensen/theory01.htm#FairValue


    Teaching case from The Wall Street Journal Accounting Weekly Review on July 27, 2012

    Microsoft Posts Rare Loss
    by: Shira Ovide
    Jul 20, 2012
    Click here to view the full article on WSJ.com
    Click here to view the video on WSJ.com WSJ Video
     

    TOPICS: Goodwill, Impairment

    SUMMARY: "Microsoft posted a rare loss due to a charge for its Internet business, but still showed signs of strength in selling software to corporations." According to the related video, the $6.2 billion charge amounts to almost the entire $6.3 billion purchase price of aQuantive in a 2007 business combination. The video also includes discussion of the interpretation of a goodwill impairment charge in layman's terms.

    CLASSROOM APPLICATION: The article is useful to introduce the reporting implications of goodwill impairment charges. NOTE TO INSTRUCTORS: YOU SHOULD DELETE THIS SECTION OF THE SUMMARY BEFORE DISTRIBUTING TO STUDENTS AS IT CONTAINS ANSWERS TO QUESTIONS BELOW. ASC references: ASC 350-20-35-1 through 35-19 provides the overall requirements for goodwill impairment assessment (under the subsequent measurement category). ASC 350-20-35-3c (subsequent measurement related to Goodwill) covers the events and circumstances that should be used in evaluating whether it is more likely that not that the fair value of a reporting unit is less than its carrying amount.

    QUESTIONS: 
    1. (Introductory) Based on the description in the article, summarize the results reported by Microsoft for the quarter ended June 30, 2012? What is your sense of the overall implications of these results for the company's business?

    2. (Introductory) Have you used the Microsoft Bing search engine? How does it compare to other search engines you use?

    3. (Advanced) Access the Microsoft filing on Form 8-K for the announcement of their operating results for the quarter ended June 30, 2012 made on July 19, 2012 and available on the SEC web site at http://www.sec.gov/Archives/edgar/data/789019/000119312512307447/d379850dex991.htm How large was the goodwill impairment charge relative to their overall operations? Clearly state how you assess the size of this charge.

    4. (Advanced) Scroll down the report to review the Fourth Quarter Financial Highlights. What operating segments does MicroSoft report?

    5. (Introductory) In which operating segment was the goodwill impairment charge recorded? How large was the charge relative to this operating segment? As in question 1 above, clearly state how you assess the size of this charge.

    6. (Introductory) Summarize the accounting process for determining a goodwill impairment charge. In your answer, include a reference to the required assessment of events and circumstances frequently leading to asset impairment charges. Also include a reference the FASB Accounting Standards Codification (ASC) sections supporting your answer.

    7. (Advanced) What particular factors led Micrsoft to report this impairment charge? How do those factors compare to the requirements under the FASB ASC?

    8. (Introductory) Refer to the related video. What is the meaning of the term non-cash charge? How do these journalists interpret this write down?
     

    Reviewed By: Judy Beckman, University of Rhode Island

     

    "Microsoft Posts Rare Loss," by Shira Ovide, The Wall Street Journal, July 20, 2012 ---
    http://professional.wsj.com/article/SB10000872396390444330904577537262279070778.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

    Microsoft Corp.posted a rare quarterly loss because of a previously announced charge for its money-losing Internet business, but the software giant continued to show signs of strength in selling software to corporations.

    The $492 million loss reflected a $6.19 billion charge for Microsoft's online division, which includes the Bing search engine business and MSN Web portal. The unit hasn't met the company's expectations for advertising sales and the company opted to write down the value of a major acquisition.

    Microsoft's total revenue rose nearly 4%, while revenue in the unit that sells software for server systems and related products rose nearly 13%. The division posted a 24% jump in operating income.

    "I feel very good about the enterprise demand for our products," said Peter Klein, Microsoft's chief financial officer, in an interview.

    Revenue for the company's Windows division declined by nearly 13%, after subtracting about $540 million in deferred revenue—tied to an offer to give buyers of personal computers the option to upgrade their machines to Windows 8, the next version of Microsoft's computer operating system.

    The loss for the fiscal period ended June 30 came to six cents a share. In the year-earlier period, Microsoft posted net income of $5.9 billion, or 69 cents a share. Revenue rose to $18.1 billion from $17.4 billion.

    For Microsoft and Chief Executive Steve Ballmer, the fourth quarter is a transition period ahead of several milestone product launches. Starting this fall, Microsoft is rolling out new versions of two of its biggest cash cows, Windows and the Office bundle of email and document software, along with an overhaul of programs for computer servers and for Microsoft's fledgling Windows Phone software.

    The stakes are high for Microsoft to prove it can catch up to rivals such as Apple Inc. AAPL +2.58% that have a head start in fast-growing computing areas such as tablets.

    By contrast, Microsoft said the market for personal computers was roughly flat in the fourth quarter, with sales of business PCs up 1% and consumer PCs down 2%. Its comments echo what third-party research firms and some other computing companies have been saying in recent weeks.

    Operating income in the division that includes the Windows operating system fell 17.5%. Some analysts believe consumers and businesses may be holding off on buying new PCs ahead of this October's launch of Windows 8, Microsoft's first operating software designed with touch-screen computing devices in mind.

    In the division anchored by the Office line of email and document software, operating income rose 9%. Microsoft's Internet division, and the business that includes the Xbox videogame console, again were money-losers during the fiscal fourth quarter.

    Microsoft said it kept a tight lid on expenses, helping boost profit growth higher than revenue growth.

    For the fiscal year ending next summer, Microsoft said it expects Windows revenue to essentially match the overall PC market. The company said its estimate excludes deferred revenue for a Windows 8 upgrade, and excludes sales of the recently announced Surface tablet computer, Microsoft's first foray into making a computer on its own.

    Continued in article

    August 1, 2012 reply from Glen Gray

    An “accounting” story has some interest, but maybe it should be assigned with the “management” story in August Vanity Fair, which can be accessed for free at http://www.vanityfair.com/business/2012/08/microsoft-lost-mojo-steve-ballmer . The comments also provide some interesting reading.

     

    Jensen Comment
    One problem with reports focusing on profits or losses is that the IASB and the FASB accounting standard setters adopted a balance sheet focus that turned the income statement into a black hole. The IASB and FASB can no longer even define profits and losses.

    This led Bob Herz, when he was Chairman of the FASB, to suggest that perhaps we should use disaggregated reporting without reporting bottom line profits and losses. Perhaps this applies to the way IBM income statements should be presented ---
    http://www.trinity.edu/rjensen/theory01.htm#ChangesOnTheWay

    No Bottom Line

    Question
    Is a major overhaul of accounting standards on the way?

    Hint
    There may no longer be the tried and untrusted earnings per share number to report!
    Comment
    It would be interesting to see a documentation of the academic research, if any, that the FASB relied upon to commence this blockbuster initiative. I recommend that some astute researcher commence to probe into the thinking behind this proposal.

    "Profit as We Know It Could Be Lost With New Accounting Statements," by David Reilly, The Wall Street Journal, May 12, 2007; Page A1 --- http://online.wsj.com/article/SB117893520139500814.html?mod=DAT

    Pretty soon the bottom line may not be, well, the bottom line.

    In coming months, accounting-rule makers are planning to unveil a draft plan to rework financial statements, the bedrock data that millions of investors use every day when deciding whether to buy or sell stocks, bonds and other financial instruments. One possible result: the elimination of what today is known as net income or net profit, the bottom-line figure showing what is left after expenses have been met and taxes paid.

    It is the item many investors look to as a key gauge of corporate performance and one measure used to determine executive compensation. In its place, investors might find a number of profit figures that correspond to different corporate activities such as business operations, financing and investing.

    Another possible radical change in the works: assets and liabilities may no longer be separate categories on the balance sheet, or fall to the left and right side in the classic format taught in introductory accounting classes.

    ACCOUNTING OVERHAUL

    Get a glimpse of what new financial statements could look like, according to an early draft recently provided by the Financial Accounting Standards Board to one of its advisory groups. The overhaul could mark one of the most drastic changes to accounting and financial reporting since the start of the Industrial Revolution in the 19th century, when companies began publishing financial information as they sought outside capital. The move is being undertaken by accounting-rule makers in the U.S. and internationally, and ultimately could affect companies and investors around the world.

    The project is aimed at providing investors with more telling information and has come about as rule makers work to one day come up with a common, global set of accounting standards. If adopted, the changes will likely force every accounting textbook to be rewritten and anyone who uses accounting -- from clerks to chief executives -- to relearn how to compile and analyze information that shows what is happening in a business.

    This is likely to come as a shock, even if many investors and executives acknowledge that net income has flaws. "If there was no bottom line, I'd want to have a sense of what other indicators I ought to be looking at to get a sense of the comprehensive health of the company," says Katrina Presti, a part-time independent health-care contractor and stay-at-home mom who is part of a 12-woman investment club in Pueblo, Colo. "Net income might be a false indicator, but what would I look at if it goes away?"

    The effort to redo financial statements reflects changes in who uses them and for what purposes. Financial statements were originally crafted with bankers and lenders in mind. Their biggest question: Is the business solvent and what's left if it fails? Stock investors care more about a business's current and future profits, so the net-income line takes on added significance for them.

    Indeed, that single profit number, particularly when it is divided by the number of shares outstanding, provides the most popular measure of a company's valuation: the price-to-earnings ratio. A company that trades at $10 a share, and which has net profit of $1 a share, has a P/E of 10.

    But giving that much power to one number has long been a recipe for fraud and stock-market excesses. Many major accounting scandals earlier this decade centered on manipulation of net income. The stock-market bubble of the 1990s was largely based on investors' assumption that net profit for stocks would grow rapidly for years to come. And the game of beating a quarterly earnings number became a distraction or worse for companies' managers and investors. Obviously it isn't known whether the new format would cut down on attempts to game the numbers, but companies would have to give a more detailed breakdown of what is going on.

    The goal of the accounting-rule makers is to better reflect how businesses are actually run and divert attention from the one number. "I know the world likes single bottom-line numbers and all of that, but complicated businesses are hard to translate into just one number," says Robert Herz, chairman of the Financial Accounting Standards Board, the U.S. rule-making body that is one of several groups working on the changes.

    At the same time, public companies today are more global than local, and as likely to be involved in services or lines of business that involve intellectual property such as software rather than the plants and equipment that defined the manufacturing age. "The income statement today looks a lot like it did when I started out in this profession," says William Parrett, the retiring CEO of accounting firm Deloitte Touche Tohmatsu, who started as a junior accountant in 1967. "But the kind of information that goes into it is completely different."

    Along the way, figures such as net income have become muddied. That is in part because more and more of the items used to calculate net profit are based on management estimates, such as the value of items that don't trade in active markets and the direction of interest rates. Also, over the years rule makers agreed to corporate demands to account for some things, such as day-to-day changes in the value of pension plans or financial instruments used to protect against changes in interest rates, in ways that keep them from causing swings in net income.

    Rule makers hope reformatting financial statements will address some of these issues, while giving investors more information about what is happening in different parts of a business to better assess its value. The project is being managed jointly by the FASB in the U.S. and the London-based International Accounting Standards Board, and involves accounting bodies in Japan, other parts of Asia and individual European nations.

    The entire process of adopting the revised approach could take a few years to play out, so much could yet change. Plus, once rule makers adopt the changes, they would have to be ratified by regulatory authorities, such as the Securities and Exchange Commission in the U.S. and the European Commission in Europe, before public companies would be required to follow them.

    As a first step, rule makers expect later this year to publish a document outlining their preliminary views on what new form financial statements might take. But already they have given hints of what's in store. In March, the FASB provided draft, new financial statements at the end of a 32-page handout for members of an advisory group. (See an example.)

    Although likely to change, this preview showed an income statement that has separate segments for the company's operating business, its financing activities, investing activities and tax payments. Each area has an income subtotal for that particular segment.

    There is also a "total comprehensive income" category that is wider ranging than net profit as it is known today, and so wouldn't be directly comparable. That is because this total would likely include gains and losses now kept in other parts of the financial statements. These include some currency fluctuations and changes in the value of financial instruments used to hedge against other items.

    Comprehensive income could also eventually include short-term changes in the value of corporate pension plans, which currently are smoothed out over a number of years. As a result, comprehensive income could be a lot more difficult to predict and could be volatile from quarter to quarter or year to year.

    As for the balance sheet, the new version would group assets and liabilities together according to similar categories of operating, investing and financing activities, although it does provide a section for shareholders equity. Currently, a balance sheet is broken down between assets and liabilities, rather than by operating categories.

    Such drastic change isn't likely to happen without a fight. Efforts to bring now-excluded figures into the income statement could prompt battles with companies that fear their profit will be subject to big swings. Companies may also balk at the expense involved.

    "The cost of this change could be monumental," says Gary John Previts, an accounting professor at Case Western Reserve University in Cleveland. "All the textbooks are going to have to change, every contract and every bank arrangement will have to change." Investors in Europe and Asia, meanwhile, have opposed the idea of dropping net profit as it appears today, David Tweedie, the IASB's chairman, said in an interview earlier this year.

    Analysts in the London office of UBS AG recently published a report arguing this very point -- that even if net income is a "simplistic measure," that doesn't mean it isn't a valid "starting point in valuation" and that "its widespread use is justification enough for its retention."

    Such opposition doesn't surprise many accounting experts. Net income