New Bookmarks
Year 2013 Quarter 1:  January 1 - March 31 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

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

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

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

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

 

Choose a Date Below for Additions to the Bookmarks File

March 31, 2013 

February 28, 2013

January 31, 2013 

 

March 31, 2013

Bob Jensen's New Bookmarks March 1-31, 2013
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/

FASB Accounting Standards Updates ---
http://www.fasb.org/cs/ContentServer?site=FASB&c=Page&pagename=FASB/Page/SectionPage&cid=1176156316498

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

2013 IFRS Blue Book (Not Free) ---
http://shop.ifrs.org/ProductCatalog/Product.aspx?ID=1717

Links to IFRS Resources (including IFRS Cases) for Educators ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
 

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

Center for Financial Services Innovation --- http://cfsinnovation.com/

"Guide to PCAOB Inspections," Center for Audit Quality, 2012 ---
http://www.thecaq.org/resources/pdfs/GuidetoPCAOBInspections.pdf
Note this has a good explanation of how the inspection process works.

PCAOB Inspection Report Database ---
http://pcaobus.org/inspections/reports/pages/default.aspx

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

Subtle Distinctions in Technical Terminology
Machine Learning, Big Data, Deep Learning, Data Mining, Statistics, Decision & Risk Analysis, Probability, Fuzzy Logic FAQ ---
http://wmbriggs.com/blog/?p=6465

Today’s FBI: Facts and Figures 2013-2014—which provides an in-depth look at the FBI and its operations—is now available ---
http://www.fbi.gov/stats-services/publications/todays-fbi-facts-figures/facts-and-figures-031413.pdf/view

AICPA Fraud Resource Center --- Click Here
http://www.aicpa.org/INTERESTAREAS/FORENSICANDVALUATION/RESOURCES/FRAUDPREVENTIONDETECTIONRESPONSE/Pages/fraud-prevention-detection-response.aspx

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


Humor Between March 1-31, 2013 --- http://www.trinity.edu/rjensen/book13q1.htm#Humor033113

Humor Between February 1-28, 2013 --- http://www.trinity.edu/rjensen/book13q1.htm#Humor022813

Humor Between January 1-31, 2013 --- http://www.trinity.edu/rjensen/book13q1.htm#Humor013113

Humor Between December 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q4.htm#Humor123112

Humor Between November 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q4.htm#Humor113012

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




The Wall Street Journal increased the billing rate for me to $26 per month. This is reasonable considering that this thick thing is delivered to my mailbox six days each week.

However, if I choose only the digital electronic version with no hard copy delivery, I only save $4 per month --- which is now a bummer price, especially for students.

However, there is a simple way to read very current articles in the WSJ electronically for free using Google Advanced Search using the "All the words" search box ---
http://www.google.com/advanced_search .
Instructions are given at
http://www.businessinsider.com/how-to-read-the-wsj-for-free-online-2009-6
Thank you Chris Nolan for the heads up.

Those of you who have access to your campus library electronic databases can probably access archived WSJ articles using database subscriptions paid for by your college or university.

The New York Times has a different free-access policy. I think you get something like 15 articles free per month. However, for me this seems to increase if I change Web browsers --- say from Firefox to Internet Explorer. Please don't ask me why this works or if it is totally ethical.

Students and faculty of a college might be able to able to have free access to NYT archives using databases subscribed toy by their college. One such database is IfnoTrac Newstands.


"10 Huge Brands That Committed Suicide," Business Insider, March 27, 2013 ---
http://www.businessinsider.com/10-brands-that-committed-suicide-2013-3

To these we might add the tens of thousands of failed companies and banks who got glowing audit reports from their auditors only slightly ahead of their death notices --- sort of like those corpses on a slap that had no warnings in their most recent complete physical examinations.


"Nate Silver Gets Real About Big Data," by Matt Asay, ReadWriteWeb, March 29, 2013 ---
http://readwrite.com/2013/03/29/nate-silver-gets-real-about-big-data

Jensen Comment
This is a message that accountics scientists don't want to hear about.

"How Non-Scientific Granulation Can Improve Scientific Accountics"
http://www.cs.trinity.edu/~rjensen/temp/AccounticsGranulationCurrentDraft.pdf
By Bob Jensen
This essay takes off from the following quotation:

A recent accountics science study suggests that audit firm scandal with respect to someone else's audit may be a reason for changing auditors.
"Audit Quality and Auditor Reputation: Evidence from Japan," by Douglas J. Skinner and Suraj Srinivasan, The Accounting Review, September 2012, Vol. 87, No. 5, pp. 1737-1765.

Our conclusions are subject to two caveats. First, we find that clients switched away from ChuoAoyama in large numbers in Spring 2006, just after Japanese regulators announced the two-month suspension and PwC formed Aarata. While we interpret these events as being a clear and undeniable signal of audit-quality problems at ChuoAoyama, we cannot know for sure what drove these switches (emphasis added). It is possible that the suspension caused firms to switch auditors for reasons unrelated to audit quality. Second, our analysis presumes that audit quality is important to Japanese companies. While we believe this to be the case, especially over the past two decades as Japanese capital markets have evolved to be more like their Western counterparts, it is possible that audit quality is, in general, less important in Japan (emphasis added) .

 


"Which Type of Returns Are You Referring To?" by Barry Ritholtz,, March 28, 2013 ---
http://www.ritholtz.com/blog/2013/03/real-nominal-total-aftertax/

Jensen Comment
Barry only a discusses a few of the many types of returns that should be understood by our students. For a more complete summary, go to
http://www.trinity.edu/rjensen/roi.htm

One of the most popular downloads at my Website compares several types of returns is the wtdcase2a.xls at the bottom of the list of files at
http://www.cs.trinity.edu/~rjensen/Excel/
Note the tab to the Answers spreadsheet.
Students can put in their own input numbers and then observe the sensitivity of the outcomes to things like inflation rates.


'The 12 Most Controversial Facts In Mathematics," by  Walter Hickey, Business Insider, March 25, 2013 ---
http://www.businessinsider.com/the-most-controversial-math-problems-2013-3

Bob Jensen's thousands of  links to tutorials in various academic disciplines ---
http://www.trinity.edu/rjensen/Bookbob2.htm


The Great Challenge of Integer Programming's Travelling Salesman Problem
Back in the days I was teaching mathematical programming at the University of Maine, one of really big mathematical challenges of the day was to discover an efficient algorithm for The Travelling Salesman Problem that was poorly named and should have been called the shortest routing problem. Solutions to this interger programming challenge have wide-reaching applications in mathematics, management science, and operations research. As computing capacity increased, brute force solutions comparing all possible routing alternatives became feasible for smaller networks. But for large networks, the problem became more like mapping chess moves where no computer on earth could handle a brute force problem efficiently in reasonable time and cost.

"Shrinking Blob Computes (satisficing) Traveling Salesman Solutions:  A blob of “intelligent” goo can compute solutions to one of the most famous problems in mathematics and produces a route map as well, say computer scientists," MIT's Technology Review, March 25, 2013 --- Click Here
http://www.technologyreview.com/view/512821/shrinking-blob-computes-traveling-salesman-solutions/?utm_campaign=newsletters&utm_source=newsletter-daily-all&utm_medium=email&utm_content=20130325

Jensen Comment
Optimization with convex space solution alternatives, like linear programming problems, are generally efficient to solve for very, very large problems. This is not the case for most integer programming problems because the solutions space is not convex. The above blob solution is unbelievable. Really


From the Scout Report on March 29, 2013

Free Alternative to Camtasia for Mac Users
Ripcorder Screen ---
https://itunes.apple.com/app/ripcorder-screen/id532632386?mt=12 

The Ripcorder Screen application allows users to create movies from their Macs' on-screen activities. The application will capture whatever is played on the display and transform it into a QuickTime movie. This can be most useful for users who would like to share information with colleagues or friends seeking to learn more about a particular computer operation or process. This version is compatible with all operating systems running Mac OS X 10.7 and newer.

There is also a Ricorder Audio App


Ribbet --- http://www.ribbet.com/ 

Ribbet offers visitors the opportunity to edit their photos on the fly online. The site gives users the ability to crop, resize, and rotate their images, along with adding captions in a host of different fonts. Also, there are a number of compelling special filters with names like Cairo, Morocco, Los Angeles, and Fiji. This version is compatible with all operating systems.


New research suggests that the speed of light may not be constant

Scientists examine nothing, find something
http://www.csmonitor.com/Science/2013/0325/Scientists-examine-nothing-find-something

Speed of light may not be fixed, scientists suggest
http://www.sciencedaily.com/releases/2013/03/130325111154.htm

Speed of Light May Not be Constant
http://blogs.voanews.com/science-world/2013/03/26/speed-of-light-may-not-be-constant/

Testing Einstein's E=mc2 in Outer Space
http://uanews.org/story/testing-einsteins-emc2-outer-space

Ole Roemer and the Speed of Light
http://www.amnh.org/education/resources/rfl/web/essaybooks/cosmic/p_roemer.html

American Association of Physics Teachers
http://aapt.org/resources/

 


Audit and Accounting Guide for Not-for-Profit Entities
From Ernst &Young on March 28, 2013

The American Institute of Certified Public Accountants (AICPA) has issued a comprehensive revision of its Audit and Accounting Guide, Not-for-Profit Entities, for the first time in 15 years. Questions raised as the Guide was being updated have resulted in new guidance from the Emerging Issues Task Force (EITF) on two not-for-profit topics. Our To the Point publication summarizes the guidance from the AICPA and the EITF.

http://www.ey.com/Publication/vwLUAssetsAL/TothePoint_BB2518_NotforProfit_27March2013/$FILE/TothePoint_BB2518_NotforProfit_27March2013.pdf

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


Is Bob Jensen a hypocrite?
I feel like a hypocrite since from the first year in my first faculty appointment I had at least one less course assignment than my colleagues --- teaching two courses per term instead of three or even four like the people up and down the hall were teaching. And I was the highest paid faculty member on the floor in each of the four universities where I had faculty appointments. Forty years later I was teaching the same light loads as well as during all 38 years in between except for the various semesters I got full pay for teaching no courses due to sabbatical leaves and two years in a think tank at Stanford University.

Now I sympathize with arguments that those other faculty (and me) really should have been teaching more across the entire 40 years. I can hear some of you saying:  "That's easy for you to say now --- while you are sitting with a eastward view of three mountain ranges and teaching not one course."

The race to teach less has not served us well, and student-to-faculty ratios were driven more by U.S. News & World Report's [annual rankings] than by rigor," [Gene Nichol (North Carolina)] said. "Professors don't teach enough. The notion that [teaching more] would cripple scholarship is not true and we know it. ...
Tax Prof Blog, March 14, 2013 --- http://taxprof.typepad.com/

Law Schools are cutting expenses in expectation of smaller class sizes. While most can't think of cutting tuition in this environment, the actions they take during the next few years could determine whether legal education moves toward a more affordable future. ...

"The race to teach less has not served us well, and student-to-faculty ratios were driven more by U.S. News & World Report's [annual rankings] than by rigor," [Gene Nichol (North Carolina)] said. "Professors don't teach enough. The notion that [teaching more] would cripple scholarship is not true and we know it." ...

[T]he primary problem facing most law schools is what to do with all the faculty they have on staff. ... "Laying off untenured [faculty] would be very destructive," [Brian Tamanaha (Washington U.)] said. "They are teaching important skills and valuable classes."

Tamanaha said the better option is to offer buyouts to tenured professors. "We will see schools offer separation packages -- one or two year's compensation if you go now," he said. "The only people interested in a buyout would be people with sufficient retirement funds or professors with practices on the side." Vermont Law School and Penn State University Dickinson School of Law have discussed similar steps. ...

Brian Leiter, a law professor at the University of Chicago Law School who runs a blog on legal education, has predicted that as many as 10 law schools will go out of business during the next decade.

Rather than face closure, law schools could take more drastic steps -- even overcoming tenure. When Hurricane Katrina devastated New Orleans, Tulane University declared financial exigency and eliminated entire departments -- terminating tenured professors. The same action has happened at other universities faced with economic hardships.

"If you say this is a tsunami of a different kind -- the 100 year flood -- then a dean could let go of faculty," another law professor said. For example, a school could choose to eliminate nonessential specialties, such as a tax law program, and terminate most faculty in those areas.

In addition to eliminating tenured positions, a dean could reduce salaries out of financial necessity. "Schools under severe financial pressure may be faced with an even starker option -- closing their doors," Tamanaha said. ...

Nichol said all law schools should reconsider their current salary structures, and not just schools in the worst economic position. "In the same way that the market for graduates is adjusting, it would not be absurd for our salaries to adjust as well," he said. "I don't see why our leave packages should be more generous than other parts of the campus. We will have to fix that now before we forced to."

Nichol said schools should consider eliminating sabbaticals, trimming travel and reducing summer research grants. "Every school needs to look line by line for where it can cut costs," [David Yellen (Dean, Loyola-Chicago)] said. Faculty travel, conferences and other things can add up to a couple of professors salaries."

Jensen Comment
And I darn well "know it." I think I do all this free academic blogging in large measure out of guilt. I need to give something back!

Franco Modigliani --- http://en.wikipedia.org/wiki/Franco_Modigliani
Trinity University has a program for bringing all possible former Nobel Prize winning economists. In an auditorium they were not to discuss technicalities of their work as much as they were to summarize their lives leading up to their high achievements. One of the most inspiring presentations I can remember was that of Franco Modigliani.

What I remember most is that he asserted that some of his most productive years of research and scholarship came during the years he was teaching five different courses on two different campuses.

The Academy increasingly coddled researchers with more pay, large expense funds, the highest salaries on campus, and lighter teaching loads. I'm not certain that they, me included, were not coddled far too much relative to the the value of the sum total of their (including my) work. I think not! The sum total may have been as high or higher if they were teaching four courses per term (maybe not five).

Bob Jensen

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

Reply from Jagdish Gangolly

Bob,

You are not alone. A colleague of mine at Albany, a mathematician in the Management Sciences department, who taught mathematics at Brown before coming to Albany was saying the same thing. He was most productive when he taught heavy loads.

Teaching and writing are probably the most demanding of intellectual tasks (unless of course you are resigned to teaching because you must). Even research nowadays is, thanks to statistical packages and abundant databases, by comparison a mundane task.

I was not as lucky as you were; I taught the usual 2 courses each semester except for the sabbaticals. But one semester I taught five courses, by happenstance. Two masters courses in accounting (an auditing and an AIS course), two doctoral seminars in (Knowledge Organization and in Statistical Natural Language Processing) Information Science, all at SUNY Albany, and an MBA management accounting course at Rensselaer Polytechnic Institute. And, strange as it may seem, that was my most productive year in research. I have never been as ready for summer in my life as at the end of that semester.

Regards,

Jagdish


"The Debt Bomb That Taxpayers Won't See Coming ," by Steven Malanga, The Wall Street Journal, March 29, 2013 ---
http://online.wsj.com/article/SB10001424127887324077704578362101467799948.html

Earlier this month, the Securities and Exchange Commission charged Illinois officials with making misleading statements to bond investors about the state's pension system. The agency detailed a long list of deceptive practices including failure to tell investors that the system was so underfunded that it risked bankruptcy.

Illinois taxpayers, as well as the holders of its debt, will ultimately bear the burden of the officials' misdeeds. But there is nothing unique about the Prairie State. For years, elected officials in states and municipalities across the country have been imprudently piling up obligations that are imposing serious strains on budgets, prompting higher taxes and cutbacks in services.

In January, city officials in Sacramento, California's capital, reported the results of a study they had commissioned on all the debt that the municipality had incurred. At a City Council meeting that the Sacramento Bee reported as "sobering," the city manager explained that Sacramento had racked up some $2 billion in obligations (mostly pensions and retiree health care). All this for a municipality of 477,000 residents with an annual general fund budget of just $366 million.

Sacramento finances are already stretched—the city has cut some 1,200 workers, or 20% of its workforce, in the past several years. Servicing its debt in years to come will only add more woe, especially given the intractability of public unions. The budget report noted that "While reducing staff is clearly not the preferred method for reducing costs, the city has a very limited ability to reduce the cost of labor absent cooperation from the city's employee groups."

According to studies by the Pew Center on the States, states and the biggest cities have made nearly three-quarters of a trillion dollars in promises to pay for retiree health-care insurance. Yet governments have set aside only about 5% of the money they'll need to pay for these promises.

This year a Chicago city commission reported that retiree health-care expenditures would soar from $109 million in this year's budget to $541 million in a decade. After concluding that the expenditures were unaffordable, one member of the commission proposed that retirees be required to sign on to the Illinois Health Insurance Exchange being created under President Obama's Affordable Care Act. Health insurance would be cheaper if it is subsidized by the federal government.

A December report by the States Project, a joint venture of Harvard's Institute of Politics and the University of Pennsylvania's Fels Institute of Government, estimated that state and local governments now owe in sum a staggering $7.3 trillion. Incredibly, the vast majority of this debt has never been approved by taxpayers, who are often unaware of the extent of their obligations.

Most state constitutions and many municipal charters limit borrowing and mandate voter approval. No matter. Politicians evade the limits, issuing billions of dollars in municipal offerings never approved by voters, sometimes with disastrous consequences. Courts have rubber-stamped many of these schemes.

The debt incurred by New Jersey for school projects is a case in point. In 2001, legislators in Trenton hatched a scheme to borrow a shocking $8.6 billion for refurbishing school buildings. The reaction to their plan in the press and among taxpayer groups was so negative that the politicians knew that voters would never approve it. So the legislature created an independent borrowing authority. Since it, and not taxpayers, would take on the debt, politicians claimed that there was no need for voters' consent.

Taxpayer groups challenged the maneuver. The state Supreme Court brushed aside their objections, arguing that there was already precedent for such borrowing.

New Jersey's Schools Construction Corp. quickly squandered half of the money on patronage and inefficient construction practices, so in 2005 the state borrowed another $3.9 billion. All of the debt is being repaid by taxpayers. The authority, which was dissolved several years ago, had no revenues of its own.

Next door, in New York, a scant 5% of the Empire State's $63 billion in outstanding debt has ever been authorized by voters, according to the state comptroller. The rest has been engineered through independent authorities such as the Transitional Finance Authority.

These authorities are designed to circumvent voters. Of the seven bond offerings that have gone before New York voters in the past 25 years, four have been defeated. But thanks to unsanctioned debt, New Yorkers bear the second-highest per capita debt burden in the nation, $3,258, according to a January report by the state comptroller. New Jersey is No. 1, at $3,964.

To prevent the pile-up of hidden debt, taxpayers need to spearhead a revolt that will narrow the ability of officials to mortgage their future. Any such revolt will first of all seek an end to government sponsored defined-benefit pension plans, through which politicians promise benefits years hence to current employees in a manner that potentially leaves taxpayers on the hook for unlimited liabilities. Simpler, defined-contribution plans featuring individual retirement accounts would make government pension systems less expensive and their accounting more transparent.

Continued in article

Jensen Comment
I was wondering why my tax exempt bond fund keeps paying relatively high interest rates each month. Yipes! Now I know.

"Former comptroller general urges fiscally responsible reforms," by Ken Tysiac, Journal of Accountancy, October 6, 2012 ---
http://journalofaccountancy.com/News/20126578.htm

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


"NYC Legend, Ed Koch, Pays $3M Due to Estate Planning Blunder With No Irrevocable Trust, Laments UltraTrust.com," PRWeb, March 31, 2013 ---
http://www.prweb.com/releases/Ed-Koch-irrevocable-trust/estate-plannnig/prweb10549965.htm

Suggestion for his epitaph:
"I should've had an irrevocable trust."

Links forwarded by Paul Caron

Jensen Comment
More accurately former Mayor Koch would've saved something less that $3 million after paying his tax attorneys and CPAs.


For me the March 2013 edition of TAR is another accountics science yawn.

One article, however, struck my eye as being worthy of debate on the AECM.

If I'm asked to criticize an analytical model TAR publication, my knee jerk reaction before I've even read the article is to go for the unrealistic underlying assumptions that are valid only in Plato's Cave. I provide what I consider to be a great illustration at
 http://www.trinity.edu/rjensen/TheoryTAR.htm#Analytics

The following article illustrates how we can go after unrealistic underlying assumptions in Plato's Cave for empirical publications as well.

My bottom line conclusion is that we should evaluate empirical accountics science studies the same way we evaluate analytical modeling accountics science studies. Go after the controversial underlying assumptions before going after the other weak spots such as missing variables, missing data, use of students as surrogates for real world decision makers, failing to contact real world players such as auditors or financial analysts, multicollinearity, heteroscedasticity, non-normal distributions, etc.

"The Contagion Effect of Low-Quality Audits, by  Jere R. Francis and Paul N. Michas, The Accounting Review, March 2013 ---
http://aaajournals.org/doi/full/10.2308/accr-50322

ABSTRACT :

We investigate if the existence of low-quality audits in an auditor office indicates the presence of a “contagion effect” on the quality of other (concurrent) audits conducted by the office. A low-quality audit is defined as the presence of one or more clients with overstated earnings that were subsequently corrected by a downward restatement. We document that the quality of audited earnings (abnormal accruals) is lower for clients in these office-years (when the misreporting occurred) compared to a control sample of office-years with no restatements. This effect lasts for up to five subsequent years, indicating that audit firms do not immediately rectify the problems that caused contagion. We also find that an office-year with client misreporting is likely to have subsequent (new) client restatements over the next five fiscal years. Overall, the evidence suggests that certain auditor offices have systematic audit-quality problems and that these problems persist over time.

Jensen Comment
How valid is it to define a low-quality audit as "presence of one or more clients with overstated earnings that were subsequently corrected by a downward restatement/"

Firstly, we might find some even lower-quality audits that had corrected upward restatements of earnings.

Secondly, how justified are the authors in assuming  subsequent downward restatements are caused or even correlated with low-quality audits? Restatements are caused by many factors, only one of which might be a low quality audit. If there was a high correlation with only low quality audits it would seem to me that audit firms would be hauled into class action lawsuits most every time earnings numbers have to be restated downward.

A low-quality audit is a defined on the basis of many factors that the PCAOB is trying to get a handle in their revealing audit inspections. For example, some of the worst audits may not have entailed earnings restatements. The poor quality may simply have been what the PCAOB considers unjustified cost cutting in in detail testing and/or weak supervision of neophyte auditors. The fact that such factors did not entail downward earning revisions may be a matter of luck or as, yet, undetected errors in the earning numbers.

My bottom line conclusion is that we should evaluate empirical accountics science studies the same way we evaluate analytical modeling accountics science studies. Go after the controversial underlying assumptions before going after the other weak spots such as missing variables, missing data, use of students as surrogates for real world decision makers, failing to contact real world players such as auditors or financial analysts, multicollinearity, heteroscedasticity, non-normal distributions, etc.


"5 Dumbest Things on Wall Street This Week: March 22, 2013, The Street ---
http://www.thestreet.com/story/11876599/1/5-dumbest-things-on-wall-street-this-week-march-22.html?kval=dontmiss

1 (To Bob Jensen Cyprus is beginning to sound like the mouse that roared)
By the time you finish this sentence the nation of Cyprus may be solvent or insolvent, in or out of the European Union or possibly even reborn as Vladimir Putin's private island getaway. The situation is still too fluid for us to predict.

2 (Auditors only stick with managements they don't trust if the clients are too big to lose)
Maxwell Storage, the energy storage device maker announced the resignation of its public accounting firm McGladrey LLP in an SEC filing Tuesday. In its farewell letter to Maxwell's audit committee, McGladrey confirmed "it could no longer rely on management's representations," nor the "information obtained directly from certain third parties." Maxwell added it will be forced to delay the reporting of its 2012 financials while it looks for an accountant to replace McGladrey. Shares of the company sank 14% to $6.40 on the news.

3 (As Bob Jensen understands it these tights are no problem doing yoga as long as you don't bend over)
Give us some credit Dumbest fans. Did you really think we would forget about the sheer madness this week at Lululemon (LULU)? The athletic-apparel purveyor announced Monday it was recalling shipments of women's yoga pants with an unacceptably high "level of sheerness" from its stores. And while Lulu says it plans to see the problem through, the company admitted the issue will indeed impact its bottom line. Shares of the company got pantsed on the news, dropping 3% to $64 on Tuesday.

4 (How could any megabanks survive without "flawed risk models?"
Ina Drew, the former head of the "London Whale" trading unit at JPMorgan Chase (JPM), blamed a "flawed" risk model and "deceptive" traders for the massive $6 billion loss at the bank in her prepared testimony last Friday before the Senate Permanent Subcommitee on Investigations. Drew resigned from her position of chief investment officer in May 2012 as a result of the scandal

5 (Since when is overstating revenue a big deal. Federal and state governments do it all the time with smoke and mirrors.)
Great Lakes Dredge & Dock revealed it overstated second-quarter revenue by $3.9 million and third-quarter revenue by $4.3 million. It also said it will review $5.6 million in questionable fourth-quarter sales.


"FASB Rolls Out More XBRL Implementation Guidance," by Tammy Whitehouse, Compliance Week, March 22, 2013 ---
http://www.complianceweek.com/fasb-rolls-out-more-xbrl-implementation-guidance/article/285581/

The Financial Accounting Standards Board has issued some new guidance on XBRL intended to further refine how preparers use the U.S. GAAP Financial Reporting Taxonomy to submit their financial statements in the XBRL format.

FASB added three new pieces to its upstart series of implementation guides -- one focused on segment reporting and two more focused specifically on the insurance sector. The segment reporting guide demonstrates the modeling that FASB has in mind for disclosures related to segment reporting.

The modeling is completed using elements in the taxonomy, focusing on detail tagging only. It provides eight separate examples of common segment reporting disclosures, such as significant items of required segment information, reconciliation of segment revenue, and reconciliation of segment profit or loss. Further examples go into greater detail related to various common segment scenarios.

As with other guides in the series, FASB says the segment reporting examples are not intended to cover every possible modeling configuration or to dictate the appearance or structure of a company's extension taxonomy. The examples are only meant to help users of the taxonomy understand how the modeling for segment reporting is structured within the taxonomy, with the hope that it will drive more consistent use of the taxonomy to produce more consistent, comparable financial reporting data. The guide does not include elements for text blocks, policy text blocks, or table blocks. 

For the insurance sector, one guide focuses on the modeling of disclosures related to concentration of credit risk, as in ceded credit risk with a single credit rating, multiple credit ratings, and those that appear in more the one table. Another insurance guide focuses on disclosures related to reinsurance, providing a model for disclosing risk management objectives and retention policies, effects of reinsurance, and the supplemental schedule of reinsurance arrangements, although it does not cover concentrations of credit risk resulting from reinsurance.

Continued in article

Jensen Comment
There's a photograph of the AECM's Louis Matherne who is spearheading XBRL for the FASB. Thanks much Louis for greasing the wheels of implementation.

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


The top 51 undergraduate business schools according to Bloomberg Business Week (Slide Show) ---
http://images.businessweek.com/slideshows/2013-03-20/best-undergraduate-business-schools-2013#slide1
Notre Dame may be Number 2 in football, but it is Number 1 in undergraduate business studies according to Business Week.

Note the links on the left side for such things as explanations of how the schools were ranked and the history of such rankings.

Business Schools With the Best Teachers Are Not Necessarily the Highest Ranked Domestic or International Business Schools (Bloomberg Busienss Week, Business Week, MBA, Rankings, Rank, Teaching, Teachers, US News, Financial Times, The Economist, Economist, WSJ)
citation:
"B-Schools With Five-Star Teachers," by Louis Lavelle, Bloomberg Business Week, November 12, 2012 ---
 http://www.businessweek.com/articles/2012-11-12/b-schools-with-five-star-teachers#r=hpt-ls 

 

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


"The Value of a Good Visual: Immediacy," by Bill Franks, Harvard Business Review Blog, March 21, 2013 ---
 http://blogs.hbr.org/cs/2013/03/the_value_of_a_good_visual_imm.html

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


"How Deferred Tax Accounting Blunts Government-Provided Incentives to Invest in Renewable Energy," by Tom Selling, The Accounting Onion, March 18, 2013 ---
http://accountingonion.com/2013/03/how-deferred-tax-accounting-blunts-government-provided-incentives-to-invest.html

Jensen Comment
Tom's arguments are pretty good on this one except that he does not tell us how failing to allocate tax deferrals possibly inflates early-on annual reported ROI to levels (say 40%) much higher than the asset is capable of generating (15%) the entire economic life of an asset.

The Case Where the Asset is Sold in Year 6
The essence of Tom's argument is a familiar one in deferred tax theory. Companies taking advantage of accelerated depreciation on tax returns without inter-period tax deferral allocation can have very high albeit rapidly declining after-tax book earnings because of reporting tax deferrals as income in the early years. Inter-period allocation of tax deferrals reduces early-on earnings but adds stability to booked earnings patterns that are low at first but steadily rising. In Tom's illustration the two earnings patterns cross at about 5.5 years for a 20-year asset. In Years 6-20 inter-period tax allocation book earnings are slightly higher than if there is no inter-period tax asset deferral.

Tom's argument is that the after-tax book earnings pattern in Years 1-5 make the solar panel investment look worse than if there is inter-period tax allocation. If the asset is sold after Year 5 after it no longer gets tax breaks then perhaps being required to make inter-period allocations discourages, as Tom argues, investments in the asset at Time Zero. We cannot evaluate returns over the entire five years without knowing the sales price of the asset in Year 5.

Overstating Annual ROI in the Early Years:  The Case Where The Asset is Held for 20 Years
If the asset has a steady annual cash flow of 15% IRR before taxes this cash flow correlates highly with the steady annual book earnings after taxes with inter-period tax allocation. Tom instead advocates no inter-period allocation such that the reported after-tax book earnings are much less correlated with the steady annual cash flows before taxes due primarily due to reporting nearly all nearly all the accelerated tax depreciation breaks in the very early years instead of spreading them over 20 years.

The bottom line is that annual Return on Investment (ROI) based on after-tax earnings without inter-period deferred tax allocation looks much higher than ROI with inter-period allocation in the early years. This makes the company look much better in Years 1-5 which in theory will lower its cost of capital. For example if the Company reports a ROI of 40% in Year 1 when at best it can only generate 15% over the next 20 years, haven't we misled investors just a bit?

In other words a company that is only capable of generating returns of 15% gets to report much higher ROI returns in the early years without inter-period tax allocation.

Of course my criticism must be modified by adding returns to deferred tax cash flows in the early years. Nether Tom nor I have added returns generated on the tax deferrals to the 15% IRR before taxes.

I might also add that IRR is nearly always a controversial criterion for investment decisions. For example, Tom's illustration generates an before-tax IRR of 15% over the 20-year life of the solar array. If the cash flows coming in each year cannot be re-invested for 15% in other investments then the IRR is not really 15%. The ex-post IRR depends upon re-investment alternatives faced by this company over the entire 20 years.

For example, a company having only one cash flow at the end of 20 years that has a 15% IRR differs greatly from one that has an annuitized 15% per year for 20 years since the 15% IRR can be obtained only if annual cash flows are reinvested for 15% each and every year.


Billy Joe "Red" McCombs --- http://en.wikipedia.org/wiki/Red_McCombs

McCombs School of Business at the University of Texas --- http://en.wikipedia.org/wiki/McCombs_School_of_Business

David Woods ---

The Woods tax shelter was promoted by Big Four accounting firm Ernst & Young, according to court documents.

"Supreme Court to weigh IRS penalties on alleged tax dodges," by Patrick Temple-West, Reuters, March 26, 2013 ---
http://newsandinsight.thomsonreuters.com/Legal/News/2013/03_-_March/Supreme_Court_to_weigh_IRS_penalties_on_alleged_tax_dodges/

The  Internal Revenue Service's practice of slapping steep, 40 percent penalties on participants in certain alleged tax shelters will soon come to trial before the Supreme Court.

Though it rarely hears tax matters, the court has decided to weigh in on a case involving Texas billionaire Billy Joe "Red" McCombs, a former owner of professional sports teams.

The court's decision, not expected until June 2014, will likely have implications beyond McCombs' case, tax lawyers said.

Oral arguments will be scheduled when the high court's next term begins in October.

The Obama administration's solicitor general is arguing that "hundreds of millions of dollars" in tax penalties are hanging in the balance, according to court filings. However, the decision will only apply to cases brought prior to 2010.

The case being taken up by the court involves a 1999 transaction undertaken by McCombs and his business partner, Gary Woods. The government contends it had no purpose other than tax avoidance. The transaction was known as "current options bring reward alternatives," or COBRA.

According to the government, Woods and McCombs bought and sold options on foreign currencies to generate paper losses used to offset gains chiefly related to McCombs's sports ventures.

The IRS initially applied a 40-percent penalty on the unpaid taxes that the agency said were owed, but the 5th U.S. Circuit Court of Appeals in New Orleans ruled in 2012 that the 40-percent penalty did not apply in the Woods case.

Woods is already subject to a 20 percent tax penalty on COBRA and the Supreme Court need not step in, Woods's lawyer has argued in court filings.

The lawyer representing Woods did not respond to requests for comment. Calls to San Antonio-based McCombs Partners, an investment management business which lists both Red McCombs and Gary Woods on its website, were not returned.

The IRS did not comment.

The government is arguing Woods and McCombs claimed more than $45 million in losses in 1999, from transactions that cost them only $1.37 million.

The COBRA strategy has drawn attention beyond the Woods case. COBRA was among a number of alleged tax shelter strategies subject to an IRS crackdown a decade ago.

Congress in 2010 passed the Health Care and Education Reconciliation Act, which slapped a 40-percent penalty on transactions such as COBRA. The penalty was to apply to taxpayers found by the IRS to have made "gross valuation misstatements" on their tax filings.

With Congress ensuring that transactions like COBRA cannot escape the 40-percent penalty, a government win in the Woods case "won't have much impact on the future," said Andrew Roberson, a partner with law firm McDermott Will & Emery LLP.

For pre-2010 cases still in limbo, "it's obviously important for the IRS to get a win at the highest level," he said.

The Woods tax shelter was promoted by Big Four accounting firm Ernst & Young, according to court documents. This month, Ernst agreed to a $123 million settlement to resolve a federal investigation into tax shelters it promoted.

The case is United States v Woods No. 12-562
http://www.supremecourt.gov/Search.aspx?FileName=/docketfiles/12-562.htm

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


Updates from the Smartest Person on the Planet:  An Algorithm for Everything (well almost everything)

Jensen Comment
The Wolfram Alpha computational search engine in my viewpoint is one of the top ten computing advances of all time ---
http://www.trinity.edu/rjensen/Searchh.htm#WolframAlpha

"Stephen Wolfram Says He Has An Algorithm For Everything — Literally," by Mark Hachman, ReadWriteWeb, March 11, 2013 ---
http://readwrite.com/2013/03/11/stephen-wolfram-has-an-algorithm-for-everything-literally

Stephen Wolfram believes that we may have already discovered the fundamental Unified Theory of Physics, and that he may able to write it down via a language that his company, Wolfram Alpha, has developed.

That's just the beginning for the man some believe to be the smartest person on the planet. Wolfram also plans to extend the power of computations to messier subjects, revolutionizing everything from law to medicine.

Best In Show At SWSW?

At his talk Monday at the SXSW conference in Austin, Texas (Stephen Wolfram: The Computational Future, #wolffuture), Wolfram revealed that he

Wolfram plans to more closely tie Mathematica to other data sources to simulate the interaction of complex machinery. The idea is to be able to answer questions like: "Would an SU-48 Flanker fighter jet be able to fly within the atmosphere of Mars?"

He will do all this, he told attendees, by opening up the fundamental language that his company created — one he calls, with characteristic modesty, the Wolfram Language — to the world at large. Eventually, he added, we'll probably use the Wolfram Language to unify all of physics, too.

Smartest Person On The Planet?

Wolfram won the award for Speaker of the Event at the 2012 SXSW conference, and he seems ready to contend for the crown again. There's no disputing his smarts — this is, after all, a guy who dropped out of Oxford at age 17 only to earn a doctorate in particle physics from Caltech three years later. But at this stage in his career, Wolfram seems obsessed with accumulating, picking apart and then weaving together disparate sources of data, such as basic rules that can be used to achieve complex results.

Continued in article


"Richard Feynman on the Universal Responsibility of Scientists," by Maria Popover, Brain Pickings, March 6, 2013 ---
http://www.brainpickings.org/index.php/2013/03/06/richard-feynman-responsibility-of-scientists/

. . .

It is our responsibility as scientists, knowing the great progress and great value of a satisfactory philosophy of ignorance, the great progress that is the fruit of freedom of thought, to proclaim the value of this freedom, to teach how doubt is not to be feared but welcomed and discussed, and to demand this freedom as our duty to all coming generations.

Jensen Comment
Are accountics scientists living up to their responsibilities?
 

In many ways they are living up to their responsibilities, but in some ways they are failing badly relative to the real scientists, especially the "welcomed and discussed part."
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm


Education: Federal Reserve Bank of Kansas City ---  http://www.kansascityfed.org/education/
Note the Financial Fables section --- http://www.kansascityfed.org/education/fables/index.cfm

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


Thunderbird School of Global Management --- http://en.wikipedia.org/wiki/Thunderbird_School_of_Global_Management

. . .

Originally unique, Thunderbird began to encounter direct competition from other international business programs in the 1980s. In response the school's marketing literature emphasized the "Thunderbird mystique" (referring to the school's tripartite curriculum and formidable alumni network) and "a difference of degree" (the MIM over the traditional MBA). By the 2000s, however, most business schools had acquired a global focus. Thunderbird, surrendering to the trend, converted its flagship degree into an MBA in International (later Global) Management.

The 1990s and 2000s brought financial upheaval as MBA programs in general fell out of favor during the internet bubble, and foreign student enrollment plummeted after 9-11. Faculty cuts occurred in 2001 and 2004; student enrollment dropped to a low of 700 in 2003, down from an average of 1,500 during the 1990s. Speculation to the effect that the school would close, or be taken over by another institution, was rife.[12] In 2004, an unprecedented pledge of $60 million (by alumnus Sam Garvin and his wife Rita) seemed to forestall these possibilities, and the name of the school was accordingly changed to "the Garvin School of International Management"--a change reverted when Garvin, who objected to plans to apply the funds to the school's operating deficits, reneged on his donation.

In 1994, the AACSB reversed a longstanding policy which made "mixed" programs such as Thunderbird's ineligible for accreditation. Thunderbird's was the first such program to be thus accredited.

During the 1990s, the school began publishing the Thunderbird International Business Review, a bimonthly academic journal.[13]

Since 2004, Thunderbird sponsored "Project Artemis," aimed at developing entrepreneurial skills among Afghan women. In addition, partnerships with investment bank Goldman Sachs, the InterAmerican Development Bank, the U.S. Dept. of State, mining company Freeport McMoRan and the Australian Government helped Thunderbird train hundreds of women entrepreneurs in Pakistan, Jordan, and Latin America.

In August 2004, Angel Cabrera, former dean of IE Business School in Madrid, Spain, became the youngest (and first foreign-born) president of the School, succeeding Roy A. Herberger, Jr. Under his leadership the School underwent a major operational and financial restructuring and launched various new programs. However, efforts to diversify revenue sources increased costs faster than revenues. Cabrera stepped down in 2012, to be succeeded briefly by former U.S. Ambassador Barbara Barrett (as interim president, for about six months), then by Larry Edward Penley (served 2012-present), previously president of Colorado State University.

In 2013, Thunderbird announced a partnership with Laureate Education, Inc., a commercial education company that operates programs in 29 countries (including the University of Liverpool's online MBA program)

 

Jensen Questions
When do you stop calling  Thunderbird University a not-for-profit school?

To my knowledge the AACSB has never accredited a for-profit undergraduate or MBA program. To what extent will the AACSB allow partnering with for-profit programs in the future?


"Thunderbird Joins With For-Profit to Offer New Programs," by Louis Lavelle, Bloomberg Businessweek, March 18, 2013 ---
http://www.businessweek.com/articles/2013-03-18/thunderbird-joins-with-for-profit-to-offer-new-programs

In an unusual partnership, Thunderbird School of Global Management today announced it is forming a partnership with a for-profit educational provider, Laureate Education, to offer educational programs around the world.

Thunderbird, in Glendale, Ariz., offers graduate business degrees, including its flagship global MBA, as well as online programs and nondegree executive education programs. Laureate Education, in Baltimore, serves more than 750,000 students through campus-based and online programs in 29 countries.

While the terms of the deal are still being hammered out, Thunderbird says the two institutions will create a jointly owned entity that will open instructional sites in a number of international locations. Among those being considered are Madrid, Paris, Santiago, Chile, and São Paulo, Brazil.

The partnership, which is expected to be finalized in June, will allow Thunderbird to expand its online and executive education offering and to offer an undergraduate business program for the first time in more than 50 years. Thunderbird said it will continue to operate as a private, not-for-profit educational institution and retain control of its curriculum, faculty, and admission standards.

Larry Edward Penley, Thunderbird’s president, says Laureate has 200,000 students studying business around the world, and 30,000 would qualify for admission to Thunderbird. The partnership gives Thunderbird the ability to recruit those students and expand enrollment in Arizona. He expects total enrollment will triple in five years, to more than 3,000 students. He also expects the 50/50 partnership to generate enough cash flow to allow Thunderbird to expand faculty and facilities to make that possible.

“We believe there will be profits that we can reinvest in Thunderbird,” Penley says. “It will allow us to hire faculty, improve facilities, and start new programs.”

Continued in article

Additional Jensen Questions
If the Thunderbird campus carries on some for-profit activities on campus such as admitting students for Laureate Education and providing online instructors will local jurisdictions continue to grant full property tax exemption?

To what extent can Thunderbird participate in for-profit courses and global profit sharing with Laureate and still  retain its tax-exempt status for state and Federal income taxes?

In particular, if Laureate itself pays no USA income taxes, to what extent can Thunderbird declare shared profits are tax exempt in the USA?


"Tax Professionals Will Continue To Be in Great Demand for Years," by Frank Byrt, AccountingWeb, March 3, 2013 ---
http://www.accountingweb.com/article/tax-professionals-will-continue-be-great-demand-years/221256?source=education


Added Jensen Comment
An early precursor of the concept of "counterfactual reasoning" is "functional fixation"

Accounting History Trivia
What accounting professors coined the phrase "functional fixation in accounting" in 1966 and in what particular accounting context?

Hint 1
Two of the three authors were my Ph.D. program advisors at Stanford University years ago.

Hint 2
Bob Ashton did some cognitive experimentation of functional fixation that was published in the Journal of Accounting Research a decade later in 1976.

Answer
Y. Ijiri, R.K. Jaedicke and K.E. Knight, "The Effects of Accounting Alternatives on Management Decisions," in R.K. Jaedicke, Y. Ijiri and 0. Nelson (Eds.), Research in Accounting Measurement , American Accounting Association, 1966, pp. 18

"Cognitive characteristics and the perceived importance of information," by by JD Dermer, October 1972, Library of MIT ---
http://dspace.mit.edu/bitstream/handle/1721.1/47056/cognitivecharact00derm.pdf?sequence=1

Recently, several accounting studies have made use of concepts and relationships from the field of cognitive psychology. For example, Ijiri, Jaedicke and Knight employed the notion of functional fixation to describe an individual's adaptiveness to a change in accounting process. Similarly, Livingstone referred to learning sets in explaining why some 2 utilities were slow in adjusting to accounting changes. In addition, Revsine employed the conceptual abstractness construct to speculate on its possible moderating effects in an experimental situation, and on its significance with respect to information overload. Yet, despite this interest in relationships between cognitive factors and information usage, little empirical study has been done of the role that cognitive factors may play in accounting.

Below is a recent article describing "functional fixedness."
"Rename It, Reuse It," by Amy Mayer, Everyday Einstein, March 14, 2013 ---
http://everydayeinstein.quickanddirtytips.com/rename-it-reuse-it.aspx

To become more inventive, new research suggests, we should start thinking about common items in terms of their component parts, decoupling their names from their uses.

When we think of an object (a candle, say) we tend to think of its name, appearance, and purpose all at once. We have expectations about how the candle works and what we can do with it. Psychologists call this rigid thinking "functional fixedness."

Tony McCaffrey, a postdoctoral researcher at the University of Massachusetts Amherst, developed a two-step "generic parts technique," which trains people to overcome functional fixedness. First, break down the items at hand into their basic parts, then name each part in a way that does not imply meaning. Using his technique, a candle becomes wax and string. Seeing the wick as a string is key: calling it a "wick" implies that its use is to be lit, but calling it a "string" opens up new possibilities.

Subjects he trained in this technique readily mastered it and solved 67% more problems requiring creative insight than subjects who did not learn the technique, according to his study published in March in Psychological Science.

For instance, when given metal rings and a candle and asked to connect the rings together, those who named the candle's generic parts realized the wick could be used to tie up the rings. Another problem asked subjects to build a simple circuit board with a terminal, wires and a screwdriver, but the wires were too short. Those who renamed the shaft of the screwdriver a "four-inch length of metal" realized it could be used to bridge the gap and conduct electricity.

Continued in article


From AccountingWeb on March 1, 2013

How to Disable Worksheet Animation in Excel 2013
Excel 2013 has arrived, and for the most part, it's much like Excel 2007 and 2010, but with some spiffy new features, such as Recommended Charts and Pivot Tables, Flash Fill, Quick Analysis, Power View, and more.

http://www.accountingweb.com/article/how-disable-worksheet-animation-excel-2013/221223?source=technology


I thought investors were not supposed to lose money in gold or Apple Corporation
"Apple Stock Just Crashed To A New Low," by Henry Blodget , Business Insider, March 1, 2013 ---
http://www.businessinsider.com/apple-stock-new-low-2013-3?op=1


"When Pigs Fly," by Joe Hoyle, Teaching Blog, March 19, 2013 ---
http://joehoyle-teaching.blogspot.com/2013/03/when-pigs-fly.html


Robotics Displacing Labor Even in Higher Education
"The New Industrial Revolution," by Jeffrey R. Young, Chronicle of Higher Education's Chronicle Review, March  25, 2013 ---
http://chronicle.com/article/The-New-Industrial-Revolution/138015/?cid=cr&utm_source=cr&utm_medium=en

Baxter is a new type of worker, who is having no trouble getting a job these days, even in a tight economy. He's a little slow, but he's easy to train. And companies don't hire him, they buy him—he even comes with a warranty.

Baxter is a robot, not a human, though human workers in all kinds of industries may soon call him a colleague. His plastic-and-metal body consists of two arms loaded with sensors to keep his lifeless limbs from accidentally knocking over anyone nearby. And he has a simulated face, displayed on a flat-panel computer monitor, so he can give a frown if he's vexed or show a bored look if he's waiting to be given more to do.

Baxter is part of a new generation of machines that are changing the labor market worldwide—and raising a new round of debate about the meaning of work itself. This robot comes at a price so low—starting at just $22,000—that even businesses that never thought of replacing people with machines may find that prospect irresistible. It's the brainchild of Rodney Brooks, who also designed the Roomba robot vacuum cleaner, which succeeded in bringing at least a little bit of robotics into millions of homes. One computer scientist predicts that robots like Baxter will soon toil in fast-food restaurants topping pizzas, at bakeries sliding dough into hot ovens, and at a variety of other service-sector jobs, in addition to factories.

I wanted to meet this worker of the future and his robot siblings, so I spent a day at this year's Automate trade show here, where Baxter was one of hundreds of new commercial robots on display. Simply by guiding his hands and pressing a few buttons, I programmed him to put objects in boxes; I played blackjack against another robot that had been temporarily programmed to deal cards to show off its dexterity; and I watched demonstration robots play flawless games of billiards on toy-sized tables. (It turns out that robots are not only better at many professional jobs than humans are, but they can best us in our hobbies, too.)

During a keynote speech to kick off the trade show, Henrik Christensen, director of robotics at Georgia Tech, outlined a vision of a near future when we'll see robots and autonomous devices everywhere, working side by side with humans and taking on a surprisingly diverse set of roles. Robots will load and unload packages from delivery trucks without human assistance—as one company's system demonstrated during the event. Robots will even drive the trucks and fly the cargo planes with our packages, Christensen predicted, noting that Google has already demonstrated its driverless car, and that the same technology that powers military drones can just as well fly a FedEx jet. "We'll see coast-to-coast package delivery with drones without having a pilot in the vehicle," he asserted.

Away from the futuristic trade floor, though, a public discussion is growing about whether robots like Baxter and other new automation technologies are taking too many jobs. Similar concerns have cropped up repeatedly for centuries: when combines first arrived on farms, when the first machines hit factory assembly lines, when computers first entered businesses. A folk tune from the 1950s called "The Automation Song" could well be sung today: "Now you've got new machines for to take my place, and you tell me it's not mine to share." Yet new jobs have always seemed to emerge to fill the gaps left by positions lost to mechanization. There may be few secretaries today, but there are legions of social-media managers and other new professional categories created by digital technology.

Still, what if this time is different? What if we're nearing an inflection point where automation is so cheap and efficient that human workers are simply outmatched? What if machines are now leading to a net loss of jobs rather than a net gain? Two professors at the Massachusetts Institute of Technology, Andrew McAfee and Erik Brynjolfsson, raised that concern in Race Against the Machine: How the Digital Revolution Is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy (Digital Frontier Press, 2011). A recent report on 60 Minutes featured the book's thesis and quoted critics concerned about the potential economic crisis caused by robots, despite the cute faces on their monitors.

But robots raise an even bigger question than how many jobs are left over for humans. A number of scholars are now arguing that all this automation could make many goods and services so cheap that a full-time jobs could become optional for most people. Baxter, then, would become a liberator of the human spirit rather than an enemy of the working man.

That utopian dream would require resetting the role work plays in our lives. If our destiny is to be freed from toil by robot helpers, what are we supposed to do with our days?

To begin to tackle that existential question, I decided to invite along a scholar of work to the Automate trade show. And that's how my guest, Burton J. Bledstein, an expert on the history of professionalism and the growth of the modern middle class, got into an argument with the head of a robotics company.

It happened at the booth for Adept Technology Inc., which makes a robot designed to roam the halls of hospitals and other facilities making deliveries. The latest model­—a foot-tall rolling platform that can be customized for a variety of tasks­—wandered around the booth, resembling something out of a Star Wars film except that it occasionally blasted techno music from its speakers. Bledstein was immediately wary of the contraption. The professor, who holds an emeritus position at the University of Illinois at Chicago, explained that he has an artificial hip and didn't want the robot to accidentally knock him down. He needn't have worried, though; the robot is designed to sense nearby objects and keep a safe distance.

The company's then-CEO, John Dulchinos, assured us that on the whole, robots aren't taking jobs—they're simply making life better for human employees by eliminating the most-tedious tasks. "I can show you some very clear examples where this product is offloading tasks from a nurse that was walking five miles a day to allow her to be able to spend time with patients," he said, as the robot tirelessly circled our feet. "I think you see that in a lot of the applications we're doing, where the mundane task is done by a robot which has very simple capability, and it frees up people to do more-elaborate and more-sophisticated tasks."

The CEO defended the broader trend of companies' embracing automation, especially in factory settings where human workers have long held what he called unfulfilling jobs, like wrapping chicken all day. "They look like zombies when they walk out of that factory," he said of such workers. "It is a mind-numbing, mundane task. There is absolutely no satisfaction from what they do."

"That's your perception," countered Bledstein. "A lot of these are unskilled people. A lot of immigrants are in these jobs. They see it as work. They appreciate the paycheck. The numbness of the work is not something that surprises them or disturbs them."

"I guess we could just turn the clock back to 1900, and we can all be farmers," retorted Dulchinos.

But what about those displaced workers who can't find alternatives, asked Bledstein, arguing that automation is happening not just in factories but also in clerical and other middle-class professions changed by computer technology. "That's kind of creating a crisis today. Especially if those people are over 50, those people are having a lot of trouble finding new work." The professor added that he worried about his undergraduate students, too, and the tough job market they face. "It might be a lost generation, it's so bad."

Dulchinos acknowledged that some workers are struggling during what he sees as a transitional period, but he argued that the solution is more technology and innovation, not less, to get to a new equilibrium even faster.

This went on for a while, and it boiled down to competing conceptions of what it means to have a job. In Bledstein's seminal book, The Culture of Professionalism, first published in 1976, he argues that Americans, in particular, have come to define their work as more than just a series of tasks that could be commodified. Bledstein tracks a history of how, in sector after sector, middle-class workers sought to elevate the meaning of their jobs, whether they worked as athletes, surgeons, or funeral directors: "The professional importance of an occupation was exaggerated when the ordinary coffin became a 'casket,' the sealed repository of a precious object; when a decaying corpse became a 'patient' prepared in an 'operating room' by an 'embalming surgeon' and visited in a 'funeral home' before being laid to rest in a 'memorial park.'"

The American dream involves more than just accumulating wealth, the historian argues. It's about developing a sense of personal value by connecting work to a broader social mission, rather than as "a mechanical job, befitting of lowly manual laborer."

Today, though, "there's disillusionment with professions," Bledstein told me, noting that the logic of efficiency is often valued more than the quality of service. "Commercialism has just taken over everywhere." He complained that in their rush to reduce production costs, some business leaders are forgetting that even manual laborers have skills and knowledge that can be tough to simulate by machine. "They want to talk about them as if these people are just drones," he said as we took a break in the back of the exhibit hall, the whir of robot motors almost drowning out our voices. "Don't minimize the extent of what quote-unquote manual workers do—even ditch diggers."

In Genesis, God sentences Adam and Eve to hard labor as part of the punishment for the apple incident. "Cursed is the ground because of you; through painful toil you will eat food from it all the days of your life" was the sentence handed down in the Garden of Eden. Yet Martin Luther argued, as have other prominent Christian leaders since, that work is also a way to connect with the divine.

Continued in article

"Rethink Robotics invented a $22,000 humanoid (i.e. trainable) robot that competes with low-wage workers," by Antonio Regalado, MIT's Technology Review, January 16, 2013 --- Click Here
http://www.technologyreview.com/news/509296/small-factories-give-baxter-the-robot-a-cautious-once-over/?utm_campaign=newsletters&utm_source=newsletter-daily-all&utm_medium=email&utm_content=20130116

"Rise of the Robots," by Paul Krugman, The New York Times, December 8, 2012 ---
http://krugman.blogs.nytimes.com/2012/12/08/rise-of-the-robots/

Catherine Rampell and Nick Wingfield write about the growing evidence for “reshoring” of manufacturing to the United States. They cite several reasons: rising wages in Asia; lower energy costs here; higher transportation costs. In a followup piece, however, Rampell cites another factor: robots.

The most valuable part of each computer, a motherboard loaded with microprocessors and memory, is already largely made with robots, according to my colleague Quentin Hardy. People do things like fitting in batteries and snapping on screens.

As more robots are built, largely by other robots, “assembly can be done here as well as anywhere else,” said Rob Enderle, an analyst based in San Jose, Calif., who has been following the computer electronics industry for a quarter-century. “That will replace most of the workers, though you will need a few people to manage the robots.”

Robots mean that labor costs don’t matter much, so you might as well locate in advanced countries with large markets and good infrastructure (which may soon not include us, but that’s another issue). On the other hand, it’s not good news for workers!

This is an old concern in economics; it’s “capital-biased technological change”, which tends to shift the distribution of income away from workers to the owners of capital.

Twenty years ago, when I was writing about globalization and inequality, capital bias didn’t look like a big issue; the major changes in income distribution had been among workers (when you include hedge fund managers and CEOs among the workers), rather than between labor and capital. So the academic literature focused almost exclusively on “skill bias”, supposedly explaining the rising college premium.

But the college premium hasn’t risen for a while. What has happened, on the other hand, is a notable shift in income away from labor:.

"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.

All the jobs are not going to Asia, They're going to Hal --- http://en.wikipedia.org/wiki/2001_Space_Oddessey
"When Machines Do Your Job: Researcher Andrew McAfee says advances in computing and artificial intelligence could create a more unequal society," by Antonio Regalado, MIT's Technology Review, July 11, 2012 ---
http://www.technologyreview.com/news/428429/when-machines-do-your-job/

Are American workers losing their jobs to machines?

That was the question posed by Race Against the Machine, an influential e-book published last October by MIT business school researchers Erik Brynjolfsson and Andrew McAfee. The pair looked at troubling U.S. employment numbers—which have declined since the recession of 2008-2009 even as economic output has risen—and concluded that computer technology was partly to blame.

Advances in hardware and software mean it's possible to automate more white-collar jobs, and to do so more quickly than in the past. Think of the airline staffers whose job checking in passengers has been taken by self-service kiosks. While more productivity is a positive, wealth is becoming more concentrated, and more middle-class workers are getting left behind.

What does it mean to have "technological unemployment" even amidst apparent digital plenty? Technology Review spoke to McAfee at the Center for Digital Business, part of the MIT Sloan School of Management, where as principal research scientist he studies new employment trends and definitions of the workplace.

Every symphony in the world incurs an operating deficit
"Financial Leadership Required to Fight Symphony Orchestra ‘Cost Disease’," by Stanford University's Robert J Flanagan, Stanford Graduate School of Business, February 8, 2012 ---
http://www.gsb.stanford.edu/news/headlines/symphony-financial-leadership.html

 What if you sat down in the concert hall one evening to hear Haydn’s Symphony No. 44 in E Minor and found 5 robots scattered among the human musicians? To get multiple audiences in and out of the concert hall faster, the human musicians and robots are playing the composition in double time.

Today’s orchestras have yet to go down this road. However, their traditional ways of doing business, as economist Robert J. Flanagan explains in his new book on symphony orchestra finances, locks them into limited opportunities for productivity growth and ensures that costs keep rising.

"Patented Book Writing System Creates, Sells Hundreds Of Thousands Of Books On Amazon," by David J. Hull, Security Hub, December 13, 2012 ---
http://singularityhub.com/2012/12/13/patented-book-writing-system-lets-one-professor-create-hundreds-of-thousands-of-amazon-books-and-counting/

Philip M. Parker, Professor of Marketing at INSEAD Business School, has had a side project for over 10 years. He’s created a computer system that can write books about specific subjects in about 20 minutes. The patented algorithm has so far generated hundreds of thousands of books. In fact, Amazon lists over 100,000 books attributed to Parker, and over 700,000 works listed for his company, ICON Group International, Inc. This doesn’t include the private works, such as internal reports, created for companies or licensing of the system itself through a separate entity called EdgeMaven Media.

Parker is not so much an author as a compiler, but the end result is the same: boatloads of written works.

"Raytheon's Missiles Are Now Made by Robots," by Ashlee Vance, Bloomberg Business Week, December 11, 2012 ---
http://www.businessweek.com/articles/2012-12-11/raytheons-missiles-now-made-by-robots

A World Without Work," by Dana Rousmaniere, Harvard Business Review Blog, January 27, 2013 --- Click Here
http://blogs.hbr.org/morning-advantage/2013/01/morning-advantage-a-world-with.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Jensen Comment
Historically, graduates who could not find jobs enlisted in the military. Wars of the future, however, will be fought largely by drones, robots, orbiting orbiting satellites. This begs the question of where graduates who cannot find work are going to turn to when the military enlistment offices shut down and Amazon's warehouse robotics replace Wal-Mart in-store workers.

If given a choice, I'm not certain I would want to be born again in the 21st Century.

The Sad State of Economic Theory and Research ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm

 


"Is it Ethical to Save Four People at the Expense of One?" by Accounting Professor Steven Mintz, Ethics Sage, March 15, 2013 ---
http://www.ethicssage.typepad.com/ 

Is it Ethical to Save Four People at the Expense of One?

Lessons from the Talmud

On Tuesday I posted a blog that presented two ethical dilemmas based on the “Trolley Problem.” The Trolley Problem is a thought experiment in ethics, first introduced by Philippa Foot in 1967. Others have  also extensively analyzed the problem including Judith Jarvis Thomason, Peter Unger, and Frances Kamm  as recently as 1996. I have used these problems in my ethics class to challenge students’ moral intuition. Here are the two dilemmas once again:

Dilemma #1

Imagine that you are standing on a footbridge spanning some trolley tracks. You see that a runaway trolley is threatening to kill five people. Standing next to you, in between the oncoming trolley and the five people, is a railway worker wearing a large backpack. You quickly realize that the only way to save the people is to push the man off the bridge and onto the tracks below. The man will die, but his body will stop the trolley from reaching the others. Legal concerns aside, would it be ethical for you to save the five people by pushing this stranger to his death?

Dilemma #2

Now assume that the runaway trolley is heading for five railway workmen who will be killed if it proceeds on its present course. The only way to save these people is to hit a switch that will turn the trolley onto a side track where it will run over and kill one workman instead of five. Ignoring legal concerns, would it be ethically acceptable for you to turn the trolley by hitting the switch in order to save five people at the expense of one person?

The choice is between saving five lives at the cost of taking one life. Before I get to the “answers,” I want to explain how one researcher is using MRI technology to map brain response while analyzing the dilemma. Joshua Greene at Harvard University was more concerned to understand why we have the intuitions, so he used functional Magnetic Resonance Imaging, or fMRI, to examine what happens in people’s brains when they make these moral judgments.

Greene found that people asked to make a moral judgment about “personal” violations, like pushing the stranger off the footbridge, showed increased activity in areas of the brain associated with the emotions. This was not the case with people asked to make judgments about relatively “impersonal” violations like throwing a switch. Moreover, the minority of subjects who did consider that it would be right to push the stranger off the footbridge took longer to reach this judgment than those who said that doing so would be wrong. Interestingly results to say the least.

I received quite a few responses to my blog and selected the best one with respect to identifying the ethical issues. The response comes from Michael Belk, a frequent reader of my blog. Here it is:

#1: I do not believe it to be ethical to intentionally end someone else's life whether it is to save others or not.  I do not believe it is my moral responsibility to sacrifice one life in order that others may go on. 

You hope and pray that it is not their time and leave the results of their outcome to faith.  I would feel terrible, but if you push someone in the way to save others, you may as well say you killed a man.  I would never be able to forgive myself.

The man has a family and people who love him, so how could you explain your actions to his family.

#2. Again I do not believe you should intentionally take a life, but if your intentions were to save the other five men and you were unaware of the damage it would do to the sole man, then you acted out of goodwill and that is more admirable.

Michael’s insights are right on the money. We have no right to sacrifice the life of one person to save others. There is a saying from the Talmud, an authoritative record of rabbinic discussions on Jewish law, Jewish ethics, customs, legends and stories: “Whoever destroys a soul, it is considered as if he destroyed an entire world. And whoever saves a life, it is considered as if he saved an entire world.”

We have no right to decide who lives and who dies. Yes, if we can save one person without harming others we have a moral obligation to do so. However, to save one life while sacrificing others is an arbitrary act in many ways. What if the one sacrificed is a humanitarian, well-respected and well-known person who works tirelessly for the poor and others who can’t help themselves? What if those saved are criminals who committed murder and escaped from prison. You see the dilemma? Who are we to judge who is a good person, and be saved, and who is a bad person? We should focus on leading the best possible life we can; to serve others whether through medicine, the clergy, the law, a teacher, nurse, or first-responder.

Jensen Comment
I have a little difficulty with Dilemma 1 in the sense of why kill the workman instead of yourself. But that's not the real issue in question.

In the USA things get confounded by our lawyers. For example sometimes doing something for the good gets you sued to high heaven whereas doing nothing gets you off scott free. "See nothing, do nothing" is a motto caused by the tort lawyers.


From Ernst & Young:  FASB's new classification and measurement model - a closer look --- Click Here
http://www.ey.com/Publication/vwLUAssetsAL/TechnicalLine_BB2504_ClassificationMeasurement_6March2013/%24FILE/TechnicalLine_BB2504_ClassificationMeasurement_6March2013.pdf

What you need to know

 • The FASB has proposed a single classification and measurement model for all financial instruments that would better converge some areas of US GAAP with IFRS 9

. • Financial assets would be classified and measured based on their contractual cash flow character istics and an entity’s business model for managing them

. • The accounting for financial liabilities generally would not change, except for the measurement of nonrecourse liabilities.

 • The proposal would significantly limit the use of the fair value option.

 • T h e proposal would change the presentation and disclosure of financial instruments in the financial statements.

 • Comments are due by 15 May 2013.

Overview
The Financial Accounting Standards Board (FASB or Board) has proposed a sweeping new classification and measurement model for financial instruments. 1 The proposal would apply to all entities across industries, not just those in financial services. The proposal would require more financial instruments to be classified and measured at fair value through net in come . However, it wouldn ’ t go as far as the FASB ’ s May 2010 exposure draft 2 on accounting for financial instruments, which would have established fair value as the primary basis for measuring financial instruments.


"Unlocking growth through mobility," Grant Thornton, March 2013 ---
http://www.grantthornton.com/staticfiles/GTCom/Advisory/IT/Mobility_article_FINAL.pdf
Thank you Jerry Trites for the heads up.


COSO to release much-awaited internal control framework in May 2013 ---
http://journalofaccountancy.com/News/20137619.htm


Equity Method
"Accounting Lessons From Corning," Michael Fu, Seeking Alpha, March 6, 2013 ---
http://seekingalpha.com/article/1252901-accounting-lessons-from-corning?source=google_news


"Helping Gen Y succeed in the workplace," by Dan Black, Ernst & Young, March 2013 ---
http://www.ey.com/US/en/Careers/EY-Faculty-Connection-Issue-39---1---Helping-Gen-Y

"Ten career tips for young CPAs," by Mark Ursick, cpa2biz, February 25, 2013 ---
http://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2013/CPA/Feb/BuildCareers.jsp

Jensen Comment
I especially agree with:  "Don’t limit your challenges; challenge your limits."

The most gung ho student I ever had studying the accounting for derivative financial instruments and hedging strategies never limited his challenges even though he was less gifted than some of my students. He just worked and worked and worked as a student.

His first job was with a Big Four firm in Houston and within three years he was the technical guy who virtually was in charge on an audit of a company that had over $1 billion in derivatives. He's since moved on to become a leading executive at Microsoft.

In contrast I had more brilliant students who got buy in my accounting theory course but would run like somebody yelled "Fire" if they had an opportunity to audit derivative financial instruments contracts. They never became executives in any companies.

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


"Accountants Will Save the World," by Peter Bakker, Harvard Business Review Blog, March 5, 2013 --- Click Here 
http://blogs.hbr.org/cs/2013/03/accountants_will_save_the_worl.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Jensen Comment
You might also want to read the comments that follow this article.

Bob Jensen's threads on triple bottom accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#TripleBottom


From the CFO.com Morning Ledger on March 19, 2013

JOBS Act spurs some companies to deregister shares. The number of public companies deciding to deregister their shares edged up 1.5% in last year’s second half. The group was led by small community banks, following the passage of the JOBS Act, which made it easier for them to shed their reporting obligations to U.S. regulators, Emily Chasan reports. Some 405 companies deregistered their stock last year in the eight months following the signing of the JOBS Act in April, up from 399 in the eight months before the law took effect. Many of the deregistered companies haven’t left public markets entirely. Instead, their shares trade over the counter.

 

From CFO.com Morning Ledger on March 14, 2013

Regulators ramp up payroll audits.
Regulators are cracking down on small businesses and other employers who misclassify workers as independent contractors to avoid paying payroll taxes and other expenses, the Journal’s
Angus Loten and Emily Maltby write. Some employers are turning to contractors to avoid hitting the federal health-care law’s 50-employee threshold for health insurance. And the crackdown is partly aimed at boosting tax revenue. The U.S. Treasury estimates that forcing employers to properly classify their workers—while tightening so-called “safe harbor” rules that provide them with leeway in determining who is and isn’t an employee—would yield $8.71 billion in added tax revenue over the next decade.

Jensen Comment

Another incentive for outsourcing certain types of work is to outsource risk of fines and bad publicity resulting from employing undocumented workers. A company, including a highly respected university, can get very bad publicity when the news media discloses a practice of hiring undocumented workers. For that reason those organizations will hire such things as building cleaning services from local businesses that are very small and less concerned about bad publicity. A friend of mine in a very respected large company in San Antonio said in all his years working as a security guard for that company he never met a janitor (male or female) who spoke one word of English.


Lenders Are Warned on Risk:  Regulators Act to Pop a Potential Bubble Caused by Surge in Leveraged Credits

From CFO.com on March 22, 2013

Regulators are sounding the alarm on debt underwriting practices. The Fed and other banking regulators said yesterday that the controls and quality checks applied by lenders when extending leveraged loans have deteriorated and they questioned whether some banks are doing enough to gauge the risks of these practices. The regulators issued guidance that lays out expectations for how banks should act. It said regulators will closely monitor banks’ underwriting of the loans – generally used to finance buyouts or acquisitions – and the ability of firms to manage their lending and withstand loan-related losses, the WSJ’s Michael R. Crittenden and Matt Wirz report.

Some Fed officials have singled out leveraged loans as a potential sign of overheating. And the guidance is another example of Fed Chairman Ben Bernanke’s belief that strong regulation – rather than higher interest rates — has to be the main weapon against financial excesses.

The guidance also highlighted the weakening of covenant protections for lenders, particularly ones that force companies to maintain their debt loads within prescribed limits, as cause for concern. Moody’s noted this week that its index of high-yield bond covenants, which measures the strength of lender protections, weakened to its lowest point since the ratings service first began tracking them in January 2011. Moody’s head of covenant research, Alex Dill, told CFOJ’s Vipal Monga in an interview that the pendulum has swung in favor of corporate borrowers and management, as lenders seem willing to give up structural protection in favor of getting yield from their investments.

Thanks Ben
"Cyprus Lifts the Curtain," by Peter Schiff, Townhall, March 21, 2013 --- Click Here
http://finance.townhall.com/columnists/peterschiff/2013/03/22/cyprus-lifts-the-curtain-n1545913?utm_source=thdaily&utm_medium=email&utm_campaign=nl

. . .

Currently, the ultra-low rates provided by the Federal Reserve, which provide a low cost of capital and sustain profits on highly leveraged bond and mortgage portfolios, are a key element keeping banks in the black. All of that would be threatened in a rising rate environment. And while the tests did assume that rates would rise from the current 1.9% on the 10 year Treasury, there were no considerations for yields surpassing 4%. They assume that interest rates will stay near historic lows, no matter how bad (or good) the economy gets, how high inflation rises, or how much money the government borrows.

Continued in article


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

From the CFO.com Morning Ledger on March 19, 2013

Ex-CEO of Calpers charged. The former head of Calpers was charged with concocting fraudulent documents to help a friend collect millions of dollars in fees from Apollo Global Management. The grand jury indictment of Federico R. Buenrostro Jr., who was chief executive of the Calpers until 2008, and his friend, Alfred J. Villalobos, are the first criminal charges in a “pay-to-play” case involving the $257 billion retirement system, the WSJ reports. The indictment alleges that Messrs. Buenrostro and Villalobos fabricated letters in 2008 that duped Apollo into paying $14 million in fees to Mr. Villalobos’s firm.

"Former California Public Employee System CEO and Former Placement Agent Indicted for Conspiracy and Fraud," FBI, March 18, 2013 --- Click Here
http://www.fbi.gov/sanfrancisco/press-releases/2013/former-california-public-employee-system-ceo-and-former-placement-agent-indicted-for-conspiracy-and-fraud

SAN FRANCISCO—A federal grand jury in San Francisco indicted Alfred J. Villalobos, of Reno, Nevada, and Federico R. Buenrostro, Jr., aka Fred Buenrostro, of Sacramento, California, on charges of conspiracy to defraud the United States, engaging in a false scheme against the United States, and conspiracy to commit mail fraud and wire fraud, U.S. Attorney Melinda Haag announced. Mr. Buenrostro was also charged in the same indictment with making a false statement to the United States and obstruction of justice.

According to the indictment, Mr. Villalobos, 69 and Mr. Buenrostro, 64, conspired to create and transmit fraudulent documents in connection with a $3 billion investment by the California Public Employee Retirement System (CalPERS) into funds managed by Apollo Global Management, a private equity firm based in New York City.

ARVCO Capital Research LLC, a financial services firm founded and managed by Mr. Villalobos, allegedly acted as a placement agent in helping Apollo to secure these investments by CalPERS. In each instance, Apollo required ARVCO to obtain an investor disclosure letter from CalPERS prior to paying ARVCO any fees for its efforts in securing CalPERS’ investments into Apollo-managed funds, citing, among other reasons, Apollo’s obligations under the securities laws.

After CalPERS’ legal and investment offices declined to sign a certain investor disclosure letter documenting ARVCO’s legal relationship with Apollo, Mr. Villalobos and Mr. Buenrostro allegedly conspired to create a series of fraudulent investor disclosure letters that were transmitted to Apollo. Apollo paid ARVCO a total of approximately $14 million dollars in fees after receiving the fraudulent letters.

ARVCO transmitted the last fraudulent investor disclosure letter in June 2008, a few weeks before Mr. Buenrostro retired from CalPERS. On July 1, 2008, Mr. Villalobos hired Mr. Buenrostro to work for ARVCO. When civil and later criminal investigations were opened into the operations of ARVCO and its role as a placement agent in connection with CalPERS’ investments in Apollo-managed funds, both defendants made false statements to and concealed information from the SEC, the USPIS, and the FBI about the authenticity of the investor disclosure letters in order to defeat and obstruct the lawful functions of those agencies.

Mr. Villalobos and Mr. Buenrostro made their initial appearance in federal court in San Francisco on March 18, 2013, and are currently out on bond. Mr. Buenrostro’s next scheduled appearance is Monday, March 25, 2013, at 9:30 a.m. for identification of counsel and review of the terms of his bond. Mr. Villalobos’ next scheduled appearance is April 9, 2013, at 9:30 a.m. for review of the terms of his bond. Both defendants are scheduled to appear before in district court on May 8, 2013, at 2:00 p.m. before Judge Breyer.

The maximum statutory penalty for conspiracy to commit mail fraud and wire fraud is 20 years in prison; $250,000 fine or twice the amount of gain or loss, whichever is greater; three years of supervised release; and a $100 special assessment. The maximum penalty for each count of conspiracy to defraud the United States, false scheme against the United States, false statement to the United States, and obstruction of justice is five years in prison; $250,000 fine or twice the amount of gain or loss, whichever is greater; three years of supervised release; and a $100 special assessment. Restitution may also be ordered as to each of the five counts. However, any sentence following conviction would be imposed by the court after consideration of the U.S. Sentencing Guidelines a the federal statute governing the imposition of a sentence.

Timothy J. Lucey is the Assistant U.S. Attorney who is prosecuting the case with the assistance of Laurie Worthen and Maryam Beros. The prosecution is the result of a two-and-a half-year investigation by the U.S. Postal Inspection Service and FBI, with substantial assistance from the Los Angeles Regional Office of the Securities and Exchange Commission as well as the U.S. Secret Service.

 

"Check Fraud Persists; Card Fraud Growing: Finance departments say check fraud was the most prevalent kind of payment fraud in 2012. But attacks on corporate cards and electronic forms are rising, too," by Vincent Ryan, CFO.com, March 19, 2013 ---
http://www3.cfo.com/article/2013/3/cash-management_payments-fraud-check-corporate-card-purchasing-ach-positive-pay-afp

"New Report Shows Changing Fraud Environment," by Curtis C. Verschoor, AccountingWeb, March 18, 2013 ---
http://www.accountingweb.com/article/new-report-shows-changing-fraud-environment/221374

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


"Former Manager of Virginia Beach Mortgage Brokerage Firm Pleads Guilty to Fraud," FBI, March 18, 2013 ---
http://www.fbi.gov/norfolk/press-releases/2013/former-manager-of-virginia-beach-mortgage-brokerage-firm-pleads-guilty-to-fraud

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


"Registered Nurse Pleads Guilty in Connection with Detroit ($24 Million) Medicare Fraud Scheme," FBI, March 22, 2013 ---
http://www.fbi.gov/detroit/press-releases/2013/registered-nurse-pleads-guilty-in-connection-with-detroit-medicare-fraud-scheme

A registered nurse who fabricated nursing visit forms in connection with a $24 million home health care fraud conspiracy in Detroit pleaded guilty today for her role in the scheme, announced Acting Assistant Attorney General Mythili Raman of the Justice Department’s Criminal Division; U.S. Attorney for the Eastern District of Michigan Barbara L. McQuade; Special Agent in Charge Robert D. Foley, III of the FBI’s Detroit Field Office; and Special Agent in Charge Lamont Pugh, III of the U.S. Department of Health and Human Services Office of Inspector General (HHS-OIG), Chicago Regional Office.

Beverly Cooper, 59, of Detroit, pleaded guilty before U.S. District Judge Victoria A. Roberts in the Eastern District of Michigan to one count of conspiracy to commit health care fraud.

Cooper admitted that she and others conspired to defraud Medicare through home health care companies operating in the Detroit area, including Reliance Home Care LLC, First Choice Home Health Care Services Inc., and Accessible Home Care Inc. According to court documents, Cooper fabricated nursing visit notes and other documents to give Medicare the impression that she had provided home health care services, when, in fact, home health care was not needed and/or was not being provided. Cooper also admitted that while at these companies, she signed nursing visit notes for home visits made by other unlicensed individuals to give Medicare the false impression that she had provided home health care. Court documents reveal that Cooper understood that the documents she created would be used by these companies to submit claims to Medicare for home health services that were not medically necessary and/or not provided.

Court documents show that when home health companies were inspected by state regulatory agencies, Cooper and her co-conspirators participated in staged home health visits, posing as employees of these companies and treating fake patients, all to give inspectors the false impression that these companies’ operations were legitimate and that home health services were in fact being provided.

Court documents allege that between 2006 and May 2012, Cooper’s conduct caused Reliance, First Choice, and Accessible to submit claims to Medicare for services that were not medically necessary and/or not provided, causing Medicare to pay these companies approximately $5,403,703.

At sentencing, scheduled for July 23, 2013, Cooper faces a maximum penalty of 10 years in prison and a $250,000 fine.

This case is being prosecuted by Trial Attorney William G. Kanellis and Assistant Chief Gejaa Gobena of the Criminal Division’s Fraud Section. It was investigated by the FBI and HHS-OIG, and it was brought as part of the Medicare Fraud Strike Force, supervised by the Criminal Division’s Fraud Section and the U.S. Attorney’s Office for the Eastern District of Michigan.

Since its inception in March 2007, the Medicare Fraud Strike Force, now operating in nine cities across the country, has charged more than 1,480 defendants who have collectively billed the Medicare program for more than $4.8 billion. In addition, HHS’s Centers for Medicare and Medicaid Services, working in conjunction with HHS-OIG, is taking steps to increase accountability and decrease the presence of fraudulent providers.

To learn more about the Health Care Fraud Prevention and Enforcement Action Team (HEAT), go to www.stopmedicarefraud.gov.

"How Monsanto outfoxed the Obama administration The inside story of how the government let one company squash biotech innovation, and dominate an entire industry," by Lina Khan, Salon, March 15, 2013 ---
http://www.salon.com/2013/03/15/how_did_monsanto_outfox_the_obama_administration/

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


Question
Goodwill Impairment: What Happens When U.S. GAAP and IFRSs Clash?

From CFO.com on March 25, 2013

Differences in the goodwill impairment standards under U.S. GAAP and IFRSs may create significant disparities as to whether goodwill is viewed as impaired and, if so, how much is written off in the United States and the other country, or even country to country. Learn more about the challenges companies, especially acquisitive ones, may face in performing goodwill impairment testing both in the U.S. and around the world.
More --- http://deloitte.wsj.com/cfo/2013/03/25/goodwill-impairment-what-happens-when-u-s-gaap-and-ifrss-clash/

For acquisitive companies, determining whether goodwill booked in transactions has become impaired and if it has, by how much, is now a fairly regular occurrence. However, the accounting involved can be anything but straightforward when the acquirer is a U.S.-based company and subsidiary businesses are located elsewhere or vice versa.

Differences in the goodwill impairment standards under U.S. GAAP and International Financial Reporting Standards (IFRSs) may create significant disparities as to whether goodwill is viewed as impaired and, if so, how much is written off in the United States and the other country, or even country-to-country. Other factors creating such disparities include the varying application of valuation methodologies and historical cultural differences in the application of impairment accounting.

Such situations may be especially troublesome for U.S. businesses because of country-to-country differences around the world. For example, a U.S. company with operations in Germany, France, Spain and Greece may write off goodwill entirely on a consolidated basis under U.S. GAAP. However, when a corporate life event, such as a spin-off or carve out, is undertaken related to the subsidiary outside of the U.S. depending on how the IFRSs principles are applied, some or none of its goodwill might be written off. (See: U.S. GAAP-IFRSs Dilemma: A Case Study further below).

Sorting out these differences may be a challenging process for management of companies operating in numerous countries across the world, when U.S. GAAP, IFRSs and potentially other financial reporting frameworks need to be addressed. Relief from the dilemma of distinguishing between the treatment under U.S. GAAP and IFRSs does not appear to be on the way any time soon. On one hand, the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) are continuing their now decade-long work to converge IFRSs and U.S. GAAP. However, converging goodwill impairment accounting does not appear to be a near-term project.

In addition, on July 13, 2012, the SEC issued its final staff report on the “Work Plan for Consideration of incorporating IFRSs into the Financial Reporting System for U.S. Issuers” without offering a timetable for potential U.S. adoption of IFRSs for domestic filers¹. This leaves companies for the foreseeable future still facing difficult situations when dealing with disparities such as goodwill impairment.

The Conceptual Foundation of Impairment Issues

The differences in U.S. GAAP and IFRSs goodwill impairment treatment flow largely from a fundamental difference in accounting approaches. As a principles-based accounting approach, IFRSs provide a conceptual basis for accountants to follow in a one-step test that has both a fair value and an asset-recoverability aspect. U.S. GAAP, on the other hand, dictates that goodwill is tested for impairment through a two-step, fair value test with the level of impairment, if present, determined in Step 2 after an extensive analysis of related asset values. However, the FASB’s recent issuance of a “step zero” qualitative assessment for goodwill impairment testing did introduce an element of a principles-based approach under U.S. GAAP³. Principles-based standards allow accountants to apply significant professional judgment in assessing a transaction. This is substantially different from the underlying “box-ticking” approach historically common in rules-based accounting standards.

The lack of precise guidelines in a principles-based approach may create inconsistencies in the application of standards across organizations and countries, particularly in a very subjective area such as fair value. On the other hand, rules-based standards can be viewed as insufficiently flexible to accommodate a topic such as fair value, which often requires significant professional judgments gained through experience, with extremely limited market data.

However, the U.S. has gradually been embracing the principles-based approach. The recently converged standards on fair value measurement (IFRS 13 and ASC 820), an IASB-FASB joint effort, supports this.

Even though the SEC has not set a timetable for if, when, or how the U.S. might move to IFRSs in the future, convergence efforts themselves in recent years have started to influence how new accounting standards are applied in practice.

U.S. GAAP-IFRSs Dilemma: A Case Study

The experience of a U.S.-based consolidated company comprising six Reporting Units (RUs) demonstrates how differences in U.S. GAAP and IFRSs may affect goodwill impairment. The company was considering a spinoff of an RU located in a country following IFRSs, as a standalone company through an IPO. Therefore, a standalone audit of the RU was necessary under IFRSs. At the end of its fiscal year, the U.S. consolidated company wrote off the goodwill in its foreign-based RU and some other domestic RUs under U.S GAAP.

Outside the U.S., meanwhile, the subsidiary—a standalone RU in the U.S. and a single Cash Generating Unit (CGU) under IFRSs—performed an independent goodwill impairment analysis. The standalone CGU management did not believe there should be a goodwill write-off under IFRSs guidelines and following typical valuation procedures in that country related to goodwill impairment testing. As a result, the standalone CGU reported goodwill under IFRSs but the standalone RU under U.S. GAAP wrote the entire amount off, at the same point in time.

Addressing the Dilemma

In a world where investors often react to new or inconsistent financial information within seconds, it is important for company management to understand environments where different conclusions may be reached relative to topics such as goodwill impairment.

Sometimes differences need to be addressed and initial conclusions potentially modified. In other situations differences are just the result of the various financial reporting frameworks and environments across the world. However, it is important to be aware that situations may occur where various parties involved may not agree or understand each other’s perspectives, and then be able to navigate them effectively to get to supportable and reasonable conclusions.

Understanding real differences due to statutory guidance—such as non-convergent accounting versus interpretations of principles-based standards, or the varying application of valuation methods—is extremely important.

The Effects of Culture and Translation

As accounting standards, IFRSs are still relatively recent, with European nations as early adopters in 2005; although, in some countries, IFRSs have been around longer. Numerous countries around the world have been transitioning to IFRSs in recent years. In many of those countries, fair value was not present in the original accounting framework. Indeed, a number of the countries now following IFRSs do not have fully functioning market- based economies, making the complexity of arriving at supportable fair value estimates even greater.

Countries around the world have operated for decades within their own accounting systems, and cultural differences cause accountants in different countries to interpret and apply accounting standards differently. Such differences can affect the measurement and disclosure of financial information in financial reports and potentially affect cross-border financial statement comparability.

National culture is most likely to influence the application of financial reporting standards where judgment is required. This is of concern due to IFRSs being principles- based and requiring substantial judgment on the part of the accountant and the valuation specialist performing the valuation.

The official working language of the IASB, and the language in which IFRSs are published, is English. Translation of IFRSs into various languages introduces an added complexity in comparability of application of IFRSs across the world, as well as comparability with U.S. GAAP. In some cases, words and phrases used in English- language accounting standards cannot be translated into other languages without some distortion of meaning. For instance, words such as “probable,” “not likely,” “reasonable assurance” and “remote” can be problematic during interpretation.

In addition, many countries that have moved to IFRSs may have introduced their own country’s version of IFRSs; such localization of the standards has led to the creation of many slightly different versions of IFRSs.

Therefore, when analyzing and contrasting financial reporting practices, such as those involving goodwill impairment testing, it is not as simple as a comparison of U.S GAAP and IFRSs.

To highlight the need for greater consistency, the European Securities and Markets Authority (ESMA) issued a Public Statement on November 12, 2012, regarding European common enforcement priorities for 2012 financial statements. ESMA’s reason for issuing the statement was “to promote consistent application of the European securities and markets legislation, and more specifically that of [IFRSs].” One of the four “…financial reporting topics which they believe are particularly significant for European listed companies…”⁴ was impairment of non-financial assets, including goodwill.

The Effects of Different Accounting Treatments

Taking a goodwill impairment can be a necessary, if disappointing, step for a company. For publicly traded companies in particular, depending on how the company has managed market expectations, the move may or may not affect the company’s market pricing. Dealing with inconsistencies from market to market can be even more perplexing. Whatever the situation, companies operating across the global economy continue to face the challenge of differing application of valuation methodologies and accounting principles under U.S. GAAP and IFRSs, local country GAAP and even country-to-country under IFRSs regarding goodwill impairment testing.

 

"Goodwill Impairment: I Love a Charade," by Tom Selling, The Accounting Onion, January 15. 2010 --- Click Here
 http://accountingonion.typepad.com/theaccountingonion/2010/01/goodwill-impairment-i-love-a-charade-reposted.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+typepad%2Ftheaccountingonion+%28The+Accounting+Onion%29 

Jensen Comment
Note that Tom wants all consolidation goodwill expensed in the year of acquisition --- something akin to taking an earnings bath up front when companies are merged or purchased. I disagree because of the way this distorts future earnings and financial performance ratios like P/E ratios and Return on Investment (ROI) and Return on Equity (ROE). Goodwill generally depicts the value in use of an acquisition above and beyond the sum of the exit values of the net assets acquired. This is comprised of the synergy and covariance components of acquisition value. This "goodwill" is paid for in an acquisition because it has future value. Expensing the so-called goodwill  completely up front, in my opinion, allows acquiring firms to overstate ROI and ROE for many future years. The term "goodwill" is really a misnomer and should be changed.

Bob Jensen's threads on goodwill and other asset impairment issues ---
http://www.trinity.edu/rjensen/Theory02.htm#Impairment

 


"Most-Admired Companies Aren't Always Great Investments," by Mark Hulbert, The Wall Street Journal, March 8, 2013 ---
http://online.wsj.com/article/SB10001424127887324034804578346620047446456.html?mod=googlenews_wsj

Amazon.com AMZN -1.09% recently emerged as the company with the best reputation among the general public in the U.S., according to a survey of more than 14,000 randomly selected individuals conducted by Harris Interactive HPOL -5.23% .

Amazon investors can only hope its fate will turn out better than Apple's, AAPL +1.40% which topped Harris Interactive's survey last year—and has since seen its stock fall more than 20%.

Was Apple's experience a fluke? I wouldn't bet on it.

There are many reasons for Apple's falling stock unrelated to consumer surveys. Yet companies that have great reputations tend to be overvalued. Consider a study that appeared in 2010 in the Journal of Portfolio Management titled "Stocks of Admired and Spurned Companies." The authors analyzed the stocks of firms appearing in Fortune magazine's annual list of "America's Most Admired Companies" between 1983 and 2007.

Though that list is compiled differently from Harris Interactive's, the two reflect many of the same underlying factors. For example, the top three most-admired companies in the current Fortune ranking are in first, second and fourth place in the Harris survey.

The researchers found the spurned companies at the bottom of Fortune's survey were a better bet, on average, than the most-admired ones at the top. A hypothetical portfolio constructed each year out of the least-admired companies performed nearly two percentage points per year better than a portfolio of the most-admired companies.

These results support a contrarian interpretation of a company's reputation, says Meir Statman, a finance professor at Santa Clara University and one of the study's authors. His research found that companies tended to rank higher in the Fortune survey if their stocks had performed particularly well over the previous 12 months. This increases the chances the company's stock will be overvalued, he says.

In fact, Mr. Statman adds, it might be that one of the reasons a company tends to be highly admired in the first place is that its stock price has gone up. This would be one big reason why its stock is so vulnerable to even a slight change in investor sentiment.

It certainly is plausible that a soaring stock price contributed to Amazon's good reputation: Its stock hit a new all-time high in January and has gained 49% over the past 12 months, versus just 13% for the Standard & Poor's 500-stock index.

Investors are more likely to find undervalued situations among the stocks of spurned companies, Mr. Statman says. He notes that such a company needn't perform spectacularly in order for its stock to be a good bet: All it must do is beat investors' diminished expectations.

Because of these factors, he says, we "should tilt our portfolios toward those at the bottom of the rankings."

Continued in article

Jensen Comment
The biggest problem for many investors is that the Fed's seemingly long-term intention is too keep interest rates so low that customary safe investments like bank Certificates of Deposits pay virtually nothing. This forces investors to either burn savings on consumption (which is what retirees are now doing) or take on more financial risks in the stock market (that provides as much illusion as reality unless investors are smart enough to realize that much of what they gain in the stock market in inflationary gain that is not for real).

I sold an Iowa farm about five years ago an am not certain that I made the right decision. Iowa farm land has since risen to an all-time high and can ride out droughts due to the government's generous subsidies for crop insurance against drought and other disasters. And for farmers who had 2012 crop successes in Iowa the corn and soy bean prices are fantastically high at the moment because of the 2012 drought. Farm land is seemingly both an inflation hedge and provides annual liquidity from crop successes or crop failures (due to crop insurance).

But farm land is not necessarily a good investment at the moment because its investment prospects have already be factored into the record high prices for farm land in 2013. Also for distant landlords, like me before I sold the land, it can be frustrating to deal with rent negotiations and tenants who are always begging for things like new tile under wet ground.  I don't want to be a landlord ever again.

Farm rents are subject to high taxes, especially from the State of Iowa. I put the farm sale proceeds into a long-term insured municipal bond fund from Vanguard and have been happy ever since with relatively high tax-free cash returns each year. Of course this is not an especially good inflation hedge, but I do not expect to be alive 20 years from now --- or less. And if tax reform ends the advantages of my tax-free investment I will simply write a check on part of my Vanguard fund and pay off my home mortgage --- my only debt that I keep for tax advantages.

What I really hate to see are all sucker adds in the media to buy gold coins. First of all, if you're going to invest in gold invest in highly-reputed gold funds rather than gold itself which is expensive to store safely and is expensive to get rid of due to need for having it assayed and need to find buyers who do not demand gouging cash discounts when you're forced to sell. Investing in precious metal mutual funds in general is risky for the short term and not good for annual cash flows. Precious metals and some other commodities may be good inflation hedges over a very long haul if you don't need shorter term cash flows. But most of us want some annual cash returns on our investments.

Put simply, investors today are between a rock and hard place until the Fed allows interest rates on safe investments return to reasonable levels that of course still vary with time-to-maturity. But a 1.25% return on a five-year Certificate of Deposit is not reasonable.

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

Bob Jensen's tax helpers are at
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation

I never give out investment or tax advice to any individuals or businesses --- which is extremely lucky for them.


New Billionaires in 2012
Time Magazine
March 18, 2013
Page 8

29 China (one of the long-term Brics)
27 United States
12 Brazil (one of the long-term Brics)
11 Russia (one of the long-term Brics)
09 France

The only missing Bric is India

A BRIC nation at the moment is a nation that has vast resources and virtually no entitlement obligations that drag down economic growth --- http://en.wikipedia.org/wiki/BRIC

In economics, BRIC (typically rendered as "the BRICs" or "the BRIC countries") is an acronym that refers to the fast-growing developing economies of Brazil, Russia, India, and China. The acronym was first coined and prominently used by Goldman Sachs in 2001. According to a paper published in 2005, Mexico and South Korea are the only other countries comparable to the BRICs, but their economies were excluded initially because they were considered already more developed. Goldman Sachs argued that, since they are developing rapidly, by 2050 the combined economies of the BRICs could eclipse the combined economies of the current richest countries of the world. The four countries, combined, currently account for more than a quarter of the world's land area and more than 40% of the world's population.

Brazil, Russia, India and China, (the BRICs) sometimes lumped together as BRIC to represent fast-growing developing economies, are selling off their U.S. Treasury Bond holdings. Russia announced earlier this month it will sell U.S. Treasury Bonds, while China and Brazil have announced plans to cut the amount of U.S. Treasury Bonds in their foreign currency reserves and buy bonds issued by the International Monetary Fund instead. The BRICs are also soliciting public support for a "super currency" capable of replacing what they see as the ailing U.S. dollar. The four countries account for 22 percent of the global economy, and their defection could deal a severe blow to the greenback. If the BRICs sell their U.S. Treasury Bond holdings, the price will drop and yields rise, and that could prompt the central banks of other countries to start selling their holdings to avoid losses too. A sell-off on a grand scale could trigger a collapse in the value of the dollar, ending the appeal of both dollars and bonds as safe-haven assets. The moves are a challenge to the power of the dollar in international financial markets. Goldman Sachs economist Alberto Ramos in an interview with Bloomberg News on Thursday said the decision by the BRICs to buy IMF bonds should not be seen simply as a desire to diversify their foreign currency portfolios but as a show of muscle.
"BRICs Launch Assault on Dollar's Global Status," The Chosun IIbo, June 14, 2009 ---
http://english.chosun.com/site/data/html_dir/2009/06/12/2009061200855.html

Their report, "Dreaming with BRICs: The Path to 2050," predicted that within 40 years, the economies of Brazil, Russia, India and China - the BRICs - would be larger than the US, Germany, Japan, Britain, France and Italy combined. China would overtake the US as the world's largest economy and India would be third, outpacing all other industrialised nations. 
"Out of the shadows," Sydney Morning Herald, February 5, 2005 --- http://www.smh.com.au/text/articles/2005/02/04/1107476799248.html 

The first economist, an early  Nobel Prize Winning economist, to raise the alarm of entitlements in my head was Milton Friedman.  He has written extensively about the lurking dangers of entitlements.  I highly recommend his fantastic "Free to Choose" series of PBS videos where his "Welfare of Entitlements" warning becomes his principle concern for the future of the Untied States 25 years ago --- http://www.ideachannel.com/FreeToChoose.htm 

 

An Instructional Teaching Case for Accounting Teachers

The Brooks Brothers Tangle With the SEC
The company had four independent auditors over the course of this saga
David Brooks apparently made threatening remarks to certain of his company's independent auditors
"Of Hurricanes and Harness Racing:  The Accounting Fraud at DHB Industries, by Michael C. Knapp and Carol A. Knapp, Issues in Accounting Education, Vol. 28, No. 1, February 2013, pp. 131-152 ---
http://aaajournals.org/doi/full/10.2308/iace-50297

You can't make up a story like this.
Andrew Cohen, Senior Legal Analyst, CBS News

ABSTRACT:

This instructional case focuses on an accounting and financial reporting fraud involving DHB Industries, Inc., the nation's largest manufacturer of bullet-resistant vests. Three executives of this Securities and Exchange Commission (SEC) registrant, including its founder and CEO, masterminded a large-scale fraud that grossly misrepresented DHB's financial statements. The three executives colluded to conceal their misdeeds from the four accounting firms that served as the company's independent auditors over the course of the fraud. In late 2010, a federal jury convicted DHB's former CEO and COO of multiple counts of fraud and related charges. This case addresses a wide range of auditing issues raised by the DHB fraud, including the identification of fraud risk factors, auditing of related-party transactions, the impact of frequent auditor changes on audit quality, and the internal control reporting responsibilities of auditors.

. . .

Circus Trial

The criminal trial of David Brooks and his co-defendant Sandra Hatfield commenced in late January 2010. Brooks faced a 17-count federal indictment that included allegations of corporate fraud, insider trading, conspiracy, and obstruction of justice. Hatfield faced similar charges in the 16-count federal indictment filed against her.

Throughout the trial, jurors were pelted with an unrelenting stream of evidence that documented how Brooks had used “DHB as his personal piggy bank” (SEC 2007). Personal expenditures paid with corporate funds included purchases of luxury automobiles, expensive art, jewelry, designer clothing, and real estate. Court testimony revealed that the largest benefactor of Brooks' embezzlement scheme was his beloved harness racing operation. Brooks reportedly diverted nearly $15 million of DHB funds through TAP to help finance his expensive hobby.

Other testimony during the long criminal trial documented how Brooks had repeatedly lied to DHB's independent auditors to conceal his fraudulent scams. Schlegel's testimony laid out in minute detail the extreme lengths to which she, Brooks, and Hatfield had gone to mislead the auditors. The most elaborate hoaxes were required to conceal the large overstatements of inventory from the curious and persistent teams of auditors.

Throughout the eight-month trial, the presiding federal magistrate, Judge Joanna Seybert, faced the daunting task of maintaining a sense of civility and decorum in her Long Island courtroom. The first drama involved the revocation of David Brooks' bail. In January 2008, three months after his initial arrest, Brooks' attorneys secured his release on bail. Because Judge Seybert believed that Brooks posed a significant flight risk, she required him to post a $400 million bail bond that included cash and other collateral of nearly $50 million. The bail terms also required Brooks to retain a security firm at an estimated cost of $3,500 per day to monitor him around the clock. ABC News (2008) reported that Brooks' bail terms were more stringent than those imposed years earlier by a federal judge on the infamous mobster John Gotti.

Just as Brooks' trial was beginning, Judge Seybert revoked his bail and remanded him to jail because of two reports given to her by the FBI. An undercover video forwarded to the FBI by Scotland Yard detectives allegedly showed Jeffrey Brooks and one of his subordinates transferring millions of euros to a large safety deposit box in a London bank. The FBI was convinced that the funds belonged to David Brooks. The FBI also informed Judge Seybert that they had discovered evidence suggesting that Brooks had secretly transferred tens of millions of dollars to bank accounts in the tiny European nation of San Marino. Judge Seybert revoked Brooks' bail because the two incidents violated the conditions of his bail agreement that mandated that all of his financial assets be “frozen.”

Midway through the trial, Judge Seybert threatened to have David Brooks removed from the courtroom after he was discovered attempting to smuggle anxiety-suppression medication into his jail cell. The anti-anxiety pills were hidden in a ballpoint pen that had been placed at Brooks' desk during a break in the courtroom proceedings. Following this incident, Judge Seybert barred Jeffrey Brooks and one of David Brooks' close friends from the courtroom. Brooks' personal psychiatrist subsequently testified that the psychiatrist at the correctional facility where Brooks was being held had prescribed him an insufficient dosage of the anti-anxiety medication. Brooks reportedly needed larger than normal dosages of that medication to ward off the panic attacks that he frequently experienced.

Later in the trial, federal prosecutors revealed that several months earlier, David Brooks had allegedly asked a veterinarian who worked in his harness racing operation to obtain a medication administered to horses. If taken by a human, this medication would supposedly wipe out his or her memory. According to the veterinarian, Brooks hoped to somehow administer the medication to Dawn Schlegel, the prosecution's principal witness, prior to the beginning of his criminal trial. This revelation and Brooks' other antics during the trial caused Comedy Central's Stephen Colbert to name Brooks his “Alpha Dog of the Week” during the August 2, 2010, airing of the popular television program The Colbert Report.

Andrew Cohen, a senior legal analyst for CBS News who monitored Brooks' trial, observed that many of its details were so salacious that major publications, such as The New York Times, would not report them (Cohen 2010). One veteran reporter summarized some of the more outrageous events and testimony that took place during the trial:

It's not an everyday federal trial in which an FBI agent walks into the courtroom in the middle of a trial and seizes the contents of a defendant's wastebasket as part of a still ongoing investigation into whether Brooks tampered with the jury. Or in which the defense asserts that the payment of company money to prostitutes might be an acceptable technique to motivate employees. Or in which a defendant says he is entitled to have his company pay for the grave of his mother, camp tuition for his children, a $60,000 sculpture of a Wall Street bull, family trips to St. Barts and St. Tropez, or allegedly drains millions of dollars off through a shell company to pay for the upkeep of harness stables. (Cohen 2010)

After spending two months studying the massive amount of evidence that prosecutors had presented to prove their allegations, a federal jury convicted Brooks on all 17 counts that had been filed against him. Sandra Hatfield, Brooks' former colleague and co-defendant, was found guilty on 14 of the 16 counts included in her federal indictment.

Epilogue

In April 2010, near the midpoint of David Brooks' criminal trial, Point Blank Solutions, the successor to DHB Industries, Inc., filed for protection from its creditors in U.S. Bankruptcy Court. To date, a reorganization plan for the company has not been approved by the federal judge presiding over the company's bankruptcy filing. Point Blank remains an operating entity and continues to claim that it is the world's leading manufacturer of body armor.

Following the completion of Brooks' trial, his attorneys immediately appealed his conviction. Among other arguments, the attorneys maintained that Brooks was incompetent and unable to contribute to his defense during much of the trial because of the anti-anxiety medication that he was taking. With his appeal still pending, Brooks has yet to be sentenced. Shortly after his criminal trial ended, Brooks pled guilty to tax evasion charges that had been pending against him for several years. Brooks is yet to stand trial on contempt charges filed against him as a result of his behavior during his criminal trial.

In February 2011, the SEC filed a civil complaint against three former members of DHB's audit committee. The federal agency charged the three individuals with being “willfully blind to numerous red flags signaling accounting fraud, reporting violations, and misappropriation at DHB” (SEC 2011). The civil complaint went on to allege that the three former audit committee members “merely rubber-stamped the decisions of DHB's senior management while making substantial sums from sales of DHB's securities” (SEC 2011).



 
QUESTIONS
  1. Exhibits 1 and 4 present DHB's original 2003–2004 balance sheets and income statements and the restated balance sheets and income statements for those two years, respectively. Review the original and restated financial statements for 2004 and identify the “material” differences between them. (Note: You are not required to identify the sources of these differences.) Defend your choices.
  2. Identify the fraud risk factors posed by DHB for its independent auditors. Which of these factors, in your opinion, should have been of primary concern to those auditors?
  3. During the 2004 DHB audit, the company's independent auditors had considerable difficulty obtaining reliable audit evidence regarding the $7 million of obsolete vest components that allegedly had been destroyed by a hurricane. What responsibility do auditors have when the client cannot provide the evidence they need to complete one or more audit tests or procedures?
  4. What responsibility, if any, do auditors have to search for related-party transactions? If auditors discover that a client has engaged in related-party transactions, what audit procedures should be applied to them?
  5. Compare and contrast the internal control reporting responsibilities of the management and independent auditors of public companies.
  6. What potential consequences do frequent changes in auditors have for the quality of a given entity's independent audits? Identify professional standards or other rules and regulations that are intended to discourage auditor changes or provide disclosure of the circumstances surrounding them.
  7. David Brooks apparently made threatening remarks to certain of his company's independent auditors. What actions should auditors take when they are the target of hostile statements or actions by client executives or employees?
  8. Does the SEC have a responsibility to protect the investing public from self-interested corporate executives? Do professional auditing standards or other rules or regulations impose such a responsibility on independent auditors?
  9. The audit committee of DHB Industries was criticized for failing to carry out its oversight responsibilities. What are the primary responsibilities of a public company's audit committee?

 

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


An Instructional Teaching Case for Accounting Instructors

From The Wall Street Journal Accounting Weekly Review on March 8, 2013

Public-University Costs Soar
by: Ruth Simon
Mar 06, 2013
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com WSJ Video
 

TOPICS: Financial Ratios, Governmental Accounting

SUMMARY: The article describes the current state of affairs at public institutions of higher education with respect to funding from the state, tuition increases, and some university options to solve the issues that they face. These concerns will be of interest to students generally. The accounting focus in best presented in the related video: return on investment in education.

CLASSROOM APPLICATION: The article may be used in any accounting class introducing return on investment. It also may be used in a class covering topics in governmental or not-for-profit entities to discuss the current economic status of public universities. By definition, the state universities that are the focus of the article will use governmental accounting requirements.

QUESTIONS: 
1. (Introductory) Summarize the points in the article about factors currently affecting the revenues to state universities.

2. (Introductory) How are the current issues facing state universities affecting their students and prospective students?

3. (Advanced) Define the term ROI (return on investment) and state how it is calculated.

4. (Advanced) Based on the discussion in the related video, how is the concept of ROI applied to assess a student's investment in college tuition and other costs?

5. (Advanced) What return measure is proposed in the video for assessing a student' return on investment in his/her higher education? What are some weaknesses of that measure? Can you propose any other measure that would address those weaknesses?
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Public-University Costs Soar," by Ruth Simon, The Wall Street Journal, March 6, 2013 ---
http://online.wsj.com/article/SB10001424127887324539404578342750480773548.html?mod=djem_jiewr_AC_domainid

Tuition at public colleges jumped last year by a record amount as state governments slashed school funding, the latest sign of strain in the U.S. higher-education sector.

The average amount that students at public colleges paid in tuition, after state and institutional grants and scholarships, climbed 8.3% last year, the biggest jump on record, according to a report based on data from all public institutions in all 50 states to be released Wednesday by the State Higher Education Executive Officers Association. Median tuition rose 4.5%.

The average state funding per student, meanwhile, fell by more than 9%, the steepest drop since the group began collecting the data in 1980. Median funding fell 10%. During the recession, states began cutting support for higher education, and the trend accelerated last year.

Rising tuition costs are "another example of the bind that public institutions are in," said Sandy Baum, a senior fellow at the George Washington University Graduate School of Education and Human Development. "Unless we make public funding a higher priority, the funds are going to have to come from parents and students."

To be sure, last year's decline in state funding nationwide was driven heavily by cutbacks in California, which has the largest state system and lashed funding per student by 14.3% last year. Not including California, per-student funding fell 8% and tuition rose 6.3%.

Paul Lingenfelter, president of the higher-education association, noted that 31 states increased higher education funding in 2012-13, and a number have proposed an increase for the coming year as well.

Kaylen Hendrick, a senior at Florida State University in Tallahassee majoring in environmental studies, is graduating in three years rather than four in order to keep costs and borrowing down.

"Growing up, I thought if I made good enough grades, that college would not be a problem," said Ms. Hendrick, 20 years old, who has taken out about $15,000 in student loans and works 20 hours a week to pay for college.

State funding for the State University System of Florida has declined by more than $1 billion over the last six years, even as enrollment has grown by more than 35,000 students, a spokeswoman for the system said.

Nationally, average tuition, after institutional grants and scholarships, increased to $5,189 in 2011-12 from $4,793 a year earlier, according to the report, which is based on the 2011-12 academic year and adjusted its figures for inflation. Tuition revenue accounted for a record 47% of educational funding at public colleges last year.

The price increases at state schools come at a time when many private colleges are reining in price increases and awarding generous scholarships to attract families worried about rising debt loads and a still shaky job market. In some cases, state tuition has risen so much that costs approach what students might pay at a private college.

At Pennsylvania State University's main campus, in-state undergraduate students receiving financial aid paid an average of $21,342 after grants and scholarships in 2010-11, according to the U.S. Department of Education, up 12% since 2008-09. State funding now accounts for less than 14% of the school's educational budget, down from as much as 62% in 1970-71. "When the appropriation is cut, tuition rises," a Penn State spokeswoman said.

In addition to raising tuition, many states have pared spending. The California State University System declined to take the vast majority of transfer students this spring and has turned away about 20,000 students who qualified for admission during each of the past three years, a spokesman said.

In Kentucky, higher tuition prices make up for just half of the loss in state funding, said Robert King, president of the Kentucky Council on Postsecondary Education, which oversees the state's system.

Continued in article

 

"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 are at
http://www.trinity.edu/rjensen/HigherEdControversies.htm


LIBOR (including a fraud bigger than Enron)  --- http://en.wikipedia.org/wiki/Libor

"Freddie Mac Sues Multiple Banks Over Libor Manipulation," by Tom Schoenberg & Andrew Zajac, Bloomberg, March 20, 2013 ---
http://www.bloomberg.com/news/2013-03-19/freddie-mac-sues-multiple-banks-over-libor-manipulation.html

Jensen Comment
Makes you wonder what PwC knew --- Probably nothing since the PCAOB accuses PwC of poor quality controls in auditing. Now Barclays at the heart of the LIBOR scandal is considering dropping PwC as its auditor.

Jensen Comment
Makes you wonder what PwC knew --- Probably nothing since the PCAOB accuses PwC of poor quality controls in auditi

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


Bad News and Bad News for PwC

First the Bad News
"Barclays (of massive LIBOR fraud fame) Considers Auditor Change After a Century With PwC," Bloomberg, March 8, 2013 ---
http://www.bloomberg.com/news/2013-03-08/barclays-considers-auditor-change-after-a-century-with-pwc.html

Now more Bad News News
"At Least PwC Doesn't Have to Worry About Improving the Supervision of Its Auditors Anymore," by Caleb Newquist, Going Concern, March 11, 2013 ---
http://goingconcern.com/post/least-pwc-doesnt-have-worry-about-improving-supervision-its-auditors-anymore

"Is FASB Killing the Auditing Profession?," by Anthony H. Catanach Jr., Grumpy Old Accountants Blog, March 15, 2013 ---
http://grumpyoldaccountants.com/blog/2013/3/15/is-fasb-killing-the-auditing-profession

Well, the auditing profession appears to have finally hit the “bottom of the barrel.”  The demise of the respected Arthur Andersen firm in the wake of the Enron scandal was a huge disappointment.  And now PricewaterhouseCoopers (PwC) has failed us by not living up to the high standards set by its legacy firm.  For those of you too young to remember, Price Waterhouse & Co. was the Brooks Brothers of the accounting and auditing profession at one time.  As Mark Stevens in The Big Eight noted in 1981 (yes, over 30 years ago), Price worked hard “to retain its image as the gilt-edge CPA firm.”  My how times have changed!

​So what happened?  On March 7, 2013, the Public Company Accounting Oversight Board (PCAOB ) reported that the PwC had failed to address certain audit related quality control criticisms levied at the firm in previous PCAOB inspection reports, not once but twice, first in March 25, 2009 and then again in August 12, 2010.  What makes this so interesting is that the issues raised in those previously issued reports would have remained “private” had PwC simply corrected the problems within 12 months of the reports’ issuance.  While this is not the first time that one of the Big Four has thumbed their noses at the PCAOB (Deloitte felt the PCAOB’s wrath in October 2011), it is surprising that “a leader in the profession” (and yes, those are PwC’s own words) has done so. You may recall that the Grumpies were not wild about this behavior the first time it happened.

Well, Lynn Turner, a former Chief Accountant of the U.S. Securities and Exchange Commission (SEC), in a recent email (March 7th) to his distribution list, has asked the million dollar question:

What kind of leaders are running the firms, what type of governance do they have, that provides that type of response to the regulator?

 

Just look at PwC’s response to the PCAOB in its March 7, 2013, Release No. 104-2013-054:

The Part II comments relate to some of the most complex, judgmental and evolving areas of auditing. Our actions relating to those areas, during the 12 months following issuance of the  comments and thereafter, have included providing our audit professionals with enhanced audit tools, training and additional technical guidance to promote more consistent audit execution. We believe that these efforts have been important positive contributors to audit quality at our firm. We are proud of our focus on continuous improvement and of the dedication and high quality audit work performed by our partners and other professionals.

Wow!  This hints at an admission by PwC that its highly paid auditors were not properly trained to audit publicly traded firms.  If this is indeed the case, we surely can’t overlook the ethical implications of a firm contracting to do work for which it was not qualified. This never would have happened at Price Waterhouse & Co. What really bothers this grumpy old accountant is that PwC just doesn’t get it. The old “we’ll try harder” language is just not acceptable.

 

Continued in article

 

"PCAOB Criticizes Quality At PwC; Nothing Happens," by Francine McKenna, Forbes, March 11, 2013 ---
http://www.forbes.com/sites/francinemckenna/2013/03/11/pcaob-criticizes-quality-at-pwc-nothing-happens/

Big news last week in the breathless world of audits and auditors. The audit regulator, the Public Company Accounting and Oversight Board – even the word “oversight” should get you excited – published its private criticisms of PricewaterhouseCoopers poor quality audit work for not one but two audit years, 2007 and 2008. If those years sound familiar, they should be.

That’s when the financial crisis started unraveling!

PricewaterhouseCoopers is, and still is, the financial, statutory auditor - with the duty to give an opinion on financial statement verity - of some of the biggest players in the financial crisis. When you watch the Andrew Ross Sorkin HBO movie, Too Big To Fail, try to imagine current PwC Audit Practice Global Leader Tim Ryan standing behind AIG or current Citi Vice Chairman and former PwC Global Chairman Sam Di Piazza standing two steps behind JPMorgan’s Jamie Dimon, or former PwC Chairman Jim Schiro now Goldman Sachs Audit Committee and Board Chairman whispering in Lloyd Blankfein‘s ear.

PwC also still audits Barclays, Bank of America, and Freddie Mac. After the TARP plan was initiated PwC got the job, along with Ernst & Young, of preparing the internal controls infrastructure at the Treasury to make sure money went out quickly and to the right banks. That open-ended procurement blank check is still in effect.

So, what will happen to PwC as a result of these very dramatic criticisms of the quality of their audits, perhaps audits of some crucial financial services companies? The experience of Deloitte, the first Big Four firm to suffer the ignominy of having the PCAOB air its dirty audit laundry in public may be instructive.

Pretty much nothing.

PwC was the consulting firm with the most clients for the recent failed OCC/Fed foreclosure reviews. The firm billed more than $1 billion and will now be able to continue servicing those banks they don’t audit with more “governance, risk, and compliance” advisory services without worrying about any scrutiny.

PwC is not worried about the PCAOB. They are laughing all the way to the banks. All of them.

Continued in article


"GT and BDO told to buck up professional scepticism," by Richard Crump, AccountancyAge, March 22, 2013 --- Click Here
http://www.accountancyage.com/aa/news/2256866/gt-and-bdo-told-to-buck-up-professional-scepticism?WT.rss_f=&WT.rss_a=GT+and+BDO+told+to+buck+up+professional+scepticism 

Bob Jensen's threads on Grant Thornton (GT) and BDO accounting firms are at
http://www.trinity.edu/rjensen/Fraud001.htm


Question
Ever since the early formation of FAS 133 and IAS 39, what has been the main objection to allowing hedge accounting on macro (portfolio) hedges?

Answer
Actually there's been no objection as long as the items in a portfolio are homogeneous. The controversy arises with heterogeneity such that more than one type of risk is being hedged in a mixed-risk portfolio. For example, consider a portfolio of real estate mortgages having different interest rates and different maturity dates. It's impossible to hedge all of these different risks with a single derivative financial instrument having one hedged interest rate or one hedging instrument maturity date.

This of course does not mean that companies do not continued hedge portfolios with mixed risks. The issue is whether they get hedge accounting relief and if so what type of relief should be given given the different risks in the portfolio that are not fully hedge (and probably not effectively hedged). A revision of IAS 39 gave very limited hedge accounting treatments in some instances, but the revision really does not address the main controversies.

The European Financial Reporting Advisory Group (EFRAG) has submitted to the IASB a letter outlining the results of its analysis of the impact on macro hedge relationships of the consequential amendments proposed by the Review Draft (RD) 'IFRS 9 General hedge accounting' on existing macro hedge relationships under IAS 39, which was published by the IASB in September 2012. EFRAG suggests an option of either following IAS 39 or IFRS 9,
IAS Plus
, March 23, 2013 ---
http://www.iasplus.com/en/news/2013/03/efrag-hedge-accounting


March 2013 Financial Reporting Briefs from Ernst & Young ---
http://www.ey.com/UL/en/AccountingLink/Accounting-Link-Home


Question
What five companies primarily drive ups and downs of the Dow price index?

Hint
It's like judging your teaching performance in a class of 30 students on the basis of only five selective students chosen not at random.

Answer
"Five Stocks Do the Heavy Lifting," by Steven Rossolillo, The Wall Street Journal, March 5, 2013 ---
http://online.wsj.com/article/SB10001424127887324539404578342771985751896.html

Jensen Comment
There's fantastic interactive graphic that accompanies this online article. You have to see it to believe it!

Bob Jensen's threads on multivariate data visualizations:
Visualization of Multivariate Data (including faces) --- http://www.trinity.edu/rjensen/352wpvisual/000datavisualization.htm 


"Seven tips to beautiful PowerPoint," by Eugene Cheng  ---
http://www.slideshare.net/itseugene/7-tips-to-beautiful-powerpoint-by-itseugenec
Thank you Andy's Teaching and Learning Blog for the heads up ---
http://awteachlearn.blogspot.com/

Bob Jensen's PowerPoint helpers ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#PowerPointHelpers


March 26, 2013 message from Paul Caron

IRS Releases 'Dirty Dozen' Tax Scams

The IRS today released (IR-2013-33) its 2013 “dirty dozen” list of tax scams:

  1. Identity Theft
  2. Phishing
  3. Return Preparer Fraud
  4. Hiding Income Offshore
  5. “Free Money” from the IRS & Tax Scams Involving Social Security
  6. Impersonation of Charitable Organizations
  7. False/Inflated Income and Expenses
  8. False Form 1099 Refund Claims
  9. Frivolous Arguments
  10. Falsely Claiming Zero Wages
  11. Disguised Corporate Ownership
  12. Misuse of Trusts

 

"Tax Scams Targeting Poor, Elderly," SmartPros, July 2011 ---
http://accounting.smartpros.com/x72366.xml

Taxpayers beware: Scammers are out there and they're digging for your personal information and for money.

The IRS is reporting an increase in tax return related scams that typically involve taxpayers who normally do not have to file federal taxes. The scammers con the taxpayers into believing they should file a return with the IRS for tax credits, refunds or rebates for which they are not entitled.

Some unscrupulous tax return preparers have been deceiving people into paying for advice about how to file false claims and some charge unreasonable amounts for preparing legitimate returns that could have been prepared for free by the IRS or by IRS sponsored Volunteer Income Tax Assistance partners.

Many of the scammers are targeting taxpayers in the Midwest and in the South, according to Sue Hales, spokeswoman for the IRS for Illinois. Some are stealing the identities of conned taxpayers and they most often prey on low income individuals and the elderly.

Taxpayers should be wary of any of the following claims:

-- Fictitious claims for refunds or rebates based on excess or withheld Social Security benefits;

-- Claims that Treasury Form 1080 can be used to transfer funds from the Social Security Administration to the IRS, enabling a payout from the IRS;

-- Unfamiliar for-profit tax services teaming up with local churches. Flyers and advertisements for free money from the IRS, suggesting the taxpayer can file with little or no documentation, have been appearing in community churches around the country. Promoters are targeting church congregations and exploiting their good intentions and credibility. These schemes often spread by word of mouth among unsuspecting, well-intentioned people telling friends and relatives;

-- Home-made flyers and brochures implying credits or refunds are available without proof of eligibility;

-- Promises of refunds for "Low income -- No Documents Tax Returns."

-- Claims for the expired Economic Recovery Credit Program or Recovery Rebate Credit;

-- Advice on using the Earned Income Tax Claims based on exaggerated reports of self-employment income;

-- In some cases, non-existent Social Security refunds or rebates have been the bait used by the con artists. In other situations, taxpayers deserve the tax credits they are promised but the preparer uses fictitious or inflated information on the return which results in a fraudulent return.

Continued in article

Bob Jensen's threads on tax frauds ---
http://www.trinity.edu/rjensen/FraudReporting.htm#TaxScams


"Can the Treasury Exempt Its Own Companies from Tax? The $45 Billion GM NOL Carryforward," by J. Mark Ramseyer and Eric Bennett Rasmusen, SSRN, March 18, 2013 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2235068

Abstract:     
To discourage firms from buying and selling tax deductions, Section 382 of the tax code limits the ability of one firm to use the ‘‘net operating losses’’ (NOLs) of another firm that it acquires. Under the Troubled Asset Relief Program, the U.S. Treasury lent a large amount of money to General Motors. In bankruptcy, it then transformed the debt into stock. GM did not make many cars anyone wanted to buy, but it did have $45 billion in NOLs. Unfortunately for the Treasury, if it now sold the stock it acquired in bankruptcy, it would trigger Sec. 382. Foreseeing this, the market would pay much less for its stock in GM. Treasury solved this problem by issuing a series of notices in which it announced that the law did not apply to itself. Sec. 382 says that the NOL limits apply when a firm’s ownership changes. That rule would not apply to any firm bought with TARP funds, declared Treasury. Notwithstanding the straightforward and all-inclusive statutory language, GM could use its NOLs in full after Treasury sold out. The Treasury issued similar notices about Citigroup and AIG.

Treasury had no legal or economic justification for any of these notices, but the press did not notice. Precisely because they involved such arcane provisions of the corporate tax code, they largely escaped public attention. The losses to the public fisc were not minor — they cost the country billions of dollars in tax revenue. That the effect could be so large and yet so hidden illustrates the risk involved in this kind of tax manipulation. The more difficult the tax rule, the more easily the government can use it to hide the cost of its policies and subsidize favored groups. We suggest that Congress give its members standing to challenge unlegislated tax law changes in court.


This type of celebrity bankruptcy that frequently happens to professional athletes should not be happening to the likes of Diane Warwick with assets of $25,500 and debts of more than $10,700,000.

"Singer Dionne Warwick files for bankruptcy," Reuters, March 26, 2013 ---
http://www.reuters.com/article/2013/03/26/entertainment-us-dionnewarwick-idUSBRE92P04J20130326

As Joe Lewis supposedly said:
I been poor
And I been rich
Rich is better


2012 IRS Data Book

Message from Paul Caron on March 26, 2013 ---
http://taxprof.typepad.com/

2012 IRS Data Book

The IRS yesterday released the 2012 IRS Data Book, which contains a wealth of statistical information for the IRS's Oct. 1, 2011 - Sept. 30, 2012 fiscal year.  Here are the statistical tables:

Returns Filed, Taxes Collected, and Refunds Issued Enforcement: Examinations Enforcement: Information Reporting and Verification Enforcement: Collections, Penalties, and Criminal Investigation Taxpayer Assistance Tax Exempt Activities Chief Counsel IRS Budget & Workforce
First-Time Homebuyer Credit

Press and blogosphere coverage:

 

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


Untouchable Gangster Bankers and Their Auditors

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

Jensen Question
Did KPMG shift its entire Fannie Mae auditing team to HSBC?

Question
What was the largest audit client lost by KPMG in the USA?

Answer
I did not research this, but the leading contender has to be when KPMG was fired from the Fannie Mae scandal in what was one of the largest earnings management frauds in history coupled with incompetent auditing of financial derivative financial instruments ---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation

From the CFO.com Morning Ledger on March 7, 2013

KPMG audit contract with HSBC at risk. KPMG could lose the biggest audit contract in Britain after HSBC decided to consider bringing in a fresh pair of eyes to vet its accounts, the FT reports. The bank said it would put its audit contract out to tender for the first time in more than two decades in the most striking sign yet that regulatory pressure is starting to break down the ties that bind many big companies to their auditor. The tender could give KPMG rival Ernst & Young an opportunity to pick up a big British bank as an audit client. HSBC said it wanted the winner of the tender to be in place by 2015.

"Gangster Bankers: Too Big to Jail:  How HSBC hooked up with drug traffickers and terrorists. And got away with it," by Matt Taibbi, Rolling Stone, February 14, 2013 ---
http://www.rollingstone.com/politics/news/gangster-bankers-too-big-to-jail-20130214

PBS Frontline:  Why don't some of biggest fraudsters in history go to prison?
"The Untouchables," Frontline, January 22, 2013 ---
http://www.pbs.org/wgbh/pages/frontline/untouchables/?elq=923e1cf54bd4465092ea4b303aac1291&elqCampaignId=511

 

March 4, 2013 message from Roger Collins

From

http://www.bbc.co.uk/news/business-21653131 

Some quotes

"HSBC paid out $4.2bn (£2.8bn) last year to cover the cost of past wrongdoing. As well as $1.9bn in fines for money laundering, the bank also set aside another $2.3bn for mis-selling financial products in the UK. The figures came as HSBC reported rising underlying profitability and revenue in 2012, and an overall profit before tax of $20.6bn

Chief executive Stuart Gulliver's total remuneration for 2012 was some $7m, compared with $6.7m the year before. And after taking account of the deferral of pay this year and in more highly-remunerated years previously, Mr Gulliver actually received $14.1m in 2012, up from $10.6m in 2011.

The company's 16 top executives received an average of $4.9m each."

"During a conference call to present the results, Mr Gulliver told investors that the bank was not reconsidering whether to relocate its headquarters from London back to Hong Kong, in order to avoid a recently agreed worldwide cap on bonuses of all employees of banks based in the EU."

"HSBC's underlying profits - which ignore one-time accounting effects as well as the impact of changes in the bank's creditworthiness - rose 18%."

"The bank's results were heavily affected by a negative "fair value adjustment" to its own debt of $5.2bn in 2012, compared with a positive adjustment of $3.9bn the year before. The adjustment is an accounting requirement that takes account of the price at which HSBC could buy back its own debts from the markets. It has the perverse effect of flattering a bank's profits at a time when markets are more worried about its ability to repay its debts, and vice versa."

More in article.

Regards,
Roger Roger Collins
Associate Professor
OM1275 TRU School of Business & Economics

Jensen Question
Did KPMG shift its entire Fannie Mae auditing team to HSBC?


John Cleese --- http://en.wikipedia.org/wiki/John_Cleese

This is No Monty Python Joke in the Faulty Tower
"Actor John Cleese Flees (to Monaco) Tax-Free Monoco for High-Tax Britain," Daily Mail, March 14, 2013 ---
http://www.dailymail.co.uk/news/article-2294537/Lonely-John-Cleese-flees-Monaco--flogs-Wife-No-4s-furniture-Mystery-stars-online-sale-luxury-flats-contents.html


From the CFO.com Morning Ledger on March 12, 2013

Restatements on the rise at big companies.
Large U.S. companies have been restating financial results in increasing numbers over the past three years, with the tally growing 21% last year and rising 60% since 2009,
Emily Chasan reports. The uptick reflects some of the complexity large multinational companies are facing in tax accounting and a move by the PCAOB to “turn up the heat” on big-company auditors, says Lynn Turner, former chief accountant at the SEC. Restatements at smaller companies, meanwhile, are starting to decline, even though those companies have traditionally been at higher risk for financial errors.

SEC says Illinois hid pension problems
Illinois settled SEC civil-fraud charges that the state misled municipal-bond investors by failing to adequately disclose the risks of its underfunded pension system,
the WSJ reports. The action was part of a broader push by the SEC to bring transparency and accountability to the muni market. The problems date back to 1994, when Illinois lawmakers passed a funding plan that would allow the state to spread the pension costs over 50 years. Illinois also left it to lawmakers to decide how much to contribute to the funds each year. In some years, the state took “pension holidays,” lowering its planned pension contributions by about half.

Greenberg gets green light for class action.
A company run by the former CEO of AIG won the right to pursue as a class action its case against the U.S. government, alleging that elements of AIG’s financial-crisis bailout package were unconstitutional,
WSJ reports. A judge ruled that the case “may be maintained as a class action,” a victory for Starr International, headed by Maurice “Hank” Greenberg, who long headed AIG. The decision marked the latest defeat for the government, which failed in its efforts last year to dismiss the claims.

Teaching Case
From The Wall Street Journal Weekly Accounting Review in March

SEC Says Illinois Hid Pension Troubles
by: Michael Corkery and Jeannette Neumann
Mar 11, 2013
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 
 

TOPICS: Bonds, Business Ethics, GAAP, Governmental Accounting, Pension Accounting

SUMMARY: "The Securities and Exchange Commission on Monday charged Illinois with securities fraud.... [alleging] the state failed to adequately disclose to investors the risks of its underfunded pensions systems." The SEC concurrently announced a settlement in the case and the related video clearly shows one WSJ editor thinks very little of that development. He also refers to governmental financial reports in general as "fraudulent." A related graphic shows that Illinois has some of the lowest levels of funding in the nation for its retirement plans.

CLASSROOM APPLICATION: The article may be used in a governmental accounting course when covering pension accounting or simply to emphasize the importance of the comprehensive annual financial report and disclosures by governmental entities. It may also be used in an ethics course covering responsibility for clarity in financial reporting.

QUESTIONS: 
1. (Introductory) What wrongful act does the Securities and Exchange Commission (SEC) accuse the state of Illinois?

2. (Introductory) What is the focus of the SEC's responsibilities over the problem in Illinois?

3. (Advanced) Summarize the requirements in accounting for pension liabilities that states and other governmental entities must follow. In your answer, state the authoritative source for those requirements.

4. (Advanced) Access the State of Illinois Comprehensive Annual Financial Report (CAFR) located on its web site at http://www.ioc.state.il.us/index.cfm/linkservid/9BE62AD6-1CC1-DE6E-2F48A7172B174FA2/showMeta/0/ Refer to the report for the fiscal year ended June 30, 2010. Scroll down to the Comptroller's transmittal letter beginning on page v, and further to her discussion of Factors Affecting Financial Condition, beginning on page vii, to Pensions discussed on page viii. How did the State of Illinois make its legally required contribution to the pension fund in 2010? Does that funding source concern you? Answer the question as if you were a citizen of the State of Illinois and if you were an employee, such as a teacher or a university professor, active in the state retirement system.

5. (Advanced) Scroll further down to the Management Discussion and Analysis, to page 15 and the section entitled Retirement Systems. Besides bond indebtedness, what is the largest liability facing the State of Illinois? How do the amounts stated in this discussion compare to the amounts reported in the WSJ article?

6. (Advanced) According to the WSJ article, a goal of defined benefit retirement systems such as those in the State of Illinois is to be 90% funded. When does the State of Illinois expect to reach that goal?

7. (Advanced) According to the article, Elaine Greenberg of the SEC said that the State of Illinois did not follow required governmental accounting standards. Scroll back up to access the auditor's report for the State of Illinois, just following the transmittal letter. Who conducts the audit? Is there any indication that the state did not follow required accounting standards? Support your answer.

8. (Introductory) Refer to the related video featuring one of the WSJ Editors and to the related Opinion page article. What do the WSJ Editors conclude about the SEC's actions in this case?

9. (Advanced) Based on the discussion in the articles, the related video, and your knowledge of pension accounting requirements, what are the areas of judgment that might mean the problem of underfunding in Illinois, and elsewhere, could be even worse than currently estimated?
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
SEC v Illinois
by Review & Outlook Opinion Page Editors
Mar 13, 2013
Page: A14

 

"SEC Says Illinois Hid Pension Troubles," by Michael Corkery and Jeannette Neumann, The Wall Street Journal, March 11, 2013 ---
http://online.wsj.com/article/SB10001424127887323826704578354370478104256.html?mod=djem_jiewr_AC_domainid

For years, Illinois officials misled investors and shortchanged the state pension system, leaving future generations of taxpayers to foot the bill, U.S. securities regulators allege.

The Securities and Exchange Commission on Monday charged Illinois with securities fraud, marking only the second time the agency has filed civil-fraud charges against a state.

But the agency and the state also announced that a settlement had already been reached in which Illinois won't pay a penalty or admit wrongdoing.

The action was part of a broader push by the SEC to bring greater transparency and accountability to the municipal-bond market, as the agency alleged the state failed to adequately disclose to investors the risks of its underfunded pensions systems.

The action also shows in detail how political decisions left the state with only 40 cents of assets for every dollar of pension liabilities—a financial hole Illinois officials are now scrambling to fill.

Yet no matter how harmful the pension practices were to the state's finances, SEC officials say they could only pursue charges against Illinois for what it failed to tell bond investors, who bought bonds worth $2.2 billion.

Most states comply with governmental accounting standards, which "Illinois did not follow," Elaine Greenberg, head of the SEC's municipal securities and public pensions unit, said in an interview. "But the SEC cannot order a state to follow any particularly methodology."

Governor Pat Quinn's Office of Management and Budget said the state has been working to enhance its disclosure practices since 2009.

States and cities across the U.S. face high pension costs. Rallying investment returns have helped make up the shortfalls at some plans, but others have cut benefits to workers to fill the deficit.

Illinois has one of the most underfunded pension systems in the U.S.

The SEC's 11-page, cease-and-desist order reveals new details about the financial and legislative practices that led to the state's current predicament.

The state's five public-employee pension plans manage the retirement benefits for clerical workers, teachers, judges, college professors and lawmakers. Collectively, their funding level stands at 40%. Nationally, the average funding level is about 75%.

The SEC settlement comes as Mr. Quinn, a Democrat, has pushed repeatedly to overhaul the state's pension system. Spiraling pension costs threaten to crowd out spending on other state services and are a major factor in Illinois's low credit rating. Standard & Poor's Ratings Services cut Illinois's rating one notch to A- in January, making it the lowest-rated U.S. state by S&P.

"This is one more weight on the scale," Illinois State Senator Daniel Biss, a Democrat, said of the SEC order.

But an overhaul, which could result in deep cuts for current workers and retirees, has remained elusive. Workers have argued that they shouldn't bear the burden for past mistakes.

The problems date back to 1994, when Illinois lawmakers passed a funding plan that would allow the state to amortize, or spread the pension costs, over 50 years. Most pensions use a 30-year amortization period. More

Heard: Muni Market Still in Need of a Minder

State officials also ignored the common practice of calculating contributions to the plans based on what is known as the "Actuarially Required Contribution."

Instead, Illinois left it to lawmakers to decide how much to contribute to the funds each year.

In some years, the state took "pension holidays," lowering its planned pension contributions by about half.

By 2009, actuaries and a consultant hired by the state began warning that the underfunding could lead to the system's insolvency, according to the SEC order.

The consultant said in a document that the state's pension system was so underfunded that it would likely "never be able to afford the level of contributions" required to reach 90% funded.

Yet, these concerns weren't disclosed to investors in bond-offering documents, the SEC said.

As it prepared its bond documents, the state made little effort to collect "potentially pertinent" information from the pension system's actuaries, the SEC said.

The state said it had worked to improve its practices after the SEC cited New Jersey for pension-disclosure issues in August 2010.

The SEC accused New Jersey of allegedly misleading investors that the state was adequately funding two of its pension systems—the agency's first securities-fraud case against a state. The SEC said the state didn't disclose that it had abandoned a five-year plan to fund the pension plans. New Jersey neither admitted nor denied wrongdoing but said it would improve its disclosures.

When New Jersey settled with the SEC, it didn't pay a fine, either. The SEC often doesn't fine governments because the costs are ultimately borne by taxpayers, according to people familiar with the agency's practices. In its Illinois order, the SEC noted that the state had taken steps to improve its disclosures, including the creation of a special "disclosure committee" that will sign off on bond-offering disclosures.

Illinois expects to sell approximately $500 million in bonds in early April, a state official said Monday. The sale was put off in January when S&P downgraded the state's credit rating.  

Continued in article

The sad state of governmental accounting ---
http://www.trinity.edu/rjensen/Theory02.htm#GovernmentalAccounting


Recalling an Ancient Jensen and Thomsen TAR Paper

"Tracking Sensors Invade the Workplace Devices on Workers, Furniture Offer Clues for Boosting Productivity," by Rachel Emma Silverman, The Wall Street Journal, March 6, 2013 ---
http://online.wsj.com/article/SB10001424127887324034804578344303429080678.html?mod=djemCFO_t

Jensen Comment
This article caught my eye, because years and years ago one of my then-current Danish doctoral students, Torbin Thomsen, and I published an article in The Accounting Review on how to improve costing of direct and  indirect labor by work sampling of workers doing varied activities throughout each day. The particular application was inspired by my wife's duties in the medical laboratory of the huge VA hospital in Palo Alto (when I was still in graduate school at Stanford). Medical labs were much less computerized in those days, and lab techs performed a variety of daily tests of blood, urine, feces, and spinal taps.

Interestingly, a famous book was latter written about this hospital ---
http://en.wikipedia.org/wiki/One_Flew_Over_the_Cuckoo%27s_Nest_%28novel%29
In also became a Academy Award winning film starring Jack Nicholson ---
http://en.wikipedia.org/wiki/One_Flew_Over_the_Cuckoo%27s_Nest_%28film%29

It was very difficult estimate the labor cost of individual types of tests (say blood cross-matching) since technicians darted from activity to activity throughout the work day and night. Torbin and I proposed a work sampling model for estimation of the the labor costs of laboratory tests.

The problem with our approach was that it was too intrusive. When randomly signaled a technician would have to top what she/he was doing and record the activity and time. In 2013 we now have new tracking sensors that are both less intrusive and/or take the need for work sampling out of the picture. It's now possible to track each entire work day. Big Brother has arrived!

"Statistical Analysis in Cost Measurement and Control," by Robert E. Jensen and Carl T. Thomsen, The Accounting Review, Vol. XLIII, No. 1, January 1968


A Master List of 700 Free Courses From Great Universities ---
http://www.openculture.com/2013/03/a_master_list_of_700_free_courses_from_great_universities.html
The Free Courses Search Site ---
http://www.openculture.com/freeonlinecourses 
There appear to be no free online accounting or business courses.
Some of the advertising disturbs me --- such as online Ph.D. programs with no GMAT required --- to me a red flag.
However many of the free courses appear to be legitimate (although not free for credit)


"New research finds support for valuing bank securities at current market value," by Elizabeth Blankespoor (Assistant Professor of Accounting at Stanford University), Stanford Graduate School of Business Newsletter, March 2013 --- Click Here
http://www.gsb.stanford.edu/news/research/new-look-truth-numbers?utm_source=Stanford+Business+Re%3AThink&utm_campaign=5edc9693da-REIS8&utm_medium=email&ct=t%28Stanford_Business_Re_Think_Issue_Eight2_22_2013%29

Early Pre-print of the Manuscript --- http://aaajournals.org/doi/pdf/10.2308/accr-50419


From the CFO.com Morning Ledger on March 12, 2013

Mary Jo White, President Obama’s nominee for SEC chairman, will make her case to the Senate Banking Committee today. In her prepared testimony, she said the SEC’s enforcement “must be bold and unrelenting.” Wrongdoers, she said, “will be aggressively and successfully pursued.” The WSJ says lawmakers will have to weigh two sides of her career. In one version, “Ms. White is a no-holds-barred crime fighter known for stretching the law to jail mob bosses and international terrorists.” In another, she’s a friend of Wall Street who represented big banks when she worked for law firm Debevoise & Plimpton

Jensen Questions
Where was she when we needed her 2000-2012?

Will the USA's biggest banks circle the wagons to protect their banksters?
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking 

Can she overcome some of the major problems of the SEC that include budget woes and a record of sloppy bookkeeping within its own house?
http://www.huffingtonpost.com/2011/02/03/sec-faces-budget-woes_n_817804.html  

 


"Ontario court approves $117M settlement between Ernst & Young, Sino-Forest:  It’s believed to be one of the largest settlements involving an auditor in Canadian history," The Star, March 20, 2013 ---
http://www.thestar.com/business/2013/03/20/ontario_court_approves_117m_settlement_between_ernst_young_sinoforest.html

The Ontario Superior Court has approved a $117-million class-action settlement involving Sino-Forest Corp. and its former auditor, Ernst & Young.

The agreed deal will see the accounting firm pay toward a fund to compensate shareholders of the troubled Chinese-Canadian company, which has been accused of fraudulently overstating its assets.

It’s believed to be one of the largest settlements involving an auditor in Canadian history.

The class-action had alleged that directors, officers, auditors and underwriters at timber trader misled investors with its accounting.

Several shareholders had originally objected to the settlement.

The company was first accused in 2011 of being a Ponzi scheme by Muddy Waters Research, prompting investigations by the Ontario regulator and the RCMP.

Continued in article

"Manhattan U.S. Attorney Announces Agreement With Ernst & Young LLP To Pay $123 Million To Resolve Federal Tax Shelter Fraud Investigation," New York State's Attorney's Office, March 1, 2013 ---
http://www.justice.gov/usao/nys/pressreleases/March13/EYNPAPR.php

Bob Jensen's threads on the legal  troubles of Ernst & Young ---
http://www.trinity.edu/rjensen/Fraud001.htm


Stanford Graduate School of Business Dean Garth Saloner discusses why and how business schools must change if they are to serve their students and society well, FEMD Global Focus, Issue 1 in 2013 ---
http://www.efmd.org/images/stories/efmd/globalfocus13/issue_1_2013_gsaloner_stanford.pdf

Jensen Comment
Note that the scope of this article is limited to a prestigious MBA program comprised mostly of matured students with stellar admissions credentials, including professional work experience and high admission scores. It focuses on having students from backgrounds ranging from chemistry, electrical engineering, psychology, history, mathematics, etc.

Stanford has no undergraduate business program, unlike Cornell.

Stanford has no accounting undergraduate or masters program like Cornell.

Stanford does have business Ph.D. programs, including an accounting Ph.D. program, but Dean Saloner is not addressing Stanford's Ph.D. programs.

My point is that "critical analytical thinking roofs" praised by Dean Saloner and broad scope a curriculum dealing with varied needs of society may not be appropriate for business and accounting programs that are not similar to Stanford's MBA program. For example, like it or not, we are not doing accounting majors much of a favor if they don't have the prerequisites to take the CPA examination in their state of choice. We aren't doing most business school graduates  much of a favor if they are more like sociology graduates and become uninteresting to business recruiters.

Critical Thinking:  Why is it so hard to teach?
http://www.trinity.edu/rjensen/HigherEdControversies.htm#CriticalThinking

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

 


But then the story gets interesting when Chimera “fires” Deloitte as its auditor on March 11, 2012, replacing them with Ernst & Young.
"Chimera: So Many Questions, Too Few Answers," by Anthony H. Cataach Jr., Grumpy Old Accountants Blog, March 3, 2013 ---
http://grumpyoldaccountants.com/blog/2013/3/3/chimera-so-many-questions-too-few-answers

The last I heard, the purpose of financial reporting was to provide information that investors, creditors, and others can use to make decisions.  Well, when a publicly traded company fails to file its required financial statements, and market regulators let it get away with it, that’s a real problem.  How are investors and creditors supposed to evaluate their investments?  And that’s the $3 billion question being asked of Chimera (CIM) by Aaron Elstein in A mythical name and profits, too?

Here is a company that has neither filed a quarterly report since November 18, 2011 (for the quarter ended September 30, 2011), nor an annual report since February 28, 2011 (for the year ended December 31, 2010).  Yet, securities regulators permit Chimera to operate, and allow its stock to be listed and traded.  John Maxwell at the Motley Fool has described this situation as “inexcusable,” and that’s an understatement, for all the questions this situation raises.

 

Okay, why no financial statements? According to its Form 8-K filing with the Securities and Exchange Commission (SEC) on March 1, 2012, the Company needed additional time to “review the application of GAAP guidance to certain of its non-Agency assets.”  But then the story gets interesting when Chimera “fires” Deloitte as its auditor on March 11, 2012, replacing them with Ernst & Young.  What’s particularly curious is that the Company kept Deloitte to audit its 2011 10-K which has yet to filed. Then, in an August 1, 2012 Form 8-K filing, we learned of Chimera’s erroneous accounting for its non-agency residential mortgage-backed securities portfolio.  Basically, the Company accounted for this portfolio as if it were high credit quality, rather than reflecting its actual poor quality, necessitating a correction to reduce net income by almost $700 million during the affected reporting period (fiscal years ended 2008 through 2010).  And just recently, on March 1, 2013, Chimera notified the SEC in a Form NT 10-K filing that its annual financial statements for the fiscal year ended December 31, 2012 are not yet ready either.  However, there is a bit of good news…according to the filing, Chimera has finally completed its review of the accounting policies for its non-agency residential mortgage-backed securities portfolio, and that its 2011 annual report is forthcoming.  Better late than never, right?  Well, that’s just the first of my many questions.

Let’s start with the accounting error, or as today’s politically correct accountants call it, the restatement.  Given all of the expertise that Deloitte’s New York office presumably gained accounting for, auditing, and valuing financial instruments during the financial crisis of 2007 and 2008, it is unbelievable that it didn’t discover the “erroneous” accounting earlier.  My review of Chimera’s 2010 10-K uncovered plenty of clues that the Company’s non-agency residential mortgage-backed securities (RMBS) portfolio was “poor quality.”  Here are just a few:

 

So you tell me…does that sound like a high quality mortgage securities portfolio?  How could such an “error” have occurred?  Surely it wasn’t due to accounting ineptitude, after all, according to Aaron Elstein, Chimera's CEO received $35 million in compensation in 2011. That kind of money should buy some expertise, right?  And according to the Company’s proxy statement (Schedule 14A) Deloitte received a whopping $827,625 in audit and audit related fees for 2010 for its work on what should be a fairly straight-forward engagement.  The balance sheet is nothing more than securities funded by repurchase agreements and collateralized debt.  How could Deloitte not see the accounting problem for three years?  

Continued in article

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


"Rethinking Mentorship," by Michael Ruderman (MBA student at Stanford), March 14, 2013 ---
http://www.huffingtonpost.com/michael-ruderman/mentors_b_2873228.html

Before starting at the Stanford Graduate School of Business, I received corporate training and mentorship that was largely directive. My managers told me what to do and I did it. When it came time for longer-term career advice, my managers encouraged me to follow in their footsteps.

Our dynamic, global economy demands creative leaders who are able to forge new paths. Mentorship must be more about empowering the mentee than about shaping the mentee to be like the mentor. It wasn't until I arrived at business school that my mentors stopped telling me what to do and started asking me questions. My mentors went from "advising" me to "coaching" me. What were my priorities? Where did I want to be in five, ten, twenty years? How did I define a successful, impactful life?

Daniel Goleman's research in the Harvard Business Review points out that the best managers must have several styles to be most effective. He points out that the "coaching" style -- acting more like a counselor than a traditional boss -- is used least often because it is the hardest, not because it is the least effective. Coaching requires managers to focus primarily on the personal development of their employees and not just work-related tasks. It requires managers to tolerate "short-term failure if it furthers long-term learning." Goleman points out that the coaching style ultimately delivers bottom-line results.

I was selected to be an Arbuckle Leadership Fellow at Stanford, a cohort of MBAs employing the coaching style to mentor other MBAs. I started the program from the perspective that my professor Carole Robin repeated over and over: our "coachees" were "creative, resourceful, and whole." I can listen deeply, ask provocative questions, use my intuition, reframe the problem, etc. But I don't need to tell them the answer in order to be an effective leader.

I was randomly assigned nine first-year MBA students to coach, all from different backgrounds. I would meet one-on-one with each of them over coffee for an hour at a time. We would talk about everything from their transition to business school life to their romantic lives to career issues. "What should I do?" they each asked. But I wouldn't tell them the answer. I would ask questions and try to help them find an answer on their own.

"Why don't you just tell me what to do?" was a common refrain from my coachees. Eventually the coachees internalized that I worked to understand their perspective and to help them find the answer on their own. Intellectual independence then bred empowerment. I watched a quiet student transform into a powerful presence in front of an executive audience.

I still had a nagging question: would the coaching style only work at business school? Could I still be a successful coaching manager and resist giving the answers in a real-world situation with deadlines, budget pressures, and valuable relationships on the line? In the run-up to the Out for Undergrad Tech Conference this February, I coached the direct reports on my team. When I fielded a question, my first instinct was to ask, "What do you think?" One of the volunteers on my team, a successful young professional at one of the hottest Silicon Valley companies, was frustrated at first, just as my MBA coachees were. But just like the Stanford MBAs, he too began to internalize that he could come up with the answers on his own. As soon as he would ask a question, he would pause, acknowledge he was thinking through an answer, and offer a solution.

Employees are motivated by more than money, and autonomy and purpose are two large motivating factors. As the global war for talent grows ever more competitive, the need to cultivate and hold onto talent is paramount. Coaching results in more autonomous employees who are able to find meaning in their work and see the purpose of their actions.

Continued in article

Jensen Comment
Mentoring may be even more of a problem in doctoral programs. One of my better former Trinity graduates was in the latter stages of an accounting doctoral program when his mentor advised him not to try to be too creative when proposing a dissertation and doing research on up to the point of receiving tenure. The mentor's advice was to crank out General Linear Model regression studies that are safe even if they were not very creative or exciting. Supposedly real attempts at creativity might be wasted time until tenure was attained.


When bailing out some companies is a bad idea for an industry
"Why We Need More Solar Companies to Fail: Solar manufacturers like Suntech are struggling. Hundreds need to die for the industry to recover," by Kevin Bullis,   MIT's Technology Review, March 18, 2013 --- Click Here
http://www.technologyreview.com/news/512516/why-we-need-more-solar-companies-to-fail/?utm_campaign=newsletters&utm_source=newsletter-daily-all&utm_medium=email&utm_content=20130318


From the AICPA Newsletter on March 11, 2013

New audit reports available from the Ethics Team
The AICPA Professional Ethics Team serves the AICPA membership by performing investigations of engagements and prescribing corrective action when violations of AICPA Professional Standards are discovered. The AICPA has compiled reports of deficiencies frequently found in its investigations of employee benefit plan and governmental and not-for-profit engagement audits during the last two years. Most often, the reporting, disclosure, and auditing errors have occurred as a result of a lack of experience and lack of specific continuing professional education in these areas. Typically, the deficiencies could have been detected by a quality control review of the financial statements and risk areas.

Jensen Comment
Since the AICPA sells continuing education courses and materials, I a bit dubious of the causality attributions. I', more inclined to blame poor supervision due to cost saving efforts of the auditing firms.


Whales Who Hate Mark-to-Market Accounting

From the CFO.com Morning Ledger on March 18, 2013

J.P. Morgan executives prodded over accounting. Former J.P. Morgan CFO Douglas Braunstein and some other ex-JPM executives got raked over the coals by a Senate panel about changes the bank made to its mark-to-market accounting processes as losses mounted on its “London Whale” trades, Emily Chasan reports. “Is it common inside J.P. Morgan to change your pricing practices when the losses start piling up?” asked Sen. Carl Levin (D., Mich), who chaired the hearing for the Senate’s Permanent Subcommittee on Investigations. Mr. Braunstein, who is currently vice chairman of the bank after stepping down from the CFO job last year, replied, “No, that is not acceptable practice.” While Mr. Braunstein said the bank believed at the time that the marks were consistent with U.S. accounting rules, he admitted that the practice of pricing its book at more advantageous levels was “not proper.”


Question
What is a "wash trade" and how can it be used to manipulate securities prices?

A wash trade (not to be confused with a wash sale) is an illegal form of stock manipulation in which an investor simultaneously sells and buys shares in order to artificially increase trading volume and thus the stock price.
http://en.wikipedia.org/wiki/Stock_manipulation

The United States Security and Exchange Commission defines a wash trade as "a securities transaction which involves no change in the beneficial ownership of the security."

 

From the CFO.com Morning Ledger on March 18, 2013

"Regulators zero in on ‘wash trades.’ U.S. regulators are investigating whether high-frequency traders are distorting stock and futures markets by illegally acting as buyer and seller in the same transactions, the WSJ reports. So-called wash trades are banned because they can feed false information into the market and be used to manipulate prices. The CFTC is focused on suspected wash trades by high-speed firms in futures contracts tied to the value of crude oil, precious metals, agricultural commodities and the S&P 500, among other underlying instruments. Investigators also are looking at the two primary exchange operators that handle such trades, CME and IntercontinentalExchange. Regulators are concerned the exchanges’ systems aren’t sophisticated enough to flag or stop wash trades.


"Law Professors See the Damage Done by ‘No Child Left Behind’," by Michele Goodwin, Chronicle of Higher Education, March 12, 2013 ---
http://chronicle.com/blogs/conversation/2013/03/12/law-professors-see-the-damage-done-by-no-child-left-behind/?cid=cr&utm_source=cr&utm_medium=en

. . .

Bernstein explained, “I want to warn you of what to expect from the students who will be arriving in your classroom, even if you teach in a highly selective institution.”

He was right to warn us, except for one error: Those students have already arrived. Very bright students now come to college and even law school ill-prepared for critical thinking, rigorous reading, high-level writing, and working independently.

Bernstein described what many college professors and even graduate-school professors have come to know firsthand. For more than a decade, a culture of test taking and teaching to the test has dominated elementary and secondary education in the United States, even at elite public and private schools. And now its effects are being felt by professors.

Continued in article

Jensen Comment
Seems like law schools are seeing more of the damage done by four years of undergraduate education in college.


"Extreme Game of Monopoly over at Simunomics," by Mark P. Holtzman, Accountinator Blog, March 12 ---
http://accountinator.com/2013/03/12/extreme-game-of-monopoly-over-at-simunomics/

I’m having a blast with Simunomics, a massive mulitplayer business simulation where you can start a business and compete with other players. The goal is, of course, to maximize shareholder value. Build up your retail, manufacturing and natural resource empire to gain market share and build up profits.

I started with manufacturing, and built factories making paper, dyes, beer, and ceramics. None of these fared very well. To keep my costs down, I built them in a depressed town (Drakar), and the markets for wholesale goods there are not very liquid. So I built a convenience store. Unfortunately, the competition for convenience stores is intense, and that store didn’t do too well, either.

So I sold everything – factories and all – and switched over to retailing. Did some market research – there’s serious demand in Drakar for phones, washing machines and fixtures. Then, I converted my convenience store to an appliance store, stocked up on phones, washing machines and fixtures, and started making money. At this point, I’m manufacturing my own phones and washing machines, which I’m reselling out of my own retail outlet.

I’ve got 272/400 points at the Startup(1) level. I’m looking forward to expanding so that I can move on to the next level. Right now, I’m aiming for more market presence in the appliance field, to expand my retail operations, and to continue to vertically integrate by manufacturing all of my own goods.

I would like to encourage my students to try out Simunomics, too. It will better help them to understand the mechanics of business operations. It’s also kind of addictive.

If you’d like to meet up over there, my business name is SHU Accountinator.

Continued in article

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


From the CFO.com Morning Ledger on March 11, 2013

Former Lehman CFO learns how to manage a life.
Erin Callan, the former CFO of Lehman Brothers, laments the lack of work-life balance during her career. “Work always came first, before my family, friends and marriage — which ended just a few years later,”
she writes in this NYT piece. Ms. Callan says she often wonders whether she would have been asked to be CFO if she hadn’t worked 24-7. She says she use to think that her “singular focus” on her career was the key to her success. “But I am beginning to realize that I sold myself short. I was talented, intelligent and energetic. It didn’t have to be so extreme. Besides, there were diminishing returns to that kind of labor.” She says if Lehman hadn’t collapsed she may never have been strong enough to step away. “Perhaps I needed what felt at the time like some of the worst experiences in my life to come to a place where I could be grateful for the life I had. I had to learn to begin to appreciate what was left.

Jensen Comment
Perhaps Erin would be less frustrated if she had not been so greedy to buy up poisoned real estate mortgages and the infamous entry into the Repo business with audit firm Ernst & Young blessings ---
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm#Repo


"How Pervasive is Corporate Fraud?," by I. J. Alexander Dyck, Adair Morse, and Luigi Zingales, SSRN, February 22, 2013 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2222608

 Abstract:
We estimate what percentage of firms engage in fraud and the economic cost of fraud. Our estimates are based on detected frauds, and frauds that we infer are started but are not caught. To identify the ‘iceberg’ of undetected fraud we take advantage of an exogenous shock to the incentives for fraud detection: Arthur Andersen’s demise, which forces companies to change auditors. By assuming that the new auditor will clean house, and examining the change in fraud detection by new auditors, we infer that the probability of a company engaging in a fraud in any given year is 14.5%. We validate the magnitude of this estimate using alternative methods. We estimate that on average corporate fraud costs investors 22 percent of enterprise value in fraud-committing firms and 3 percent of enterprise value across all firms.

Number of Pages in PDF File: 56

Keywords: corporate fraud, governance, detection

Jensen Comment
The definition of "fraud" is subject to a lot of dispute.
For example, the controversial accounting of Repo 105 sales by Lehman Bros. that were 100% certain to be returned in a few weeks from former Lehman employees could be defined as fraudulent accounting and most certainly was defined as fraud by the Bank Examiner overseeing the subsequent bankruptcy. But auditors Ernst & Young vehemently denied that this was fraud and eventually prevailed in court due to a loophole in FAS 140. I question using the letter of the law as an excuse to deceive, but who am I to judge.

Detected frauds may only be the tip of the iceberg in the same way that the number of student and faculty cheating incidents detected and prosecuted by a university may only be the tip of icebergs.

Hence when the above article concludes that "detected" fraud costs investors 22% we really do not know how much undetected fraud adds to this cost.

Also the partitioning of losses may be somewhat arbitrary.
In the above example, we might conclude that, if the Repo accounting at Lehman was fraudulent, it was a nail in the coffin that carried Lehman to its demise. However, many non-fraudulent activities are millions of nails in that same coffin --- such as the financial decisions to buy real estate mortgages when not knowing that many of those investments would would be defaulted.


From Ernst & Young on March 8, 2013

FASB issues two ASUs

The FASB issued two Accounting Standards Updates (ASUs) on EITF consensuses it ratified at its 31 January 2013 meeting:

ASU 2013-04, Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date, requires a reporting entity that is jointly and severally liable to measure the obligation as the sum of the amount the entity has agreed with co-obligors to pay and any additional amount it expects to pay on behalf of a co-obligor.

ASU 2013-05, Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity, specifies that a cumulative translation adjustment (CTA) should be released into earnings when an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a consolidated foreign entity and the sale or transfer results in the complete or substantially complete liquidation of the foreign entity. For sales of an equity method investment that is a foreign entity, a pro rata portion of CTA attributable to the investment would be recognized in earnings upon sale of the investment. When an entity sells either a part or all of its investment in a consolidated foreign entity, CTA would be recognized in earnings only if the sale results in the parent no longer having a controlling financial interest in the foreign entity. CTA would be recognized in earnings in a business combination achieved in stages (i.e., a step acquisition).


From CFO.com Morning Ledger on March 8, 2013

Companies are tapping into their massive cash hoards to reward shareholders handsomely. S&P 500 firms are expected to pay at least $300 billion in dividends this year – topping last year’s $282 billion, the WSJ reports in this A1 must-read. And analysts say that could go even higher. Apple stands to pay out about $10 billion in a dividend policy it initiated last year, while Exxon Mobil and AT&T are each set to pay dividends around $10 billion. Then there are the buybacks. In February alone, American companies – including Home Depot, General Electric and PepsiCo — announced plans to buy back $117.8 billion of their own shares — the highest monthly total in records dating back to 1985.

“We are starting to get out of hunker-down mode, so what you have now is a bunch of cash-hoarders who have decided to take that cash out of their balance sheets,” said David Ikenberry, dean of the University of Colorado’s business school. “Is that a good thing? It probably is. They’re liberating capital and putting it back out into the capital markets, and letting that multiplier effect kick in.”

Cash piles are still growing. The Fed’s latest quarterly “Flow of Funds” report, released yesterday, said that cash and cash-equivalents held by U.S. corporations, excluding financial companies, stood at $1.79 trillion in Q4 of 2012, up from $1.77 trillion the previous quarter. “Corporations are flush with cash and that cash sitting in the corporate coffers is earning next to nothing,” said Rob Leiphart, an analyst at Birinyi Associates. “Companies have to do something with it.


"For Aspiring Forensic Accountants and Fraud Investigators," by Tracey Coenen, The Fraud Files Blog, March 24, 2013 ---
http://www.sequenceinc.com/fraudfiles/2013/03/for-aspiring-forensic-accountants-and-fraud-investigators/

Bob Jensen's threads on forensic accounting are at
http://www.trinity.edu/rjensen/Fraud001c.htm#Forensic

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


"10 Worst Corporate Accounting Scandals," by Barry Ritholtz, Ritholtz Blog, March 7, 2013 ---
http://www.ritholtz.com/blog/2013/03/worst-corp-scandals/#more-90147

Jensen Comment
Barry is a financial analyst with a political science background. As an accounting professor I claim that he missed some of the biggest accounting scandals even if we leave out the really big scandals before 1950 (e.g, leave out the South Sea Scandal of monumental proportion).

There are really two tacks that one can take in the definition of "Corporate Accounting Scandals." One is the size of the "theft" resulting from accountant and/or auditor negligence. Barry probably had this in mind, but he missed a few such as the Franklin Raines earnings management scandal at Fannie Mae.

The other tack is gross accountant and/or audit negligence even when the size of the theft is somewhat smaller for a worse crime. For example, there was enormous accountant and/or auditor negligence when pilfered $53 million from Dixon, Illinois ---
"Rita Crundwell, Ill. financial officer (Dixon, Illinois horse enthusiast) who allegedly stole $53 million, sentenced to 19.5 years in prison," by Casey Glynn, CBS News, February 14, 2013 ---
http://www.cbsnews.com/8301-504083_162-57569411-504083/rita-crundwell-ill-financial-officer-who-allegedly-stole-$53-million-sentenced-to-19.5-years-in-prison/
There are many such thefts by accountants that are bad as it gets even if the amounts they stole is are not in the record books.

Here are some examples of accounting examples Barry should've also considered::

When KPMG Got Fired
Fannie Mae may have conducted the worst earnings management scheme in the history of accounting.
 
You can read the following at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm
 
. . . flexibility also gave Fannie the ability to manipulate earnings to hit -- within pennies -- target numbers for executive bonuses. Ofheo details an example from 1998, the year the Russian financial crisis sent interest rates tumbling. Lower rates caused a lot of mortgage holders to prepay their existing home mortgages. And Fannie was suddenly facing an estimated expense of $400 million.

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

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

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

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

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

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

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

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

 

Wikipedia has a listing of major accounting scandals that I don't think Barry looked at when listing his "10 Worst Corporate Accounting Scandals" ---
http://en.wikipedia.org/wiki/Accounting_fraud#List_of_major_accounting_scandals

 

And if we move beyond accounting per se, the recent LIBOR scandals are bigger than all of his "10 Worst" combined ---
http://www.trinity.edu/rjensen/FraudRotten.htm


Don't do as I do, do as I say
Author Unknown

"Why analysts should not be investors," by Felix Salmon, Reuters, March 7, 2013 ---
http://blogs.reuters.com/felix-salmon/2013/03/07/why-analysts-should-not-be-investors-andy-zaky-edition/


Summary of redeliberations in the (converged) revenue recognition project, Deloitte, March 13, 2013 ---
http://www.iasplus.com/en/news/2013/03/revenue

IFRS 2013 Red Book now available --- Click Here
http://shop.ifrs.org/ProductCatalog/Product.aspx?ID=1734&utm_source=Email&utm_medium=Email&utm_term=Red%2B2013&utm_content=Email%2BRed%2B2013&utm_campaign=Email%2BRed%2B2013


Question
What is the difference between news and sponsored content?

Hint
On television we call it an infomercial --- something that causes me to change channels in the blink of an eye.

"Deloitte And Wall Street Journal Exclusive For Sponsored Content," by Francine McKenna, re:TheAuditors, March 14, 2013 ---
http://retheauditors.com/2013/03/14/deloitte-and-wall-street-journal-exclusive-for-sponsored-content/

Your favorite newspapers, magazines and blogs are so hungry for content to fill their pages that sometimes, rather than paying their own writers to produce text, video, and other journalism those publications take money from strangers to print their content instead.

You may not have noticed. It’s getting harder and harder to discern journalism from newsy advertising.

You may know it as advertising or maybe “advertorial” but publications are slipping it in under new fancy media names like “sponsored content” and “sponsored posts”. There’s an entire publication called paid Content that promotes the approach as a way for media organizations to pay the bills.

The Wall Street Journal has been accepting sponsored content, in an exclusive contract with Deloitte, for its CFO Journal, CIO Journal for a while and now will feature Deloitte’s content in a new publication, Risk & Compliance Journal.

I have not seen that reported elsewhere.

A recent controversy over “sponsored content” by Scientology in the Atlantic magazine raised the temperature of the discussion amongst media watchers to “hot”.

A critic of the practice, Andrew Sullivan, wrote about what he thinks went wrong with the Atlantic’s foray.

Continued in article

Jensen Comment
I also see a lot of this in Time Magazine in terms of pharmaceutical advertising that now runs centerfold pages on health and medication that looks like medical news but has "Advertisement" printed at the top of each page in fine print. I guess it's a step up from the centerfold section of Playboy, but then again maybe not.

I wonder how long it will take MOOCs to discover this type of revenue source?


March 4, 2013 message from Roger Collins

From

http://www.bbc.co.uk/news/business-21653131 

Some quotes

"HSBC paid out $4.2bn (£2.8bn) last year to cover the cost of past wrongdoing. As well as $1.9bn in fines for money laundering, the bank also set aside another $2.3bn for mis-selling financial products in the UK. The figures came as HSBC reported rising underlying profitability and revenue in 2012, and an overall profit before tax of $20.6bn

Chief executive Stuart Gulliver's total remuneration for 2012 was some $7m, compared with $6.7m the year before. And after taking account of the deferral of pay this year and in more highly-remunerated years previously, Mr Gulliver actually received $14.1m in 2012, up from $10.6m in 2011.

The company's 16 top executives received an average of $4.9m each."

"During a conference call to present the results, Mr Gulliver told investors that the bank was not reconsidering whether to relocate its headquarters from London back to Hong Kong, in order to avoid a recently agreed worldwide cap on bonuses of all employees of banks based in the EU."

"HSBC's underlying profits - which ignore one-time accounting effects as well as the impact of changes in the bank's creditworthiness - rose 18%."

"The bank's results were heavily affected by a negative "fair value adjustment" to its own debt of $5.2bn in 2012, compared with a positive adjustment of $3.9bn the year before. The adjustment is an accounting requirement that takes account of the price at which HSBC could buy back its own debts from the markets. It has the perverse effect of flattering a bank's profits at a time when markets are more worried about its ability to repay its debts, and vice versa."

More in article.

Regards,

Roger

Roger Collins
Associate Professor
OM1275 TRU School of Business & Economics

 

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


"Ex-Jenkens & Gilchrist Lawyer Gets 8 Years in Tax Case," by Patricia Hurtado, Bloomberg Businessweek, March 1, 2013 ---
http://www.businessweek.com/news/2013-03-01/ex-lawyer-donna-guerin-gets-8-year-sentence-in-tax-shelter-case#p1

Former Jenkens & Gilchrist lawyer Donna Guerin was sentenced to eight years in prison and ordered to pay $190 million for her role in what the U.S. called the largest criminal tax fraud in history.

Guerin, 52, pleaded guilty in September 2012 just as she was set to be retried with three other defendants for running a 10-year scheme that created $7 billion in fraudulent tax deductions, more than $1.5 billion in phony losses and $92 million in actual losses to the U.S. Treasury.

U.S. District Judge William Pauley in New York, who presided over the case, said that as both a lawyer and a certified public accountant, Guerin had violated her oaths to uphold the law by helping her clients avoid paying their taxes through shelters.

“It’s the modern-day equivalent of Hawthorne’s story of Midas,” Pauley said yesterday. “Everything she touched turned to gold with tragic consequences. Her fall has been Faustian.” Guerin was “the embodiment of the American dream, but then her lust for money turned her dream into a nightmare,” he said.

Pauley ordered Guerin to report to prison on May 14. The judge also directed her to pay $200,000 before she surrenders to U.S. prison authorities and said she must turn over 20 percent of her gross income after she’s released from prison. Guerin and her lawyer declined to comment after the hearing.

‘Breathtaking’ Conspiracy

“When an attorney violates her oath to uphold the law, she undermines our entire system of justice,” Pauley said. “This tax shelter fraud conspiracy was breathtaking in its scope and in the damage it caused our nation.”

Mark Rotert, Guerin’s lawyer, argued that his client’s culpability in the conspiracy was “relatively minor” and said she had merely followed others at her firm who were willing to “push the envelope” on an aggressive tax shelter strategy.

Her lawyers had sought something shorter than the 10-year term calculated by U.S. probation officials and said their client was merely a “junior” law partner when it came to implementing the tax shelters.

Pauley rejected his argument, saying Guerin hadn’t been satisfied earning hundreds of thousands of dollars as a partner and instead had earned millions that were generated through the tax-shelter scheme. Pauley said Guerin had been a “leader” and had even instructed young associates at her now-defunct law firm how to conduct a “hide the ball tax strategy.”

‘Willing Tools’

“Lawyers and accountants became willing tools for their ultra-wealthy clients to avoid their fair share of taxes. These professionals violated their oaths to line their pockets. Ms. Guerin played a central role, she was not a mindless automaton,” the judge said. “She became a criminal for two reasons: the lure of the money and because she believed that she was never going to be brought to justice.”

Guerin told the judge said her crimes had caused her to abandon efforts to adopt a child. She said she regretted relying on her superiors and not asking more questions or challenging the tax-fraud scheme.

“I am here as a defeated person,” she said. “I never wanted to be a famous attorney, nor an infamous one.”

Guerin was initially convicted by a federal jury in Manhattan in May 2011 with her three co-defendants. Those convictions were overturned after Pauley found that a juror had lied about her past, including that she was an alcoholic and a suspended attorney.

‘Significant’ Term

Assistant U.S. Attorneys Stanley Okula and Nanette Davis said in court papers that Guerin deserved a “significant” prison term of at least 10 years.

“This was a species or a subset of activity that was so flagrant and knowingly wrong, any first-year law student would know was wrong,” Okula told Pauley yesterday. He argued that Guerin had given tutorials to young associates at the firm, teaching them how to evade taxes.

Okula disputed Rotert’s claim that Guerin’s co-defendants had merely followed others at the firm.

Continued in article

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


"10 Worst Corporate Accounting Scandals," by Barry Ritholtz, Ritholtz Blog, March 7, 2013 ---
http://www.ritholtz.com/blog/2013/03/worst-corp-scandals/#more-90147

Jensen Comment
Barry is a financial analyst with a political science background. As an accounting professor I claim that he missed some of the biggest accounting scandals even if we leave out the really big scandals before 1950 (e.g, leave out the South Sea Scandal of monumental proportion).

There are really two tacks that one can take in the definition of "Corporate Accounting Scandals." One is the size of the "theft" resulting from accountant and/or auditor negligence. Barry probably had this in mind, but he missed a few such as the Franklin Raines earnings management scandal at Fannie Mae.

The other tack is gross accountant and/or audit negligence even when the size of the theft is somewhat smaller for a worse crime. For example, there was enormous accountant and/or auditor negligence when pilfered $53 million from Dixon, Illinois ---
"Rita Crundwell, Ill. financial officer (Dixon, Illinois horse enthusiast) who allegedly stole $53 million, sentenced to 19.5 years in prison," by Casey Glynn, CBS News, February 14, 2013 ---
http://www.cbsnews.com/8301-504083_162-57569411-504083/rita-crundwell-ill-financial-officer-who-allegedly-stole-$53-million-sentenced-to-19.5-years-in-prison/
There are many such thefts by accountants that are bad as it gets even if the amounts they stole is are not in the record books.

Here are some examples of accounting examples Barry should've also considered::

When KPMG Got Fired
Fannie Mae may have conducted the worst earnings management scheme in the history of accounting.
 
You can read the following at http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm
 
. . . flexibility also gave Fannie the ability to manipulate earnings to hit -- within pennies -- target numbers for executive bonuses. Ofheo details an example from 1998, the year the Russian financial crisis sent interest rates tumbling. Lower rates caused a lot of mortgage holders to prepay their existing home mortgages. And Fannie was suddenly facing an estimated expense of $400 million.

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

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

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

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

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

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

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

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

 

Wikipedia has a listing of major accounting scandals that I don't think Barry looked at when listing his "10 Worst Corporate Accounting Scandals" ---
http://en.wikipedia.org/wiki/Accounting_fraud#List_of_major_accounting_scandals

One of the largest settlements/fines paid by an accounting firm arose when KPMG confessed to selling over $2 billion in fraudulent tax shelters. The firms cash settlement with the IRS was over $400 million, which was a small amount compared to the actual damages.

The February 19, 2004 Frontline worldwide broadcast is going to greatly sadden the already sad face of KPMG.  As a former KPMG Professor of Accounting at Florida State University, it also saddens me that the primary focus of the Frontline broadcast was on the bogus tax shelters marketed by KPMG over the past few years.  All the other large firms were selling such shelters to some extent, but when their tactics were exposed the others quickly apologized and promised to abandon sales of such shelters.  KPMG stonewalled and lied to a much greater extent in part because their illegality went much deeper.  The video can now be viewed online for free from http://www.pbs.org/wgbh/pages/frontline/shows/tax/view/

My summary of the highlights is as follows:

 

  1. These illegal acts added an enormous amount of revenue to KPMG, over $1 billion dollars of fraud.

    American investigators have discovered that KPMG marketed a tax shelter to investors that generated more than $1bn (£591m) in unlawful benefits in less than a year.
    David Harding, Financial Director --- http://www.financialdirector.co.uk/News/1135558 

     

  2. While KPMG and all the other large firms were desperately promising the public and the SEC that they were changing their ethics and professionalism in the wake of the Andersen melt down and their own publicized scandals, there were signs that none of the firms, and especially KPMG, just were not getting it.  See former executive partner Art Wyatt's August 3, 2004 speech entitled "ACCOUNTING PROFESSIONALISM:  THEY JUST DON'T GET IT" --- http://aaahq.org/AM2003/WyattSpeech.pdf 

     

  3. KPMG's  illegal acts in not registering the bogus tax shelters was deliberate with the strategy that if the firm got caught by the IRS the penalties were only about 10% of the profits in those shelters such that the illegality was approved all the way to the top executives of KPMG.  

    Former Partner's Memo Says Fees Reaped From Sales of Tax Shelter Far Outweigh Potential Penalties

    KPMG LLP in 1998 decided not to register a new tax-sheltering strategy for wealthy individuals after a tax partner in a memo determined the potential penalties were vastly lower than the potential fees.

    The shelter, which was designed to minimize taxes owed on large capital gains such as from the sale of stock or a business, was widely marketed and has come under the scrutiny of the Internal Revenue Service. It was during the late 1990s that sales of tax shelters boomed as large accounting firms like KPMG and other advisers stepped up their marketing efforts.

    Gregg W. Ritchie, then a KPMG LLP tax partner who now works for a Los Angeles-based investment firm, presented the cost-benefit analysis about marketing one of the firm's tax-shelter strategies, dubbed OPIS, in a three-page memorandum to a senior tax partner at the accounting firm in May 1998. By his calculations, the firm would reap fees of $360,000 per shelter sold and potentially pay only penalties of $31,000 if discovered, according to the internal note.

    Mr. Ritchie recommended that KPMG avoid registering the strategy with the IRS, and avoid potential scrutiny, even though he assumed the firm would conclude it met the agency's definition of a tax shelter and therefore should be registered. The memo, which was reviewed by The Wall Street Journal, stated that, "The rewards of a successful marketing of the OPIS product [and the competitive disadvantages which may result from registration] far exceed the financial exposure to penalties that may arise."

    The directive, addressed to Jeffrey N. Stein, a former head of tax service and now the firm's deputy chairman, is becoming a headache itself for KPMG, which currently is under IRS scrutiny for the sale of OPIS and other questionable tax strategies. The memo is expected to play a role at a hearing Tuesday by the Senate's Permanent Subcommittee on Investigations, which has been reviewing the role of KPMG and other professionals in the mass marketing of abusive tax shelters. A second day of hearings, planned for Thursday, will explore the role of lawyers, bankers and other advisers.

    Richard Smith, KPMG's current head of tax services, said Mr. Ritchie's note "reflects an internal debate back and forth" about complex issues regarding IRS regulations. And the firm's ultimate decision not to register the shelter "was made based on an analysis of the law. It wasn't made on the basis of the size of the penalties" compared with fees. Mr. Ritchie, who left KPMG in 1998, declined to comment. Mr. Stein couldn't be reached for comment Sunday.

    KPMG, in a statement Friday, said it has made "substantial improvements and changes in KPMG's tax practices, policies and procedures over the past three years to respond to the evolving nature of both the tax laws and regulations, and the needs of our clients. The tax strategies that will be discussed at the subcommittee hearing represent an earlier time at KPMG and a far different regulatory and marketplace environment. None of the strategies -- nor anything like these tax strategies -- is currently being offered by KPMG."

    Continued in the article.


     

  4. KPMG would probably still be selling the bogus tax shelters if a KPMG whistle blower named Mike Hamersley had not called attention to the highly secretive bogus tax shelter sales team at KPMG.  His  recent and highly damaging testimony to KPMG is available at http://finance.senate.gov/hearings/testimony/2003test/102103mhtest.pdf 
    This is really, really bad for the image of professionalism that KPMG tries to portray on their happy face side of the firm.  KPMG is now under criminal investigation by the U.S. Department of Justice.

     

  5. The reason that KPMG and the other large accounting firms did and can continue to sell illegal tax shelters at the margin is that they have poured millions into an expensive lobby team in Washington DC that has been highly successful in blocking Senator Grassley's proposed legislation that would make all tax shelters illegal if the sheltering strategy served no economic purpose other than to cheat on taxes.  Your large accounting firms in conjunction with the world's largest banks continue to block this legislation.  If the accounting firms wanted to really improve their professionalism image they would announce that they have shifted their lobbying efforts to supporting Senator Grassley's proposed cleanup legislation.  But to do so would put these firms at odds with their largest clients who are the primary benefactors of abusive tax shelters.

 

And KPMG's negligent audits of Countrywide Financial may have resulted in the largest economic damage ever for an auditing firm.
"Settling For Silence: KPMG Closes The Books On New Century And Countrywide," by Francine McKenna, re:TheAuditors, August 18, 2010 ---
http://retheauditors.com/2010/08/18/settling-for-silence-kpmg-closes-the-books-on-new-century-and-countrywide/

And if we move beyond accounting per se, the recent LIBOR scandals are bigger than all of his "10 Worst" combined ---
http://www.trinity.edu/rjensen/FraudRotten.htm


The Latest from Reform Activists Lynn Turner and Francine McKenna (to say nothing of the PCAOB)
"The PCAOB & Auditor Failures to Remediate," The Corporate Council.net, March 11, 2013 ---
http://www.thecorporatecounsel.net/blog/index.html
Thank you Caleb Newquist for the heads up.

Last week, the PCAOB issued a rare rebuke to a Big Four auditor as PricewaterhouseCoopers was faulted for failing to promptly address quality control problems in audits occurring in 2007 and 2008. The rebuke came after the PCAOB had reviewed the remediation efforts of PwC in response to the nonpublic portions of the Board's March 2009 and August 2010 inspection reports. Learn more in this GoingConcern blog, WSJ article and Reuters article.

And as AccountingWeb.com recently blogged, this comes on the heels of another PCAOB report on US auditors' performance, in which the the Board found a reduced rate of "significant audit performance deficiencies" compared to its last review in 2007. However, the PCAOB did note that problems persist with almost half of the audit firms inspected having at least one "significant audit performance deficiency." The PCAOB called out small firms and big firms alike in its report. Here's a list of auditors that failed to address quality control criticisms satisfactorily.

Here are some thoughts from Lynn Turner on the PwC inspection report:

 

The PCAOB Inspection reports are critical of PwC audit partners for not supervising those staff doing the vast majority of the work. In one instance cited below, it notes the partner only spent 2% of the hours put in on the audit. That is a significant issue that would affect audit quality and the credibility of the audit report.

A few years ago, the PCAOB proposed that investors be told the name of the audit partner, as is done in Europe and other parts of the world. This could be done either through the partner signing the report, as is the typical custom, or having the auditors name be disclosed as some have proposed.

Investors are asked to vote on and ratify the auditor as part of the proxy voting process for many companies. Yet today, the PCAOB continues to withhold from investors, the name of the companies whose audits the PCAOB inspection reports call into question, those audits of questionable quality and credibility, and which have not been done in accordance with professional standards. The PCAOB has also failed to act on the proposal to provide investors with transparency as to who the audit partner is. As a result, despite all the criticism leveled by the PCAOB against PwC in today's report, investors are left totally unable to discern which of these audits they should be concerned about, when voting on the auditor ratification. The PCAOB is simply forcing investors to "fly blind" on that vote.

While SOX does prohibit the PCAOB from disclosing certain information on an auditor that arises as a result of an inspection, it does not prohibit in any fashion the PCAOB from disclosing the name of the Company. And it would not prohibit the disclosure of the names of these partners who perform poorly if the PCAOB were the Board ever to act on its own proposal. Rather, a majority of the PCAOB board members have decided to act in a manner that reduces transparency with respect to audit quality for investors.

 

Francine McKenna on Audit Industry Developments

In this podcast, Francine McKenna of re:theauditors delves into some of the latest audit industry developments, including:

- Why should audit committees care about PCAOB inspection reports?
- How can the audit committee learn more about a PCAOB inspection report? Should they ask the auditor? The PCAOB?
- In what instances can a PCAOB inspection report be used in litigation against the auditor by the client or shareholder plaintiffs?
- Is it the audit committee's responsibility or the auditor's to make sure the firm is independent? What if the auditor uses its member firms all over the world to complete the audit? What can happen if the audit firm is not independent?
- What role does an external auditor play when there's a corporate investigation? Can the auditor be hired to perform an investigation of fraud or illegal acts? Should the auditor be hired to perform a corporate investigation? Advantages and disadvantages?

As an aside, here's a Bloomberg article critical of the nonprosecution agreement over illegal tax shelters that the DOJ just reached with Ernst & Young.

And Janice Brunner & Ning Chiu note in this Davis Polk blog: "The New York City Bar Association Financial Reporting Committee has asked the NYSE to consider revising its rules regarding the extent to which audit committees shoulder the burden for risk management oversight. NYSE requires audit committees to discuss policies with respect to risk assessment and risk management. Commentary to these rules indicates that the audit committee is not required to be the sole body responsible for risk assessment and management, but it must discuss guidelines and policies to govern the process by which this activity is undertaken.

The Financial Reporting Committee letter expressed concern that the NYSE rules not only call upon audit committees to assume oversight responsibility for risks beyond those associated with financial reporting, but also that the level of responsibility the committees must undertake is unfortunately ambiguous. The letter argues that audit committees are already burdened with their existing duties and also do not possess particular expertise in broader subjects of risk management that may expand to operational and environmental risk, for example. The letter suggests perhaps a more useful approach would be to vest in the entire board the responsibilities for the allocation of risk management oversight instead. "

 

Webcast: "What the Top Compensation Consultants Are NOW Telling Compensation Committees"

Continued in article

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


"Hidden Numbers Make Banks Even Bigger," by Floyd Norris, The New York Times, March 14, 2013 ---  Click Here
http://www.nytimes.com/2013/03/15/business/new-rules-will-give-a-truer-picture-of-banks-size.html?nl=todaysheadlines&emc=edit_th_20130315&_r=2&pagewanted=all&#h[]

It sounds like a simple question. How big is that bank?

But it is not.

Under American accounting rules, banks that trade a lot of derivatives can keep literally trillions of dollars in assets and liabilities off their balance sheets. Since 2009, they have at least been required to make disclosures about how large those amounts are, but the disclosures leave out some things and — amazingly enough — in some cases do not seem to add up.

The international accounting rules are different. They also allow some assets to vanish, but not nearly as many. As a result, it is virtually impossible to confidently declare how a particular European bank compares in size with an American bank.

Much of that will change when first-quarter financial statements start coming off the printing presses in a few weeks. For the first time, European and American banks are supposed to have comparable disclosures regarding assets. Their balance sheets will still be radically different, but for those who care, the comparison will be possible.

This comes to mind because these days it seems that big banks do not much want to be thought of that way. A rather angry argument has broken out regarding whether “too big to fail” institutions get what amounts to a subsidy from investor confidence that no matter what else happens, they would not be allowed to fail. The banks deny it all. Subsidy? Penalty is more like it, they say.

We’ll get back to that argument in a moment. But first, there is some evidence that the big American banks may have scaled back their derivatives positions last year. At five of six major financial institutions, the amount of assets kept off the balance sheet appears to be lower at the end of 2012 than it was a year earlier.

Still, the numbers are big. JPMorgan Chase, the biggest American institution, had $2.4 trillion in assets on its balance sheet at the end of 2012. But it has derivatives with a market value of an additional $1.5 trillion that it does not show on its balance sheet, down from $1.7 trillion a year earlier.

So is JPMorgan getting bigger? Measured by assets on the balance sheet, the answer is yes. That total was up $93 billion from 2011. But after adjusting for the hidden assets, the bank appears to have shrunk by $109 billion last year. If the bank used international accounting rules, it appears it would be getting smaller.

Not having those assets on the balance sheet makes the bank look less leveraged than it might otherwise appear to be. If you simply compare the book value of the bank with its assets, it appears it has $11.56 in assets for every dollar in equity. Add in those derivatives, and the figure leaps to $18.95.

It is not as if those assets are not real, or that they are perfectly offset by liabilities also kept off the balance sheet. There is a similar amount of liabilities that are not shown, but there is no way to know just how they match up with the assets in terms of riskiness. The nature of derivatives makes it hard to assess aggregate totals.

If a bank has a $1 million loan to someone, that is an asset that would go on the balance sheet at $1 million. Presumably the worst that could happen is that the bank would lose the entire amount. But a large derivative position might currently have a market value of $1 million, and thus would be shown as being worth the same amount, whether on or off the balance sheet. But if the market moves sharply, the profit or loss could be many multiples of that figure.

Under American accounting rules, banks that deal in derivatives can net out most of their exposure by offsetting the assets against the liabilities. They do this based not on the nature of the asset or liability, but on the identity of the institution on the other side of the trade — the counterparty, in market lingo.

The logic of this has to do with what would happen in a bankruptcy. What are called “netting agreements” allow only the net value to be claimed in case of a failure. So the bank shows the sum of those net positions with each party.

But those positions are not offsetting in terms of risk, or at least there is no way to know if they are. The figures shown in the financial statements and footnotes simply describe market values on the day of the balance sheet. If prices move the wrong way, as asset can turn into a liability, or a liability can become much larger. And both can happen at the same time. The asset might be an interest rate swap, while the liability is a wheat future. Obviously, they are not particularly likely to move in tandem.

To return to JPMorgan, on its balance sheet are derivative assets of $75 billion, and derivative liabilities of $71 billion. Neither number is very large relative to the size of the bank, and you might think that swings in values would be unlikely to be very large.

But those numbers are $1.5 trillion smaller than the actual totals. Obviously, the swings on a portfolio of that size could be much larger.

A few years ago, the accounting rule makers set out to get rid of the netting, and make balance sheets more accurate. But there were complaints from banks and others, and the American rule makers at the Financial Accounting Standards Board concluded that was not a good idea. So there is still netting in the United States. Some of it, involving repos and reverse repos, is not disclosed at all now, but will be when the new rules kick in.

The sort-of invisible derivative assets and liabilities are only part of the reason that it is so hard to really get a handle on just how risky any given bank is.

Continued in article

I never could understand the reasons for this amendment to FAS 133 that originally did not allow such offsetting. At the time I blamed it on the zeal for convergence with the IASB and political pressures that seemed to be even greater in Europe than the U.S. Perhaps I was wrong in this.

I'm beginning to think that when something smells fishy there probably are some rancid fish hiding somewhere

I've never been in favor of what I think is one of the worst decisions ever made by the FASB that runs counter to the original FAS 133 requirements.
"Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities," ASU No. 2011-08, FASB --- Click Here
http://www.fasb.org/cs/BlobServer?blobkey=id&blobwhere=1175825893217&blobheader=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs

Why Is the FASB Issuing
This Accounting Standards Update (Update) ? The main objective in developing this Update is to address implementation issues about the scope of Accounting Standards Update No. 2011 - 11, Balance Sheet (Topic 210) : Disclosures about Offsetting Assets and Liabilities . Stakeholders have told the Board that because the scope in Update 2011 - 11 is unclear, diversity in practice may result . Recent feedback from stakeholders is that standard commercial provisions of many contracts would equate to a master netting arrangement . Stakeholders questioned whether it was the Board’s intent to require disclosures for such a broad scope, which would significantly increase the cost of compliance . The objective of this Update is to clarify the scope of the offsetting disclosures and address any unintended consequences.

What Are the Main Provisions?
The amendments clarify that the scope of Update 2011 - 11 applies to derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives , repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210 - 20 - 45 or Section 815 - 10 - 45 or subject to an enforceable master netting arrangement or similar agreement .

Who Is Affected by the Amendments in This Update?
The amendments in this Update affect entities that have derivatives accounted for in accordance with Topic 815, including bifurcated embedded derivatives , repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210 - 20 - 45 or Section 815 - 10 - 45 or subject to an enforceable master netting arrangement or similar agreement . Entities with other types of financial a ssets and financial liabilities subject to a master netting arrangement or similar agreement also are affected because these amendments make them no longer subject to the disclosure requirements in Update 2011 - 11.

How Do the Main Provisions?
Differ from Cur rent U.S. Generally Accepted Accounting Principles ( GAAP ) and Why Would They Be an Improvement? The amendments clarify the intended scope of the disclosures required by Section 210 - 20 - 50 . The Board concluded that the clarified scope will reduce significant ly the operability concerns expressed by preparers while still providing decision - useful information about certain transactions involving master netting arrangements . The amendments provide a user of financial statements with comparable information as it r elates to certain reconciling differences between financial statements prepared in accordance with U.S. GAAP and those financial statements prepared in accordance with International Financial Reporting Standards (IFRS).

When W ill the Amendments Be Effective?
An entity is required to apply the amendments for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods . An entity should provide the required disclosures retrospectively for all comparative periods presented . The effective date is the same as the effective date of Update 2011 - 11.

How Do the Provisions Compare with International Financial Reporting Standards (IFRS)?
The disclosures required by the amendments in Update 2011 - 11 are the result of a joint project between the FASB and the International Accounting Standards Board (IASB), which was intended to provide comparable information about balance sheet offsetting between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS . The amendments in this Update clarify that the scope of the disclosures under U.S. GAAP is limited to include derivatives accounted for in accordance with Topic 815 , including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210 - 20 - 45 or Section 815 - 10 - 45 or subject to a n enforceable master netting arrangement or similar agreement.

Continued in article

 

I personally was more concerned about how banks changed income smoothing practices.
"The Impact of SFAS 133 on Income Smoothing by Banks through Loan Loss Provisions," by Emre Kilic Gerald J. Lobo, Tharindra Ranasinghe, and K. Sivaramakrishnan Rice University, The Accounting Review, Vol. 88, No. 1, 2013, pp. 233-260 ---
http://aaajournals.org/doi/pdf/10.2308/accr-50264

We examine the impact of SFAS 133, Accounting for Derivative Instruments and Hedging Activities , on the reporting behavior of commercial banks and the informativeness of their financial statements. We argue that, because mandatory recognition of hedge ineffectiveness under SFAS 133 reduced banks’ ability to smooth income through derivatives, banks that are more affected by SFAS 133 rely more on loan loss provisions to smooth income. We find evidence consistent with this argument. We also find that the increased reliance on loan loss provisions for smoothing income has impaired the informativeness of loan loss provisions for future loan defaults and bank stock returns.


Nations gradually adopting IFRS are not supposed to "stop half way"

"IASB chairman encourages Indonesia to fully adopt IFRSs ," Deloitte, March 18, 2013 ---
http://www.iasplus.com/en/news/2013/03/hoogervorst

Hans Hoogervorst, Chairman of the International Accounting Standards Board (IASB), recently spoke at an international seminar on “IFRS Dynamics 2013 and Beyond: Impact to Indonesia” organised by the Indonesian Institute of Accountants (Ikatan Akuntan Indonesia, IAI). He encouraged Indonesia that currently follows a gradual convergence process to fully embrace IFRSs.

Indonesia's approach to IFRS adoption is to maintain its national GAAP (Indonesian Financial Accounting Standards, IFAS) and converge it gradually with IFRSs as much as possible. Since 2012, the standards applied in Indonesia are based on those IFRSs that were effective at 1 January 2009. However, there is currently no plan (and consequently no timetable) for a full adoption of IFRSs.

In his speech, Mr. Hoogervorst outlined the benefits he sees for Indonesia if IFRSs are fully adopted. He described how Europe profited from adopting IFRSs and invited Indonesia to imagine the benefits that emerging economies could draw from the use of IFRS, especially economies that are so forcefully on the rise as Indonesia. He added: "For many emerging economies, adoption of IFRS has become an important statement of ambition – an international commitment to adhere to the highest possible standards of financial reporting."

However, Mr. Hoogervorst also warned that jurisdictions should embrace IFRSs fully and not stop half-way:

It is important to understand that the full benefits of using the IFRS-brand can only be enjoyed if you adopt it fully. For foreign investors it is very difficult to discern small differences from big ones. If a jurisdiction cannot state that it has fully adopted IFRS, investors are likely to think that the differences are much bigger than they really are. If you have gone through all the trouble to adopt 95% of IFRSs, please make sure you also do the last 5%. Otherwise, you have all the pain of transition without the full gain of international recognition of that achievement.

Regarding fears of difficulties or problems with transition, Mr. Hoogervorst offered the IASB's assistance and pointed at the IASB's Asia-Oceania office in Tokyo and the Emerging Economies Group. He also mentioned the IASB's close cooperation with the Asian-Oceanian Standard-Setters Group, which he described to be likely represented in the Accounting Standards Advisory Forum the IFRS Foundation has set up to deepen the IASB's cooperation with standard-setters across the world. Mr. Hoogervorst indicated that all of these initiatives offered excellent opportunities for a strong Indonesian participation in financial reporting and he concluded: "You have a wonderful opportunity to help shape the future of global financial reporting".

Jensen Comment
I think national standard setters can adopt the essence of most any IFRS standard, but they should not claim to be in the process of converging to a full set of IFRS standards if that is not the intent. The U.S. has made it clear, thus far, that the express train to IFRS has been side tracked indefinitely even though the FASB and IASB are still working jointly on selected convergence standards.


From the AICPA newsletter on March 18, 2013

Financial community grapples with diverging FASB, IASB standards
The Financial Accounting Standards Board and the International Accounting Standards Board have not reached resolution over how to revise accounting standards for loan losses. The larger financial community is trying to help analysts and bankers make sense of the divergent approaches. The American Bankers Association has published an FAQ about FASB's approach. Fitch Ratings issued a statement saying that it believes FASB's proposed model "is likely to lead to quarterly adjustments in expected loss projections, possibly leading to more volatility in provision expense and reported earnings."
http://r.smartbrief.com/resp/enrkBYbWhBCihqgTCidmwjCicNCViA?format=standard

"FASB gives more detail on expected credit loss proposal" by Ken Tysiac, Journal of Accountancy, March 26, 2013 ---
http://journalofaccountancy.com/News/20137633.htm

Jensen Comment
Note that both the FASB and IASB are moving away from the fair value market model for loan loss estimation. The "divergence" between the FASB and IASB is is only about how expected loss computations.


Question
What is "force-placed" insurance?

"GSE Investigation Into Force-Placed Insurance (finally)," by Barry Ritholtz, March 26, 2013 ---
http://www.ritholtz.com/blog/2013/03/force-placed-insurance-investigated/

Fannie & Freddie have finally begun to investigate the self-dealing and often fraudulent practice of Force-Placed Insurance. Both the New York State Insurance Regulator and the Consumer Financial Protection Bureau have been way ahead of the GSEs on this.

For those of you who may be unfamiliar with Force-Placed Insurance, it is an optional bank insurance product that sometimes gets forcibly jammed down the throats of home owners and mortgage investors at grossly inflated prices. As Jeff Horowitz detailed in 2010 (Losses from Force-Placed Insurance Are Beginning to Rankle Investors), most of the fees, commissions and revenues from this “product” went straight back to the banks holding the related mortgage, typically to wholly owned subsidiaries.

It was an abusive practice, and in quite a few instances, the additional costs actually tipped homeowners into foreclosure.

Here’s the WSJ:

“The Federal Housing Finance Agency, which regulates mortgage giants Fannie Mae (FNMA) and Freddie Mac (FMCC) plans to file a notice Tuesday to ban lucrative fees and commissions paid by insurers to banks on so-called force-placed insurance . . .

Forced policies have boomed in the wake of the housing bust, as many homeowners struggled to keep up with mortgage payments. Some borrowers may try to save money by dropping the original standard coverage, only to be hit by policies with premiums that are typically at least twice as expensive as voluntary insurance, and sometimes cost as much as 10 times more. Nearly six million such policies have been written since 2009, insurance industry data indicate. Consumers are free at any point to replace a force-placed policy with one of their own choosing.”

The Consumer Financial Protection Bureau has issued new rules on this, but the real action seems to be the variety of civil suits from investors; additionally, New York State just reached a settlement with forced-placed insurer Assurant, including a $14 million penalty, and a long list of practice changes (after the jump). If it were up to me, I would have insisted on profit disgorgement and jail time for the CEO (But I am “unreasonable”).

Hopefully, this is the first of many . . .


Buffet's Berkshire Hathaway Performs Worse Than the S&P 500

"Buffett Questions Performance as S&P 500 Beats Berkshire," by Antoine Gara, The Street, March 1, 2013 ---
http://www.thestreet.com/story/11857405/1/buffett-questions-performance-as-sp-500-beats-berkshire.html

For the first time, Warren Buffett appears concerned he will underperform the S&P 500 when it comes to his favorite way to peg the performance of his investing conglomerate, Berkshire Hathaway (BRK.A_).

In Berkshire Hathaway's annual letter to shareholders, Buffett outlined why he is worried a rising stock market will put the firm's performance below that of the S&P 500 over a five-year stretch.

Such a scenario would be the first in Berkshire's history, indicating that even the 'Oracle of Omaha' is having trouble keeping up with rising markets.

Continued in article

Jensen Comment
Another consideration for the stock market under the Fed's Quantitative Easing will be how much are the returns after inflation. The USA is just not accustomed to inflation adjustments for reduced purchasing power of the USA dollar


"New Center Hopes to Clean Up Sloppy Science and Bogus Research," by Tom Bartlett, Chronicle of Higher Education, March 6, 2013 ---
http://chronicle.com/article/New-Center-Hopes-to-Clean-Up/137683/

Something is wrong with science, or at least with how science is often done. Flashy research in prestigious journals later proves to be bogus. Researchers have built careers on findings that are dubious or even turn out to be fraudulent. Much of the conversation about that trend has focused on flaws in social psychology, but the problem is not confined to a single field. If you keep up with the latest retractions and scandals, it's hard not to wonder how much research is trustworthy.

But Tuesday might just be a turning point. A new organization, called the Center for Open Science, is opening its doors in an attempt to harness and focus a growing movement to clean up science. The center's organizers don't put it quite like that; they say the center aims to "build tools to improve the scientific process and promote accurate, transparent findings in scientific research." Now, anybody with an idea and some chutzpah can start a center. But what makes this effort promising is that it has some real money behind it: The center has been given $5.25-million by the Laura and John Arnold Foundation to help get started.

It's also promising because a co-director of the center is Brian Nosek, an associate professor of psychology at the University of Virginia (the other director is a Virginia graduate student, Jeffrey Spies). Mr. Nosek is the force behind the Reproducibility Project, an effort to replicate every study from three psychology journals published in 2008, in an attempt to gauge how much published research might actually be baseless.

Mr. Nosek is one of a number of strong voices in psychology arguing for more transparency and accountability. But up until now there hasn't been an organization solely devoted to solving those problems. "This gives real backing to show that this is serious and that we can really put the resources behind it to do it right," Mr. Nosek said. "This whole movement, if it is a movement, has gathered sufficient steam to actually come to this."

'Rejigger Those Incentives'

So what exactly will the center do? Some of that grant money will go to finance the Reproducibility Project and to further develop the Open Science Framework, which already allows scientists to share and store findings and hypotheses. More openness is intended to combat, among other things, the so-called file-drawer effect, in which scientists publish their successful experiments while neglecting to mention their multiple flubbed attempts, giving a false impression of a finding's robustness.

The center hopes to encourage scientists to "register" their hypotheses before they carry out experiments, a procedure that should help keep them honest. And the center is working with journals, like Perspectives on Psychological Science, to publish the results of experiments even if they don't pan out the way the researchers hoped. Scientists are "reinforced for publishing, not for getting it right in the current incentives," Mr. Nosek said. "We're working to rejigger those incentives."

Mr. Nosek and his compatriots didn't solicit funds for the center. Foundations have been knocking on their door. The Arnold Foundation sought out Mr. Nosek because of a concern about whether the research that's used to make policy decisions is really reliable.

"It doesn't benefit anyone if the publications that get out there are in any way skewed toward the sexy results that might be a fluke, as opposed to the rigorous replication and testing of ideas," said Stuart Buck, the foundation's director of research.

Other foundations have been calling too. With more grants likely to be on the way, Mr. Nosek thinks the center will have $8-million to $10-million in commitments before writing a grant proposal. The goal is an annual budget of $3-million. "There are other possibilities that we might be able to grow more dramatically than that," Mr. Nosek said. "It feels like it's raining money. It's just ridiculous how much interest there is in these issues."

Continued in article

Appeal for a "Daisy Chain of Replication"
"Nobel laureate challenges psychologists to clean up their act: Social-priming research needs “daisy chain” of replication," by Ed Yong, Nature, October 3, 2012 ---
http://www.nature.com/news/nobel-laureate-challenges-psychologists-to-clean-up-their-act-1.11535

Jensen Comment
Accountics scientists set a high bar because they replicate virtually all their published research.

Yeah Right!
Accountics science journals like The Accounting Review have referees that discourage replications by refusing to publish them. They won't even publish commentaries that question the outcomes ---
http://www.trinity.edu/rjensen/TheoryTAR.htm

Accountics science researchers won't even discuss their work on the AAA Commons ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm


Questions
How many fraudulent SPEs did CFO Andy Fastow create to steal over $50 million from his employer (Enron)?

What is most unusual and actually unethical about the way Enron's SPEs were managed?  How were these related party dealings disclosed and yet obscured in the infamous Footnote 16 of Enron's Year 2000 Annual Report?

Answer
Over 3,000
See the answers to Questions 14 and 15 at http://www.trinity.edu/rjensen/FraudEnronQuiz.htm#14


 

Special Purpose Entity (SPE) and Special Purpose Vehicle (SPV)--- http://en.wikipedia.org/wiki/Special_purpose_entity

Variable Interest Entity (VIE or QSPE) --- http://en.wikipedia.org/wiki/Variable_interest_entity

"New challenge to VIEs," China Accounting Blog, March 5, 2013 ---
http://www.chinaaccountingblog.com/weblog/new-challenge-to-vies.html

I have learned from some investors that there has been a major challenge against the VIE structure of a U.S. listed Chinese company. The challenge relates to whether the VIE can be consolidated into the financial statements. The SEC has been aggressively examining VIE arrangements, but I have been unable to learn whether this challenge is a result of an SEC investigation, or who the company or auditor are.

Bear with me; this discussion has to get technical.

Under the VIE accounting rules, consolidation of the VIE is allowed if the public company is considered to be the primary beneficiary of the VIE (ASC 810-25-20). In a typical VIE arrangement, there are two potential beneficiaries of the VIE: 1) the Chinese individual who owns the shares in the VIE, and 2) the public company that has contracts with both that individual and the VIE that transfer control and economic interests to the public company. VIE arrangements are structured to make it clear that all of the control and economic interest flows to the public company.

Clear until now, anyway.

In many VIEs the founder of the company is the owner of the VIE. The founder also usually has voting control over the public company, which is often retained after the IPO by use of two classes of shares. Founders typically retain voting control even if their share holdings are reduced to a minority position. The two class of shares approach to retaining control by founders is common in technology offerings, most famously in Facebook. Two classes of stock are not allowed on the Hong Kong exchange, and that presents a challenge for U.S. listed companies that may want to move onto the Hong Kong exchange if they get kicked out of the U.S., but that is another story.

Under typical VIE agreements, the founder agrees to transfer his VIE shares to another VIE shareholder at the public company's request, and to otherwise vote those shares and select VIE management at the public company’s direction. Since the public company can remove the VIE owner at will, it has been thought that the VIE owner has no rights, and accordingly no interest in the VIE. Therefore the public company is the only beneficiary of the VIE and can consolidate it into their financial statements.

The founder, however, could stop any attempt to remove him as the owner of the VIE since he has voting control over the public company. With voting control, the founder has the power to elect the board that selects, terminates and sets the compensation of management, and establishes operating and capital decisions of the company. Do these powers mean that the founder is actually the primary beneficiary of the VIE? If the founder is the primary beneficiary, the public company cannot consolidate the VIE and instead will report its share of earnings as it receives them.

What happens if the SEC or auditors decide that this is the correct approach? Companies with this fact pattern will be forced to deconsolidate their VIEs, and restate prior financial statements. The VIE will drop out of the financial statements, possibly turning income into losses in some companies, while having a minor effect on some others.

Companies affected by this are likely to restructure their VIEs to be allowed to consolidate in the future. The easy solution seems to be to pick someone other than the founder to own the VIE. While that may fix the accounting problem, it introduces a huge amount of risk. One reason that the VIE is usually held by the founder is to align the interests of the VIE shareholder with the interests of the public shareholders. The idea is that the founder will not steal the VIE since doing so would destroy the value of his shares in the public company.

If the SEC is making this position clear to the accounting firms, we could see some real surprises when companies file their Form 20F over the next few weeks.

What's Right and What's Wrong With (SPEs), SPVs, and VIEs ---
http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm


From CFO Morning Ledger on March 4, 2013

Deal or No Deal: Can Busted M&A Deals Be Avoided?

Research by Hollis Skaife, professor of accounting in the Department of Accounting and Information Systems at the University of Wisconsin-Madison and a Deloitte Fellow and Scholar, and Daniel Wangerin, an assistant professor in the Department of Accounting and Information Systems at Michigan State University, looks at what impact low quality financial reporting may have on the outcome of M&A deals and offers a metric that may capture its existence before a deal closes.

Read the full article at
http://deloitte.wsj.com/cfo/2013/03/04/deal-or-no-deal-can-busted-ma-deals-be-avoided/

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


Billionaire Ex-Convicts Should Lie Low
"Martha Stewart Takes the Stand to Save Her Company," by Jeff Macke, Yahoo, March 5, 2013 --- Click Here
http://finance.yahoo.com/blogs/breakout/martha-stewart-takes-stand-save-her-company-155500326.html;_ylt=Agbbzidr5xzzYViIg1xYfDOiuYdG;_ylu=X3oDMTNyNHEyaDR0BG1pdANGUCBUb3AgU3RvcnkgTGVmdARwa2cDMDNhNjdlMjItN2M3NS0zNDg3LTk4NmUtMzI2NGI5ZGY2ODJiBHBvcwMxBHNlYwN0b3Bfc3RvcnkEdmVyAzM1MmZlYjAzLTg1YWYtMTFlMi1iZmZmLWEyNjkwMjhhMjg0YQ--;_ylg=X3oDMTFpNzk0NjhtBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANob21lBHB0A3NlY3Rpb25z;_ylv=3

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


"Citigroup Discovers Performance Data? Really?" by Jonathan Weil, Bloomberg, March 3, 2013 ---
http://www.bloomberg.com/news/2013-03-05/citigroup-discovers-performance-data-really-.html

The Wall Street Journal has a curious article about Citigroup Inc. and its new chief executive officer, Michael Corbat. It says he is "putting his stamp on the company with a simple formula: You can't manage what you can't measure."

Readers learn he spoke to a gathering of 300 executives at a New Jersey hotel last month where he "proposed a slate of new, more-rigorous ways to track both the performance of individual executives and the third-largest U.S. bank as a whole." Score cards will rate top managers in five categories: capital, clients, costs, culture and controls. (The Five C's!)

"Mr. Corbat wants to more-closely track how executives perform against their financial plan," the article said. "The quantitative focus is the sharpest sign yet of how Mr. Corbat is likely to differ from his predecessor, Vikram Pandit, who was forced out by the board in October after a series of mishaps."

It went on: "Most large financial companies use some type of metrics to gauge their progress. Under Mr. Pandit, Citigroup used score cards for some departments, but not others."

Here's what's baffling: Did Citigroup not use a quantitative focus to measure performance before? Is the use of data and metrics really something new to many of its executives? Anything is possible, I suppose. This is Citigroup, the mother of all bank bailouts. But this would be incredible if true.

Jensen Comment
There's one very negative comment to this article.


Dilbert Cartoons on Market Manipulations
"Scott Adams Discovers Market Manipulation," by Barry Ritholtz, Ritholtz Blog, March 2013 ---
http://www.ritholtz.com/blog/2013/03/scott-adams-manipulators/

Regular readers know I am a fan of Scott Adams, creator of the comic Dilbert and occasional commentator on a variety of matters.

He has a somewhat odd blog post up, titled, Here Come the Market Manipulators. In it, he makes two interesting suggestions: The first is to decry “market manipulators,” who do what they do for fun and profit to the detriment of the rest of us. The second is to say that these manipulators are likely to cause “a 20% correction in 2013.”

Let’s quickly address both of these issues: First off, have a look at the frequency of 20% corrections in markets. According to Fidelity (citing research from Capital Research and Management Company), over the period encompassing 1900-2010, has seen the following corrections occur:

Corrections During 1900 – 2010

5%:  3 times per year

10%:  Once per year

20%:  Once every 3.5 years

Note that Fido does not specify which market, but given the dates we can assume it is the Dow Industrials. (I’ll check on that later).

Note that US market’s have not had a 20% correction since the lows in March 2009. I’ll pull up the relevant data in the office, but a prior corrective action of 19% is the closest we’ve come, followed by a ~16% and ~11%.

As to the manipulators of the market, I can only say: Dude, where have you been the past 100 years or so?

Yes, the market gets manipulated. Whether its tax cuts or interest rate cuts or federal spending or wars or QE or legislative rule changes to FASB or even the creation of IRAs and 401ks, manipulation abounds.

In terms of the larger investors who attract followers — I do not see the same evidence that Adams sees. Sure, the market is often driven by large investors. Yes, many of these people have others who follow them. We need only look at what Buffet, Soros, Dalio, Icahn, Ackman, Einhorn and others have done to see widely imitated stock trades. But that has shown itself to be a bad idea, and I doubt anyone is making much money attempting to do so. And, it hardly leads to the conclusion that any more than the usual manipulation is going on.

Will be have a 20% correction? I guarantee that eventually, we will. Indeed, we are even overdue for it, postponed as it is by the Fed’s manipulation.

But I have strong doubts it is going to be caused by a cabal manipulating markets for fun & profit. It will occur because that’s what markets do . . .

 

 

Previously:
Dilbert’s Unified Theory of Everything Financial’  (October 15th, 2006)

7 Suggestions for Scott Adams (November 27th, 2007)

Don’t Follow Wealthy Investors, Part 14 (February 17th, 2008)

"What’s Wrong with the Financial Services Industry?" by Barry Ritholtz, Ritholtz Blog, February 21, 2013 ---
http://www.ritholtz.com/blog/2013/02/whats-wrong-with-the-financial-services-industry/

Jensen Comment
You can also see a Dilbert cartoon about making up data ---
http://www.trinity.edu/rjensen/Theory01.htm

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

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


From CFO.com Morning Ledger on March 26, 2013

Pension deficits hit year-end record
Combined pension deficits among the 100 largest U.S. corporate pension plans soared last year to a record $388.8 billion, according to actuarial and benefits consulting firm Milliman Inc. The combined deficit rose by more than $61 billion from the end of 2011, driven by a record year-end average discount rate of just over 4%,
Maxwell Murphy notes. Milliman said the increase comes even as companies are working to tame the risk associated with their pension obligations. In 2012, the 100 plan sponsors booked a total of $55.8 billion in charges that lowered corporate earnings, up from $38.5 billion a year earlier. Milliman expects pension charges to rise to $63.4 billion this year.

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


"Jury convicts former Detroit mayor Kilpatrick on corruption charges," Fox News, March 11, 2013 ---
http://www.foxnews.com/us/2013/03/11/jury-convicts-former-detroit-mayor-kilpatrick-on-corruption-charges/?test=latestnews

Former Detroit Mayor Kwame Kilpatrick was convicted Monday of corruption charges, ensuring a return to prison for a man once among the nation's youngest big-city leaders.

Jurors convicted Kilpatrick of a raft of crimes, including a racketeering conspiracy charge. He was portrayed during a five-month trial as an unscrupulous politician who took bribes, rigged contracts and lived far beyond his means while in office until fall 2008.

Prosecutors said Kilpatrick ran a "private profit machine" out of Detroit's City Hall. The government presented evidence to show he got a share of the spoils after ensuring that Bobby Ferguson's excavating company was awarded millions in work from the water department.

Business owners said they were forced to hire Ferguson as a subcontractor or risk losing city contracts. Separately, fundraiser Emma Bell said she gave Kilpatrick more than $200,000 as his personal cut of political donations, pulling cash from her bra during private meetings. A high-ranking aide, Derrick Miller, told jurors that he often was the middle man, passing bribes from others.

Internal Revenue Service agents said Kilpatrick spent $840,000 beyond his mayoral salary.

Ferguson, Kilpatrick's pal, was also convicted of a racketeering conspiracy charge. The jury could not reach a verdict on the same charge for Kilpatrick's father, Bernard Kilpatrick, but convicted him of submitting a false tax return.

Kwame Kilpatrick, who now lives near Dallas, declined to testify. He has long denied any wrongdoing, and defense attorney James Thomas told jurors that his client often was showered with cash gifts from city workers and political supporters during holidays and birthdays.

The government said Kilpatrick abused the Civic Fund, a nonprofit fund he created to help distressed Detroit residents. There was evidence that it was used for yoga lessons, camps for his kids, golf clubs and travel.

Kilpatrick, 42, was elected in 2001 at age 31. He resigned in 2008 and pleaded guilty to obstruction of justice in a different scandal involving sexually explicit text messages and an extramarital affair with his chief of staff.

The Democrat spent 14 months in prison for violating probation in that case after a judge said he failed to report assets that could be put toward his $1 million restitution to Detroit.

Voters booted his mother, Carolyn Cheeks Kilpatrick, from Congress in 2010, partly because of a negative perception of her due to her son's troubles.

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


In 1837, the Massachusetts Board of Education devoted part of its first annual report to praising a recent classroom innovation called the blackboard. This “invaluable and indispensible” innovation...
On March 4, 2013 the Financial Education Daily Linked this Quotation to the Harvard Gazette, but I could not find the source of the quote.

"From Law School to Business School — evolution of the case method," Harvard Gazette, April 3, 2008
http://news.harvard.edu/gazette/story/2008/04/from-law-school-to-business-school-%E2%80%94-evolution-of-the-case-method/

On a recent Wednesday morning, 90 high achievers from around the world prepared to get down to cases.

Their professor buzzed through the classroom like a worker bee. Armed with large, multicolored pieces of chalk, he organized his notes, copied pastel-coded facts and figures on the blackboard, and set up a film screen. Soon his students would be equally hard at work, but in a strictly cerebral way.

This day the instructor was inclined to be kind, giving the young man who would open the class discussion an early heads-up, allowing some time to prepare. Often in this setting, classes start with the heart-pounding “cold call,” where a student is put to the test without warning. The deceptively simple “start us off” translates into “as quickly and coherently and convincingly as possible, tell us everything known about this situation and give us your best insight.”

As well as being busy and congenial, Jan Rivkin, a professor in the strategy unit at Harvard Business School (HBS), was clearly engaging, his enthusiasm infectious, his sense of humor unmistakable.

He started with a brief refresher video, one he’d secured from a colleague on holiday in the Bahamas. The class watched their vacationing instructor drop to his knees on the beach as the tape rolled. With a straight face, he reviewed the finer points of his recent technology-operations-management discussion with the class, drawing a series of overlapping diagrams in the sand. When done, he promptly jumped into the ocean.

The crowd loved it, but it was the last light moment. For the next hour-and-a-half the class examined whether the Spanish clothing company Zara should update its retailers’ IT infrastructure.

During the ensuing discussion and debate, Jan Rivkin, deftly prodded, questioned, and encouraged his deeply engaged class.

It was just another day at HBS — and one of its standard case-classes. The case method is the primary mode of teaching and learning at the institution, which celebrates its 100th anniversary this year. In honor of its centennial, the School will host a series of events on Tuesday (April 8) that will include a number of panels, a birthday celebration, and a case discussion on the future of HBS.

While it didn’t begin with the School’s inception, the revolutionary instructional approach followed shortly thereafter. But it wasn’t an entirely novel concept. The model was actually borrowed from the Harvard Law School and Christopher Columbus Langdell HLS Class of 1853 and dean of the Law School in 1870, who pioneered the technique for the examination of Harvard Law School cases.

Later, at HBS, it was Dean Wallace P. Donham, a Law School grad familiar with the technique, who pushed for the full inclusion of the case method at the Business School, where it was altered and adapted to a business perspective. Since 1921, it has been a core part of the curriculum.

The method of teaching differs greatly from the traditional lecture format, in which students take notes as the professor speaks. Instead, students are engaged in a dynamic back-and-forth with one another and their professor, discussing a topic typically pulled from a relevant, real-life business scenario and featuring a dilemma or challenge. Sometimes, once the class has examined and discussed the case, the actual CEO or president of the company in question will appear in person to explain how the situation ultimately unfolded.

The case topics are wide-ranging and include everything from the world of finance to semiconductors to sweeteners to satellite television.

Some cases offer historic reflections, employing the lessons tragedy imparts. Cases have been written, for example, about the space shuttle Columbia’s final mission in 2003 and the management decisions made prior to its fatal re-entry into the Earth’s atmosphere, Abraham Lincoln’s leadership during the Civil War, and the management of national intelligence prior to the terrorist attacks of Sept. 11, 2001.

Students are given an overview of the case’s material to read ahead of time. The packets, roughly 20 to 25 pages long, include a list of facts, an outline of the challenge at hand, and a history of the company or situation in text, charts, and graphs, all compiled into a neat brief.

More than 80 percent of HBS classes are built on the case method. Each week students prepare approximately 14 cases both alone and with the help of study groups. But in the end they are on their own. In class, it is up to the individual to articulate his or her argument and persuade others of its merits. A hefty 50 percent of a student’s grade is determined by class participation, so taking part in the conversation is crucial. Students raise their hands energetically, trying to get quality “air time,” as they call it. Two important unwritten rules, self-enforced by the students themselves: Never speak unless you have something valuable to contribute, and keep it brief.

The teaching technique most effectively prepares the CEOs of tomorrow for what they will inevitably face in the real world, say the professors who employ it.

“Getting a piece of material, having to sift through it, figure out what’s important, … come to a point of view, [then] come to class both prepared to argue that point of view … [and] prepared to listen and be open to others’ viewpoints — those are the skills that the business world demands, and via the case method they get to practice those in the classroom,” said Michael J. Roberts, senior lecturer of business administration and executive director of the Arthur Rock Center for Entrepreneurship.

Continued in article

March 4, 2013 reply from Steve Zeff

Bob,

Thanks for this. I presume you save seen my article, "The Contribution of the Harvard Business School to Management Control, 1908 - 1980," in the special issue 2008 of JMAR. Bob Kaplan invited me to do the research and write the article for the April 2008 history symposium at HBS, which kicked off its 100th anniversary celebration. I attach the article.

Steve.

"How Virtual Teams Can Outperform Traditional Teams," by Jason Sylva, Harvard Business Review Blog, October 9, 2012 --- Click Here
http://blogs.hbr.org/events/2012/10/how-virtual-teams-can-outperfo.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

People can easily list problems they believe are associated with virtual teams: They haven't met and don't really know other team members; it is hard to monitor the work of others; and dispersions can lead to big inefficiencies and degraded performance.

In this HBR webinar, Keith Ferrazzi, a foremost expert on professional relationship development and author of Never Eat Alone and Who's Got Your Back?, shares a strategy for managing virtual teams that can change how your company operates - and how you manage for years to come.

Continued in article

Jensen Comment
This theory should be tested in a variety of ways with respect to case analysis by teams. I've always argued that case learning is best in live classrooms, but I'm beginning to doubt myself on this one. Even Harvard and Darden should experiment with onsite versus online team assignments. One advantage of online team assignments is grading if instructors carefully track team member contributions, possibly by monitoring online performance as silent or active (avatar) trackers.

Bob Jensen's threads on case method teaching and research ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Cases


At the start of an exam, a student openly wondered, "But Professor Einstein, this is the same exam question as last year!" To which the great man supposedly replied, "Correct, young man, but we need to find new answers."
Werner Reinartz --- http://blogs.hbr.org/cs/2013/03/measuring_creativity_we_have_t.html

A Retirement Crisis is Brewing

Question
How would you like to retire with a small nest egg that cannot earn as much as one percent per year in a safe investment?

If you lock up a minimum of $100,000 for five years in a Certificate of Deposit the best you can do is 1.75 % which most likely won't cover food and fuel price increases over the next five years. A one-year CD gets you a whopping 0.94% annual rate. ---
http://cdrates.bankaholic.com/ ---
Thanks ever so much Ben Bernanke.

The CREF bond yield to date in 2013 is at a (negative)  -0.13%.
The TIAA-CREF Inflation linked bond fund is at a (negative) -0.80% thus far in 2013
The CREF Equity Index at a (positive) +0.73% thus far in 2013 but has much more high-risk volatility for what you've struggled to save and might lose
According to MSNBC, President Obama's approval rating fell 15% since January 2013 and is now less than 50%
Congressional approval ratings barely registers
It's time for term limits

From CFO.com Morning Ledger on March 19, 2013

A retirement crisis is brewing as workers save too little and companies face bigger pension liabilities. A report out today from the Employee Benefit Research Institute (PDF) shows that 57% of U.S. workers have less than $25,000 in total household savings and investments excluding their homes. Only 49% reported having so little money saved in 2008. And 28% of Americans have no confidence they will have enough money to retire comfortably—the highest level in the study’s 23-year history, the WSJ’s Kelly Greene and CFOJ’s Vipal Monga report.

Corporate balance sheets (including TIAA-CREF) are also under pressure. Based on another recent report, the Society of Actuaries said rising life expectancies could add as much as $97 billion to corporate pension liabilities in coming years, an increase of up to 5%. Goodyear said life expectancy growth for its plan’s beneficiaries is one reason its global pension-funding gap widened to $3.5 billion last year from $3.1 billion in 2011.

The effect of longer life spans on pension obligations has been dwarfed by the impact of declining interest rates over recent years. Because of the way pension liabilities are calculated, lower rates mean that future obligations are higher today. But interest rates are likely to rise at some point, which will lessen pension obligations. “Rates can go up,” said Rama Variankaval, an executive director in the corporate finance advisory group of J.P. Morgan’s investment bank. “Mortality is more of a one-way street.

 

World Life Expectancy Map --- http://www.worldlifeexpectancy.com/index.php

Life Expectancy Trend for the United States --- http://www.aging.senate.gov/crs/aging1.pdf

Summary

As a result of falling age-specific mortality, life expectancy rose dramatically in the United States over the past century . Final data for 2003 (the most recent available) show that life expectancy at birth for the total population has reached an all-time American high level, 77.5 years, up from 49.2 years at the turn of the 20th century. Record-high life expectancies we re found for white females (80.5 years) and black females (76.1 years), as well as for white males (75.3 year s) and black males (69.0 years). Life expectancy gaps between males and females and between whites and blacks persisted.

In combination with decreasing fertility, the life expectancy gains have led to a rapid aging of the American population, as reflected by an increasing proportion of persons aged 65 and older. This report documents the improvements in longevity that have occurred, analyzing both the underlying factors that contributed to mortality reductions and the continuing longevity differentials by sex and race. In addition, it considers whether life expectancy will continue to increase in future years. Detailed statistics on life expectancy are provided. A brief comparison with other countries is also provided.

While this report focuses on a description of the demographic context of life expectancy change in the United States, these trends have implications for a wide range of social and economic programs and issues that are likely to be considered by Congress.

Question
How is the Federal Reserve under Ben Bernanke destroying pension funds, especially defined benefit pensions like those of teachers, firefighters, police, municipal workers, and state workers, and postal workers.?

There's no worry about Social Security Trust Funds since Congress, in it's great wisdom, emptied those trust funds long ago on things other than Social Security pensions.

"Bernanke Unbounded:  The Fed enters a brave new world of unlimited monetary easing," The Wall Street Journal, September 13, 2012 ---
http://professional.wsj.com/article/SB10000872396390444709004577649831698298106.html?mg=reno64-wsj#mod=djemEditorialPage_t
Read that printing trillions of greenbacks without taxing or borrowing to pay Federal government bills. The net effect is to drive interest rates on savings accounts, Certificates of Deposits, and pension funds to virtually zero.

From the CFO.com Morning Ledger on March 20, 2013

Pension math overwhelmed by discount rate.
Longer lifespans are putting some pressure on corporate defined benefit plans, but changes in the interest rates used to calculate liabilities are by far the biggest issue facing pensions, writes Vipal Monga. As we noted yesterday, increased longevity could add as much as 5% to pension liabilities. But, as CFO Journal reported last month, that increase is dwarfed by the impact of falling discount rates. “Mortality is somewhat of a second-order element [in the rise of obligations],” said Rama Variankaval, an executive director in the corporate finance advisory group of J.P. Morgan’s, investment bank. DuPont CFO Nick Fanandakis said in an interview that his company tries to adjust its mortality assumptions every year, and any increase in the lifespan of retirees will be insignificant compared to changes in the discount rate. “[Longevity increases] won’t move the needle,” he said. The company’s U.S. plans had a pension deficit of $6.6 billion at the end of 2012.

Jensen Comment
University employees in TIAA are given a choice to transfer funds into the riskier CREF equity funds, although there are restrictions on how much can be shifted in any give year. TIAA is not doing so well since 2008 thanks to Ben Bernanke.

Every Breath You Take
Here's an
anti-Bernanke musical performance by the Dean of Columbia Business School ---
http://www.youtube.com/watch?v=3u2qRXb4xCU
Ben Bernanke (Chairman of the Federal Reserve and a great friend of big banks) --- http://en.wikipedia.org/wiki/Ben_Bernanke
R. Glenn Hubbard (Dean of the Columbia Business School) ---
http://en.wikipedia.org/wiki/Glenn_Hubbard_(economics)

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


Question
Who made the most serious mistake:  TurboTax in Minnesota or H&R Block in the entire USA?

Answer
The two mistakes probably cannot be compared because they are so different. In the case of H&R Block, the IRS shares the blame and will probably correct the returns. TurboTax victims may have to refile. H&R Block victims will have to wait and wait for refunds while the IRS corrects their returns. However, since money no longer has time value, perhaps they are slightly less damaged than they would have been before Ben Bernanke.

"H&R Block Gaffe Gums Up the Works," by Ken Berry, AccountingWeb, March 14, 2013 ---
http://www.accountingweb.com/article/hr-block-gaffe-gums-works/221358?source=tax


"Fundamentals of Gift Tax," by Mark Powell and Andrea Kushner Ross, SSRN, November 1, 2012 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2212313
A detailed overview of the US gift and generation-skipping transfer taxes.

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


Teaching Case in Cost and Managerial Accounting
From The Wall Street Journal Accounting Weekly Review on March 29, 2013

Boom Times on the Tracks: Rail Capacity, Spending Soar
by: Betsy Morris
Mar 27, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Cost Accounting, Managerial Accounting, Manufacturing, Supply Chains

SUMMARY: This is quite a long article covering the recent revival of U.S. rail transportation as well as some of its up and down history. "North America's major freight railroads are in the midst of a building boom unlike anything since the industry's Gilded Age heyday in the 19th century-this year pouring $14billion into rail yards, refueling stations, additional track. With enhanced speed and efficiency, rail is fast becoming a dominant player in the nation's commercial transport system and a vital cog in its economic recovery." The investment boom is focused on making "existing rail lines more efficient and able to haul more and different types of freight."

CLASSROOM APPLICATION: The article contains an excellent general discussion of management accounting issues about capital spending, use of technology, use of metrics, and measuring carbon footprint.

QUESTIONS: 
1. (Introductory) The first graphic related to the article shows "capital spending by the biggest freight railroads in the U.S." Define capital spending in general, then describe the types of capital spending that U.S. railroads have been doing over the last 8 to 10 years.

2. (Introductory) What types of goods are railroads shipping? Against what other modes of transportation are railroads now effectively competing?

3. (Advanced) Why is rail shipping "helping to make manufacturing in North America cost effective again"? In your answer, specifically state how transportation costs must be considered in the cost of, and therefore pricing of, any product an American producer will sell.

4. (Advanced) What happened when the rail industry faced "a near-death experience in the 1970s"? Include in your answer a comment on how information technology and metrics can help change "how you run a railroad."

5. (Advanced) How did UPS use its influence over its supply chain to further contribute to its railroad transportation suppliers' use of "technology and strategy"? In your answer, provide a brief definition of a supply chain.

6. (Advanced) Union Pacific Corp.'s chief executive is concerned about "juggling capital investments with return to shareholders." Explain that statement

7. (Advanced) The director of logistics and transportation at the Container Store Inc. says that one benefit of using railroads has been to cut his company's carbon footprint by 40%. What is a carbon footprint? In what external report might that information be published by the company?
 

Reviewed By: Judy Beckman, University of Rhode Island

"Boom Times on the Tracks: Rail Capacity, Spending Soar," by: Betsy Morris, The Wall Street Journal, March 27, 2013 ---
http://online.wsj.com/article/SB10001424127887324034804578348214242291132.html

EPPING, N.D.—On a recent subzero day at a rail station here on the plains, a giant tank train stretches like a black belt across the horizon—as far as the eye can see. Soon it will be filled to the brim with light, sweet crude oil and headed to a refinery on Puget Sound. Another mile-long train will pull in right behind it, and another after that.

Containers are loaded onto a train at the BNSF facility in Fort Worth.

Increasingly, scenes like this are being played throughout the country. "Hot Trains" dedicated to high-priority customers like United Parcel Service Inc. UPS +0.55% roar across the country to deliver everything from microwaves to tennis shoes and Amazon.com AMZN +0.45% packages. FedEx Corp., FDX +0.56% known for its huge fleet of aircraft, is using more trains, too.

Welcome to the revival of the Railroad Age. North America's major freight railroads are in the midst of a building boom unlike anything since the industry's Gilded Age heyday in the 19th century—this year pouring $14 billion into rail yards, refueling stations, additional track. With enhanced speed and efficiency, rail is fast becoming a dominant player in the nation's commercial transport system and a vital cog in its economic recovery.

This time around, though, the expansion isn't so much geographic—it is about a race to make existing rail lines more efficient and able to haul more and different types of freight. Some of the railroads are building massive new terminals that resemble inland ports. They are turning their networks into double-lane steel freeways to capture as much as they can get of U.S. freight demand that is projected to grow by half, to $27.5 billion by 2040, according to the U.S. Department of Transportation. In some cases, rail lines are increasing the heights of mountain tunnels and raising bridges to accommodate stacked containers. All told, 2013 stands to be the industry's third year in a row of record capital spending—more than double the yearly outlays of $5.9 billion a decade ago.

And in a turnabout few could have imagined decades ago, rail is stealing share from other types of commercial transport—most notably the trucking business, which is waylaid by high fuel prices, overloaded highways, driver shortages and regulations that are pushing up costs.

Transport by rail is also relatively cheap. Though rising, U.S. freight rail rates are nearly half what they were three decades ago, according to the Association of American Railroads. And those bargains are helping to make manufacturing in North America cost effective again. Since 2007, more than $100 billion of foreign direct investments have been made in Mexico, Robert Knight, Union Pacific UNP +1.12% Chief Financial Officer, told analysts at a recent conference. He expects annual production of 2.7 million vehicles in that country to increase by another million by 2015.

"We wouldn't have as many companies considering moving back to the U.S. or near-shoring," if not for rail, says Yossi Sheffi, Professor of Engineering Systems at MIT and director of its Center for Transportation and Logistics. "Some of it is the cheaper energy. But we could not be moving the oil around without rail. We could not have the huge amount of imports without the rail."

A confluence of other factors is advancing the trend. The energy boom, for instance, is reviving industries like steel and chemicals. Higher labor and transportation costs in parts of Asia are triggering a surge in sourcing from nearby.

"All those things have put the railroads into a great sweet spot for what's next in this economy," says Matthew K. Rose, chief executive officer of BNSF Railway. "Nobody wants to miss out."

BNSF, purchased by Warren Buffett's Berkshire Hathaway Inc. BRKB +1.01% in 2010, is investing $4.1 billion on a list that includes locomotives, freight cars, a giant terminal southwest of Kansas City and new track and equipment for its oil-related business in the Bakken shale region of North Dakota and Montana.

Union Pacific Corp. is spending $3.6 billion on a giant terminal near Santa Teresa, N.M. It is designing a new $400 million-$500 million bridge over the Mississippi at Clinton, Iowa, to replace an old drawbridge that routinely delays trains for hours at a time. It will double some track in Louisiana and Texas and expand rail yards there and in Arkansas to provide more capacity to chemical customers such as Dow Chemical Co. DOW +0.19% and Exxon Mobil Corp. XOM -0.52%

CSX Corp. CSX +1.15% will spend $2.3 billion partly to finish the first phase of a multiyear project, raising highway bridges, enlarging mountain tunnels and clearing some 40-odd obstacles to make enough space to accommodate double-decker containers all the way from the Midwest to the mid-Atlantic ports.

Kansas City Southern Railway Co. will spend $515 million. "We're a growth railroad," David Starling, its chief executive, told a securities analyst who questioned the expenditure in January. "The worst thing this team wants to be accused of is having some service deterioration because we didn't have the foresight to spend the money."

Passenger rail is undergoing something of a renaissance, too. It was the passenger business that nearly killed the freight business in the 1960s and 1970s. Part of the legislation designed to save the railroads in the 1970s allowed them to shed the passenger business. Lately, the Obama administration has invested nearly $12 billion in passenger rail, according to the Department of Transportation, that has been used to fund 152 projects in 32 states.

Trains may seem like relics of a bygone era. Not so. Steeled by a near-death experience in the 1970s—when many railroads filed for bankruptcy and braced for the threat of a government takeover—the railroads instead were largely deregulated. The survivors fought hard. They squeezed capacity, resolved labor issues, swallowed up weaker players and rebuilt. By the time rail's prospects began to brighten a decade ago, the executives were "a much younger, more IT, more metric-minded group," says William Galligan, vice president of investor relations at Kansas City Southern KSU +2.93% . "They had a whole new view toward how you run a railroad."

Continued in article

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


Expectations GAP in Managerial Accounting

Jensen Comment
In some ways the expectations GAAP between the accounting Academy and the profession of management accounting is more serious than that of financial accounting. The financial accounting profession pays little attention to accountics research but continues to be happy with the Academy as long as accounting graduates meet expectations for passing the CPA examination and sufficient knowledge to hit the ground running on audits. There is concern about the shortage of new faculty in auditing and taxation, which is why the large CPA firms and the AICPA now fund doctoral fellowships for accounting Ph.D. students in those  specialties. There is also concern about insufficient numbers of minority students who pass the CPA examination. These problems are discussed at
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms
 

The practicing profession pretty well gave up on clinical accounting research since the 1960s ---
http://www.trinity.edu/rjensen/theory01.htm#AcademicsVersusProfession

In managerial accounting there's more of a "crisis" in the Academy. Sue Haka posted the following to the AAA Commons when she was President of the American Accounting Association.

Saving Management Accounting in the Academy
discussion posted January 7, 2009 by Sue Haka, last edited February 10, 2012 by Tracey Sutherland , tagged managerial
315 Views, 13 Comments
discussion:
Saving Management Accounting in the Academy
details:
The long run place of management accounting in the academy seems in peril for several reasons. First, there is an ongoing migration of accounting topics to other disciplines. Second, evidence suggests that the diversity in management accounting research seems to be dwindling. Third, the value of our content for MBA programs is not apparent. Finally, our engagement with the management accounting practitioner community is weak.

First-topic migration: I don't know about your experiences, but at my institution I must be ever vigilant about traditional management accounting topics migrating into management, marketing, or supply chain classes. While I am delighted that cost-volume-profit topics are important to my marketing colleagues, unfortunately the students that come to my management accounting class after having been "taught" CVP by my marketing colleagues cannot distinguish between fixed and variable costs! Other topics taught by my colleagues include ABC in supply chain and balanced scorecard in management. Making sure that students are required to take a management accounting class prior to classes where discussions about how ABC is important for supply chain decision making requires constant vigilance. Years ago management accounting virtually gave capital budgeting up to the finance department...is fair value measurement next!

Second-research diversity: I have often been among those who have suggested that general accounting research is not sufficiently diverse (i.e. an overabundance of financial archival focus). I forgot my mother's phrase--when you point at others, three fingers point back at you! Recent reviews of JMAR topical areas suggest a lack of diversity within our discipline. These reviews show an overwhelming focus on performance measurement--in 2008 (2007) 48% (50%) of submitted articles were focused on performance measurement. Only one other category is over 12%. It seems that management accounting research is fairly narrow.

Third-value in the MBA: Management accounting should be a bedrock of MBA programs. However, we have let financial accounting eclipse management accounting. MBA programs have, over the last decade, decreased accounting content and the majority of that reduction has come out of management accounting. Yet most MBAs become managers and management accounting should be highly value added for them.

Finally-practitioner engagement: While our colleagues in auditing and financial accounting have opportunities to serve as fellows at the SEC or FASB or take a semester or year to work at one of the big four firms, management accounting faculty have few established programs allowing us to experience first hand many of the issues that we teach and write about. I believe creating these types of opportunities would help us diversify our research and convince others of the value of management accounting for MBAs and in the practicing communities.

I'm sure you have other issues that imperil the discipline of management accounting. Please add your comments and discussion.

 

"Crisis in Management Accounting Curricula: The Unclear Role of Information Systems and Information Technology," by Gary Spraakman, SSRN, January 13, 2011 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1740142

Abstract:     
The purpose of this literature review paper is to critically evaluate the research on the presence of information systems and information technology (IS/IT) in and for management accounting curricula. Over the last 35 years, there were 13 management accounting curricula pronouncements in the literature; only 10 of them specified IS/IT knowledge and skills necessary for university graduates pursuing management accounting positions. The 10 educators pronouncements did not thoughtfully include IS/IT in the curricula and the pronouncements were not informed by the practice of management accounting. In contrast to research on the use of IS/IT in the practice of management accounting and the IFAC, the professional management accounting associations placed little importance on the inclusion of IS/IT in management accounting curricula. The paper recommends practitioners be questioned and studied in depth as the actual use IS/IT has in management accounting in order to make a practice-informed recommendation for the role of IS/IT in management accounting curricula.

 

There are many other articles on the expectations gap in managerial accounting. Go to Google Advanced Search at
http://www.google.com/advanced_search

All These Words --- Managerial
This Exact Word or Phrase --- "Expectations Gap" AND "Management Accounting"
None of these words --- Auditing Audit

Also do the same type of search in Advanced Google Scholar --- Click Here
https://www.google.com/search?as_q=&as_epq=Advanced+Google+Scholar&as_oq=&as_eq=&as_nlo=&as_nhi=&lr=&cr=&as_qdr=all&as_sitesearch=&as_occt=any&safe=images&tbs=&as_filetype=&as_rights=

 

The practicing profession pretty well gave up on clinical accounting research since the 1960s ---
http://www.trinity.edu/rjensen/theory01.htm#AcademicsVersusProfession

 


March 1, 2013 message from Dennis Huber

The American Anti-Corruption Institute (AACI) ® ©
 
http://theaaci.com/about-us.html
 
The American Anti-Corruption Institute is a for-profit, Limited Liability Corporation (LLC) incorporated in Delaware 05/14/2012. Its headquarters is in Arizona, but no foreign corporation authorization was found on the AZ Secretary of State website. It issues the Certified Anti-Corruption Manager ® ©(CACM) ® © which is now in the grandfathering process. There is a Four-Point Code of Ethics.
 
See my papers comparing corporations that issue certifications at http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=371197.

 


OCI Reporting Update From Ernst & Young on February 28, 2013

Technical Line: What the new AOCI disclosures will look like

The FASB has issued new guidance requiring companies to report, in one place, information about reclassifications out of accumulated other comprehensive income (AOCI). Companies are also required to present reclassifications by component when reporting changes in AOCI balances. Public companies must make the disclosures in fiscal years and interim periods within those years beginning after 15 December 2012. For calendar-year public companies, that means the first quarter of 2013. For nonpublic companies, the Accounting Standards Update (ASU) is effective for fiscal years beginning after 15 December 2013 and interim and annual periods thereafter. The guidance should be applied prospectively. Our
Technical Line publication describes the requirements and provides examples of what the disclosures might look like.

Download --- Click Here
http://www.ey.com/publication/vwluassetsdld/technicalline_bb2503_aoci_27february2013/$file/technicalline_bb2503_aoci_27february2013.pdf?OpenElement

"Academic Research and Standard-Setting: The Case of Other Comprehensive Income," by Lynn L. Rees and Philip B. Shane, Accounting Horizons, December 2012, Vol. 26, No. 4, pp. 789-815. ---
http://aaajournals.org/doi/full/10.2308/acch-50237 

This paper links academic accounting research on comprehensive income reporting with the accounting standard-setting efforts of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). We begin by discussing the development of reporting other comprehensive income, and we identify a significant weakness in the FASB's Conceptual Framework, in the lack of a cohesive definition of any subcategory of comprehensive income, including earnings. We identify several attributes that could help allocate comprehensive income between net income, other comprehensive income, and other subcategories. We then review academic research related to remaining standard-setting issues, and identify gaps in academic research where hypotheses could be developed and tested. Our objectives are to (1) stimulate standard-setters to better conceptualize what is meant by other comprehensive income and to distinguish it from earnings, and (2) stimulate researchers to develop and test hypotheses that might help in that process.

. . .

Potential Alternative Definitions of Earnings

Table 1 summarizes and categorizes various standard-setting issues related to reporting comprehensive income, and provides the organizing structure for our literature review later in the paper. The most important of these issues is the definition of earnings, or what makes up earnings and how it is distinguished from OCI. This is a “cross-cutting” issue because it arises when the Boards deliberate on various topics. The Boards cooperatively initiated the financial statement presentation project intending, in part, to solve the comprehensive income composition problem, but the project was subsequently delayed.

Table 2 presents a list of the specific comprehensive income components under current U.S. GAAP that require recognition as OCI. The second column presents the statement that provided financial reporting guidance for the OCI component, along with its effective date. The effective dates provide an indication as to how the OCI components have expanded over time. Since the issuance of Statement No. 130, which established formal reporting of OCI, new OCI-expanding requirements were promulgated in Statement No. 133. Financial instruments, insurance, and leases are three examples of topics currently on the FASB's agenda where OCI has been discussed as an option to report various gains and losses. In all these discussions, a framework is lacking that can guide standard-setter decisions. The increased use of accumulated OCI to capture various changes in net assets and the likely expansion of OCI items reinforce the notion that standard-setters must eventually come to grips with the distinction between OCI and earnings, or even whether the practice of reporting OCI with recycling should be retained.7

Presumably, elements with similar informational attributes should be classified together in financial statements. It is unclear what attributes the items listed in Table 2 possess that result in their being characterized differently from other components of income. Notably, the basis for conclusions of the FASB standards gives little to no economic reasoning for the decision to place these items in OCI. While not exhaustive, Table 2 presents four attributes that standard-setters could potentially use to distinguish between earnings and OCI: (1) the degree of persistence of the item, (2) whether the item results from a firm's core operations, (3) whether the item represents a change in net assets that is reasonably within management's control, and (4) whether the item results from remeasurement of an asset/liability. We discuss in turn the merits and potential problems of using these attributes to form a reporting framework for comprehensive income.

Degree of Persistence.

The degree of persistence of various comprehensive income components has significant implications for firm value (e.g., Friedman 1957; Kormendi and Lipe 1987; Collins and Kothari 1989). Ohlson's (1995, 1999) valuation model places a heavy emphasis on earnings persistence, which suggests that a reporting format that facilitates identifying the level of persistence across income components could be useful to investors. Examples abound as to how the concept of income persistence has been used in standard-setting, including separate presentation in the income statement for one-time items, extraordinary items, and discontinued operations. Standard-setters have justified several footnote disclosures (segmental disclosures) and disaggregation requirements (e.g., components of pension expense) on the basis of providing information to financial statement users about the persistence of various income statement components.

Thus, the persistence of revenue and expense items potentially could serve as a distinguishing characteristic of earnings and OCI. Table 2 shows that we regard all the items currently recognized in OCI as having relatively low persistence. However, several other low-persistence items are not recognized in OCI; for example, gains/losses on sale of assets, impairments of assets, restructuring charges, and gains/losses from litigation. To be consistent with this definition of OCI, the current paradigm must change significantly, and the resulting total for OCI would look substantially different from what it is now.

Using persistence of an item to distinguish earnings from OCI would create significant problems for standard-setters. Persistence can range from completely transitory (zero persistence) to permanent (100 percent persistence). At what point along this range is an item persistent enough to be recorded in earnings? While restructuring charges are typically considered as having low persistence, if they occur every two to three years, is this frequent enough to be classified with other earnings components or infrequent enough to be classified with OCI? Furthermore, the relative persistence of an item likely varies across industries, and even across firms.

In spite of these inherent difficulties, standard-setters could establish criteria related to persistence that they might use to ultimately determine the classification of particular items. In addition, standard-setters would not be restricted to classifying income components in one of two categories. As an example, highly persistent components could be classified as part of “recurring earnings,” medium-persistence items could go to “other earnings,” and low-persistence items to OCI (or some other nomenclature). Standard-setters could create additional partitions as needed.

Core Operations.

Classifying income components as earnings or OCI based on whether they are part of a firm's core operations is intuitively appealing. This criterion is related to income persistence, as we would expect core earnings to be more persistent than noncore income items. Furthermore, classifying income based on whether it is part of core operations has a long history in accounting.

In current practice, companies and investors place primary importance on some variant of earnings. However, it is not clear which variant of earnings is superior. Many companies report pro forma net income, which presumably provides investors with a more representative measure of the company's core income, but definitions of pro forma earnings vary across firms. Similarly, analysts tend to forecast a company's core earnings (Gu and Chen 2004). Evidence in prior research indicates that pro forma earnings and actual earnings forecasted by analysts are more closely associated with share prices than income from continuing operations based on current U.S. GAAP (e.g., Bradshaw and Sloan 2002; Bhattacharya et al. 2003).

The problems inherent with this attribute are similar to those of the earnings-persistence criterion. No generally accepted definition of core operations exists. At what point along a continuum does an activity become part of the core operations of a business? As Table 2 indicates, classifying gains/losses from holding available-for-sale securities as part of core earnings depends on whether the firm operates in the financial sector. Different operating environments across firms and industries could make it difficult for standard-setters to determine whether an item belongs in core earnings or OCI.8 In addition, differences in application across firms may give rise to concerns about comparability and potential for abuse on the part of managers in exercising their discretion (e.g., Barth et al. 2011).

The FASB's (2010) Staff Draft on Financial Statement Presentation tries to address the definitional issue by using interrelationships and synergies between assets and liabilities as a criterion to distinguish operating (or core) activities from investing (or noncore) activities. Specifically, the Staff Draft states:

An entity shall classify in the operating category:

Assets that are used as part of the entity's day-to-day business and all changes in those assets Liabilities that arise from the entity's day-to-day business and all changes in those liabilities.

Operating activities generate revenue through a process that requires the interrelated use of the entity's resources. An asset or a liability that an entity uses to generate a return and any change in that asset or liability shall be classified in the investing category. No significant synergies are created for the entity by combining an asset or a liability classified in the investing category with other resources of the entity. An asset or a liability classified in the investing category may yield a return for the entity in the form of, for example, interest, dividends, royalties, equity income, gains, or losses. (FASB 2010, paras. 72, 73, 81)

The above distinction between operating activities and investing activities could similarly be used to distinguish between core activities and noncore activities. Alternatively, standard-setters might develop other definitions. Similar to the degree of persistence attribute, standard-setters would not be restricted to a simple core versus noncore dichotomy when using this definition.

Another possible solution is to allow management to determine which items belong in core earnings. Companies exercise this discretion today when they choose to disclose pro forma earnings. Furthermore, the FASB established the precedent of the “management approach” when it allowed management to determine how to report segment disclosures. In several other areas of U.S. GAAP, management is responsible for establishing boundaries that define its operating environment. FASB Accounting Standards Codification Topic 320 (formerly Statement 115) permits different measurements for identical investments based on management's intent to sell or hold the instrument. Other examples where U.S. GAAP allows for management discretion include determining the rate to discount pension liabilities, defining reporting units, and determining whether an impairment is other than temporary. However, the management approach accentuates the concern about comparability and potential for abuse.

Management Control.

Given a premise that evaluating management's stewardship is a primary role of financial statements, a possible rationale for excluding certain items from earnings is that they do not provide a good measure to evaluate management.9 Management can largely control the firm's operating costs and can influence the level of revenues generated. However, some decisions that affect comprehensive income can be established by company policy or the company mission statement and, thus, be outside the control of management. For example, a company policy might be to invest excess cash in marketable securities with the objective of maximizing returns. Once the board of directors establishes this policy, management has little influence over how market-wide fluctuations in security prices affect earnings, and hedging the gains/losses would be inconsistent with the objective of maximizing returns. Similarly, a company's mission statement might include expansion overseas, or prior management might have already decided to establish a foreign subsidiary. The resulting gains/losses from foreign currency fluctuations would seemingly be out of management's control, and hedging these gains/losses would not make economic sense if the subsidiary's functional currency is its local currency and the parent has no intention of repatriating the subsidiary's cash flows.

Of course, determining what is and is not ostensibly under management's control becomes highly subjective and would probably differ across industries, and perhaps even across firms within industries. For example, gains/losses from investment holdings might not be relevant in evaluating management of some companies, but might be very relevant for managers of holding companies. In addition, the time horizon affects what is under management's control. That is, as the time horizon lengthens, more things are under management's control.

In Table 2, we classify items as not under management's control if they are based on fluctuations in stock prices or exchange rates, which academic research shows to be largely random within efficient markets. Using this classification model, most, but not all, of the OCI items listed in Table 2 are classified as not under the management's control. Some of the pension items currently recognized in OCI are within the control of management, because management controls the decision to revise a pension plan. While management has control over when to harvest gains/losses on available-for-sale (AFS) securities by deciding when to sell the securities, it cannot control market prices. Thus, under this criterion, unrealized gains/losses on AFS securities are appropriately recognized in OCI. However, gains/losses on trading securities and the effects of tax rate changes are beyond management's control, and yet, these items are currently included as part of earnings. Thus, “management control” does not distinguish what is and is not included in earnings under current U.S. GAAP.

Remeasurements.

Barker (2004) explains how the measurement and presentation of comprehensive income might rely on remeasurements. The FASB's (2010) Staff Draft on Financial Statement Presentation defines remeasurements as follows:

A remeasurement is an amount recognized in comprehensive income that increases or decreases the net carrying amount of an asset or a liability and that is the result of:

A change in (or realization of) a current price or value A change in an estimate of a current price or value or A change in any estimate or method used to measure the carrying amount of an asset or a liability. (FASB 2010, para. 234)

Using this definition, examples of remeasurements are impairments of land, unrealized gains/losses due to fair value changes in securities, income tax expenses due to changes in statutory tax rates, and unexpected gains/losses from holding pension assets. All of these items represent a change in carrying value of an already existing asset or liability due to changes in prices or estimates (land, investments, deferred tax asset/liability, and pension asset/liability, respectively).

Table 3 reproduces a table from Barker (2004) that illustrates how a firm's income statement might look using a “matrix format” if standard-setters adopt the remeasurement approach to reporting comprehensive income. Note that the presentation in Table 3 does not employ earnings as a subtotal of comprehensive income; however, the approach could be modified to define earnings as the sum of all items before remeasurements, if considered useful. Tarca et al. (2008) conduct an experiment with analysts, accountants, and M.B.A. students to assess whether the matrix income statement format in Table 3 facilitates or hinders users' ability to extract information. They find evidence suggesting that the matrix format facilitates more accurate information extraction for users across all sophistication levels relative to a typical format based on IAS 1.

 

Table 3:  Illustration of Matrix Reporting Format
http://www.cs.trinity.edu/~rjensen/temp/ReesShane2012Table3.jpg

 

Employing remeasurements to distinguish between earnings and other comprehensive income largely incorporates the criterion of earnings persistence. Most remeasurements result from price changes, where the current change has little or no association with future changes and, therefore, these components of income are transitory. In contrast, earnings components before remeasurements generally represent items that are likely more persistent.

Perhaps the most significant advantage of the remeasurement criterion is that it is less subjective than the other criteria previously discussed. Most of the other criteria in Table 2 are continuous in nature. Drawing a bright line to differentiate what belongs in earnings from what belongs in OCI is challenging and will likely be susceptible to income manipulation. In contrast, determining whether a component of income arises from a remeasurement is more straightforward.

Yet another advantage of this approach is it allows for a full fair value balance sheet that clearly discloses the effects of fair value measurement on periodic comprehensive income, while also showing earnings effects under a modified historical cost system (i.e., before remeasurements). This approach could potentially provide better information about probable future cash flows.

Other.

The attributes standard-setters could use to classify income components into earnings or OCI are not limited to the list in Table 2. Ketz (1999) suggests using the level of measurement uncertainty. As an example, gains/losses from Level 1 fair value measurements might be viewed as sufficiently certain to include in earnings, while Level 3 fair value measurements might generate gains/losses that belong in OCI. Song et al. (2010) provide some support for this partition in that they document the value relevance of Level 1 and Level 2 fair values exceeds the value relevance of Level 3 fair values.

Another potential attribute might be the horizon over which unrealized gains/losses are ultimately realized. That is, unrealized gains/losses from foreign currency fluctuations, term life insurance contracts, or holding pension assets that will not be realized for many years in the future might be disclosed as part of OCI, whereas unrealized gains/losses from trading and available-for-sale securities could be part of earnings.

As previously discussed, the attributes of measurement uncertainty and timeliness create similar problems in determining where to draw the line. Which items are sufficiently reliable (or timely) to include in earnings, and will differences in implementation across firms and industries impair comparability?

The overriding purpose of the discussion in this subsection is to point out that several alternative attributes could potentially guide standard-setters in establishing criteria to differentiate earnings from OCI. Ultimately, the choice regarding whether/how to distinguish net income from OCI is a matter of policy. However, academic research can inform policy decisions, as described in the fourth and fifth sections.

Summary

Reporting OCI is a relatively recent phenomenon that presumes financial statement users are provided with better information when specific comprehensive income components are excluded from earnings-per-share (EPS), and recycled back into net income only after the occurrence of a specified transaction or event. The number of income components included in OCI has increased over time, and this expansion is likely to continue as standard-setters address new agenda items (e.g., financial instruments and insurance contracts). The lack of a clear definitional distinction between earnings and OCI in the FASB/IASB Conceptual Frameworks has led to: (1) ad hoc decisions on the income components classified in OCI, and (2) no conceptual basis for deciding whether OCI should be excluded from earnings-per-share (EPS) in the current period or recycled through EPS in subsequent periods. In this section, we discussed alternative criteria that standard-setters could use to distinguish earnings from OCI, along with the advantages and challenges of each criterion. Further, due to the inherent difficulties in drawing bright lines between earnings that are persistent versus transitory, core versus noncore, under management control or not, and amenable to remeasurement or not, standard-setters might consider eliminating OCI; that is, they might decide to adopt an all-inclusive income statement approach, where comprehensive income is reporte

. . .

Continued in article


History of Women in Accounting and Other Walks of Life

Judith Drake (scholar on barriers to women in physical and mental work, including accounting) --- http://en.wikipedia.org/wiki/Judith_Drake

Eight Special Women of Accounting --- http://www.journalofaccountancy.com/Issues/2007/Aug/EightSpecialWomenInAccounting.htm

Among the AICPA-donated volumes at Ole Miss are two binders containing photographs of individuals appearing in the JofA or at accounting conventions from 1887 to 1979. Of the 446 individuals featured, eight are women—Christine Ross, Ellen Libby Eastman, Miriam Donnelly, Mary E. Murphy, Helen Lord, Helen H. Fortune, Mary E. Lewis and Beth M. Thompson. In a time when the profession was the all-but-exclusive domain of men, they stood out not only because of their gender but in many cases because of their accomplishments and contributions to accounting. Consider that in 1933, slightly more than 100 CPA certificates had been issued to women. By 1946, World War II had changed traditional notions of gender in the workplace, and female CPAs had more than tripled to 360—still a small contingent but, as information gleaned from the AICPA Library indicates, one capable of exerting a strong and beneficial influence on the profession.


Christine Ross

Born about 1873 in Nova Scotia, Ross took New York by storm in the late 1890s. New York state enacted licensure legislation in 1896 and gave its inaugural CPA exam in December 1896. Ross sat for the exam in June 1898, scoring second or third in her group. Six to 18 months elapsed while her certificate was delayed by state regents because of her gender. But she had completed the requirements and became the first woman CPA in the United States, receiving certificate no. 143 on Dec. 21, 1899.

Ross began practicing accounting around 1889. For several years, she worked for Manning’s Yacht Agency in New York. Her clients included women’s organizations, wealthy women and those in fashion and business.

Helen Lord
Lord received her CPA certificate from New York in 1934 and in 1935 joined the American Society of Certified Public Accountants, which merged with the American Institute of Accountants (later AICPA) the following year. In 1937, she was a partner with her father in the New York firm of Lord & Lord and a member of the AIA. She served in the late 1940s as business manager of The Woman CPA, published by the American Woman’s Society of Certified Public Accountants–American Society of Women Accountants. Lord reported the journal then had a circulation of more than 2,200.

Helen Hifner Fortune
Fortune, one of the first women CPAs in Kentucky, received certificate no. 174 in 1935 and was admitted to the AIA the following year. She became a member of an AIA committee in 1942 and by 1947 was a partner in the Lexington, Ky., firm of Hifner and Fortune.

Ellen Libby Eastman
Eastman began her career as a clerk in a Maine lumber company, eventually becoming chief accountant. She studied for the CPA exam at night and became the first woman CPA in Maine, receiving certificate no. 37 dated 1918. She was also the first woman to establish a public accounting practice in New England. Arriving in New York in 1920, Eastman focused on tax work and audited the accounts of the American Women’s Hospital in Greece. In 1925, she was a member of the ASCPA. In 1940, Eastman began working with the law firm of Hawkins, Delafield & Longfellow in New York.

She was outspoken and eloquent regarding a woman’s ability to succeed in accounting. In a 1929 article in The Certified Public Accountant, Eastman recounted her adventures:

One must be willing and able to endure long and irregular hours, unusual working arrangements and difficult travel conditions. I have worked eighteen out of the twenty-four hours of a day with time for but one meal; I have worked in the office of a bank president with its mahogany furnishings and oriental rugs and I have worked in the corner of a grain mill with a grain bin for a desk and a salt box for a chair; I have been accorded the courtesy of the private car and chauffeur of my client and have also walked two miles over the top of a mountain to a lumber camp inaccessible even with a Ford car. I have ridden from ten to fifteen miles into the country after leaving the railroad, the only conveyance being a horse and traverse runners—and this in the severity of a New England winter. I have done it with a thermometer registering fourteen degrees below zero and a twenty-five mile per hour gale blowing. I have chilled my feet and frozen my nose for the sake of success in a job which I love. I have been snowbound in railroad stations and have been stranded five miles from a garage with both rear tires of my car flat. I have ridden into and out of open culvert ditches with the workmen shouting warnings to me. And always one must keep the appointment; “how” is not the client’s concern.
 

Mary E. Murphy
A long-lived pioneer, Murphy (1905–1985) lectured, researched and taught in the United States and abroad, retiring in 1973. The Iowa native earned her bachelor of commerce degree with a major in accounting from the University of Iowa in 1927, then obtained a master’s in accountancy in 1928 from Columbia University Business School. In 1938, she received a doctorate in accountancy—only the second woman in the United States to do so—from the London School of Economics.

In 1928, Murphy began working in the New York office of Lybrand, Ross Bros. & Montgomery. Two years later, she took the CPA exam in Iowa and received certificate no. 67, to become the first woman CPA in Iowa. She joined the AIA in 1937.

Following her public accounting stint, she served for three years as the chair of the Department of Commerce at St. Mary’s College in Notre Dame, Ind. Murphy also was an assistant professor of economics at Hunter College of the City University of New York until 1951. In 1952, she received the first Fulbright professorship of accounting, with assignments in Australia and New Zealand. In 1957, she was appointed as the first director of research of the Institute of Chartered Accountants in Australia. Murphy retired in 1973 from the accounting faculty at California State University.

She published or collaborated on more than 20 books and 100 journal articles and many book reviews and scholarly papers. From 1946 to 1965 she was the most frequently published author in The Accounting Review. Murphy investigated the role of accounting in the economy, made the case for accounting education improvements and paved the way for other aspiring women accountants to prosper. More than half her publications explored international accounting, often advocating standardization. She also emphasized accounting history and biographies.

Mary E. Lewis
Lewis received California CPA certificate no. 1404 in 1939. She was admitted to the AIA that year and by 1947 had her own firm in Los Angeles.
 

Beth M. Thompson
Thompson worked as the office manager in the Kentucky Automobile Agency she and her husband, Charles R. Thompson, owned. After closing the car business, they moved to Florida, where she worked for an accounting firm. She passed the CPA exam in 1951 with the encouragement of her husband and opened her own accounting business in Miami. In 1955, Thompson was one of only 900 women CPAs and the only female president of a state association chapter—the Dade County chapter of the Florida Institute of CPAs.

Miriam Donnelly
From 1949 to 1955, Donnelly was head librarian of the AIA library. (In 1957, the AIA was renamed the AICPA.) She began her career with the library as assistant librarian and cataloger in 1927, after working for two governmental libraries and the New York Public Library.

 

History of women accountants in the 1880. US Federal Census ---
http://repository.usfca.edu/cgi/viewcontent.cgi?article=1001&context=acct

Christine Ross (The First Woman CPA) --- Click Here
http://books.google.com/books?id=W8Z2a53DJ2cC&pg=PA151&lpg=PA151&dq=%22First+Woman+CPA%22&source=bl&ots=irXssMWzFN&sig=0AneWv1qO-MB6_ixatHq-mMerRQ&hl=en&sa=X&ei=N8o8UY3XBYrK0AHngoCYBw&ved=0CDgQ6AEwAQ#v=onepage&q=%22First%20Woman%20CPA%22&f=false

Mary Jo McCann (First Woman CPA in Kansas) ---
http://www.kscpa.org/about/news/119-mary_jo_mccann_first_woman_cpa_in_kansas_passes

Bertha Aldrich (First Woman CPA in California) --- http://boards.ancestry.com/surnames.aldrich/600/mb.ashx

Accounting Reform (search for women) --- http://en.wikipedia.org/wiki/Accounting_reform

American Society of Women Accountants --- http://en.wikipedia.org/wiki/University_of_Cambridge#Women.27s_education

Accounting and Financial Women's Alliance --- http://www.afwa.org/

Accounting History Libraries at the University of Mississippi (Ole Miss) --- http://www.olemiss.edu/depts/accountancy/libraries.html
There are many items pertaining to accounting women in history, especially in the Accounting Historians Journal

Ruth Andersen, First Woman on the Board of a Big Four Accounting Firm --- http://en.wikipedia.org/wiki/Ruth_Anderson_%28accountant%29

Erma Bombeck (a termite control accountant at an advertising agency) --- http://en.wikipedia.org/wiki/Erma_Bombeck

Cynthia Cooper (Internal auditor who blew the whistle at WorldCom) --- http://en.wikipedia.org/wiki/Cynthia_Cooper_%28accountant%29

Lynn Brewer was never enough of a player to even mention in my threads on the Enron scandal
The foul mouthed Sherron Watkins was the significant whistleblower at Enron
http://www.trinity.edu/rjensen/FraudEnronQuiz.htm#10

Grace Andrews (early mathematician and accountant in Barnard College) --- http://en.wikipedia.org/wiki/Grace_Andrews_%28mathematician%29

Patricia Courtney (IRS agent and professional baseball star) --- http://en.wikipedia.org/wiki/Patricia_Courtney

Patrecia Barringer (Tax accountant, auditor, and professional baseball star) ---http://en.wikipedia.org/wiki/Patricia_Barringer

Helen Nordquist (Telephone operator, accountant, and professional baseball star) --- http://en.wikipedia.org/wiki/Helen_Nordquist

Rita Lee (Accounting Student Tennis Star) --- http://en.wikipedia.org/wiki/Janet_Lee

Diane Cummins (Canadian Accountant Track Star) --- http://en.wikipedia.org/wiki/Diane_Cummins

Sue Hearnshaw (British Chartered Accountant and Long Jump Star) --- http://en.wikipedia.org/wiki/Sue_Hearnshaw

Betty Wagner Spandikow (Accountant Who Became an Advocate of Breast Feeding) --- http://en.wikipedia.org/wiki/Betty_Wagner_Spandikow

Jennifer Archer (Oil and Gas Accountant Turned Fiction Writer) --- http://en.wikipedia.org/wiki/Jennifer_Archer

 

Women in Business --- http://en.wikipedia.org/wiki/Women_in_business

American Business Women Association --- http://en.wikipedia.org/wiki/American_Business_Women%27s_Association

9 to 5 Film --- http://en.wikipedia.org/wiki/9_to_5_%28musical%29

Career Women --- http://en.wikipedia.org/wiki/Career_woman

A History of Entrereneurship
"Who Are The Entrepreneurs: The Elite or the Everyday Man? A History of Entrepreneurship," by Heather A. Haveman, Jacob Habinek, and Leo A Googman, UC Berkeley,  2011 ---
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

China's Tiger Women Billionaires ---
http://www.thedailybeast.com/newsweek/2012/03/04/amy-chua-profiles-four-female-tycoons-in-china.html

"Liz Claiborne Must Say Adieu to Liz," by: Dana Mattioli, The Wall Street Journal, October 13, 2011 ---
http://online.wsj.com/article/SB10001424052970203914304576626711202553884.html?mod=djem_jiewr_AC_domainid

"New Questions on Women, Academe and Careers," by Scott Jaschik, Inside Higher Ed, September 22, 2008 --- http://www.insidehighered.com/news/2008/09/22/women

Barbara Franklin (one of the first graduates of the Harvard Business School) --- http://en.wikipedia.org/wiki/Barbara_Franklin

History of Feminism --- http://en.wikipedia.org/wiki/History_of_feminism
Also see http://en.wikipedia.org/wiki/Mich%C3%A8le_Pujol

National Organization for Women (NOW) --- http://www.now.org/
For example, search for "Accounting" in the search box

Women's Work --- http://en.wikipedia.org/wiki/Women%27s_work 

Teachers, Accountants, and Physician Women as Slaves in Ancient Rome ---
http://en.wikipedia.org/wiki/Slavery_in_ancient_Rome

Conduct Literature for Women, 1500-1640, eds. William St Clair & Irmgard Maassen (6 Volumes) (London: Pickering and Chatto, 2000).

Conduct Literature for Women, 1640-1710, eds. William St Clair & Irmgard Maassen (6 Volumes) (London: Pickering and Chatto, 2002).

History of Women in the United States --- http://en.wikipedia.org/wiki/History_of_women_in_the_United_States

The Arthur and Elizabeth Schlesinger Library on the History of Women in America ---  http://www.radcliffe.harvard.edu/schlesinger-library

Women's suffrage in the United Kingdom --- http://en.wikipedia.org/wiki/Women%27s_suffrage_in_the_United_Kingdom 

By Popular Demand: "Votes for Women" Suffrage Pictures, 1850-1920 --- http://memory.loc.gov/ammem/vfwhtml/vfwhome.html

Women's Rights --- http://en.wikipedia.org/wiki/Women%27s_rights
Title 15 of the United States Code ---  http://en.wikipedia.org/wiki/Title_15_of_the_United_States_Code
Title 9 of the United States Code --- http://en.wikipedia.org/wiki/Title_9_of_the_United_States_Code
Women's Sports --- http://en.wikipedia.org/wiki/Women%27s_sports

Famous Women in History --- http://www.historynet.com/famous-women-in-history

National Women's Hall of Fame --- http://www.greatwomen.org/
Note that some states also have hall of fame sites for women inductees

Women in Islam ---
http://en.wikipedia.org/w/index.php?title=Special:Search&limit=20&offset=120&redirs=1&profile=default&search=Women+in+Accounting

Sharia (search for the sections pertaining to women) --- http://en.wikipedia.org/wiki/Sharia

Women's Rights Movement in Iran --- http://en.wikipedia.org/wiki/Women%27s_rights_movement_in_Iran

Women in Saudi Arabia --- http://en.wikipedia.org/wiki/Saudi_Arabia

Women in Libya --- http://en.wikipedia.org/wiki/Women_in_Libya

 

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

Women of Singapore --- http://en.wikipedia.org/wiki/Women_in_Singapore

Women's Roles in World Wars --- http://en.wikipedia.org/wiki/Women%27s_roles_in_the_World_Wars
Women in the Military --- http://en.wikipedia.org/wiki/Women_in_the_military
Yugoslav Partisans --- http://en.wikipedia.org/wiki/Yugoslav_Partisans
The story of women bomber pilots from the Women's Auxiliary Ferrying Squadron --- http://en.wikipedia.org/wiki/Ladies_Courageous

Rosie the Riveter --- http://en.wikipedia.org/wiki/Rosie_the_Riveter

Victorian Dress Reform --- http://en.wikipedia.org/wiki/Victorian_dress_reform

Women's Educational and Industrial Union --- http://en.wikipedia.org/wiki/Women%27s_Educational_and_Industrial_Union H

Women in Science --- http://womeninscience.history.msu.edu/

Discovering American Women's History Online --- http://digital.mtsu.edu/cdm/landingpage/collection/women

International Museum of Women http://www.imow.org/home/

Women in Scotland --- http://en.wikipedia.org/wiki/History_of_Dundee
Also see http://en.wikipedia.org/wiki/Women_in_early_modern_Scotland

 Helena Marfell, First President of the Country Women's Association of Australia ---
http://en.wikipedia.org/wiki/Helena_Marfell

Women and Mormanism --- http://en.wikipedia.org/wiki/Women_and_Mormonism

WomenWatch: UN Information and Resources on Gender Equality and Empowerment --- http://www.un.org/womenwatch/

Sophia Smith Collection: Women's History Archives at Smith College --- http://www.smith.edu/libraries/libs/ssc/digitalcoll.html

Wisconsin Women's History --- http://womenst.library.wisc.edu/bibliogs/wis-women-history.html

Women in Prison --- http://en.wikipedia.org/wiki/Nicole_Hahn_Rafter

Women in Prison Film --- http://en.wikipedia.org/wiki/WIP

Women in the Ku Klux Klan --- http://en.wikipedia.org/wiki/Ku_Klux_Klan

Women on Death Row --- http://en.wikipedia.org/wiki/Capital_punishment_debate_in_the_United_States

Gifts of Speech: Women's Speeches from Around the World --- http://gos.sbc.edu/

Women's Legal History --- http://wlh.law.stanford.edu/

The Frances Perkins Center --- http://francesperkinscenter.org/

Chicago Women's Liberation Union Herstory Project --- http://www.cwluherstory.org/

David Foster Wallace’s 1994 Syllabus: How to Teach Serious Literature with Lightweight Books --- Click Here
http://www.openculture.com/2013/02/david_foster_wallaces_1994_syllabus.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29

National Women's History Project http://www.nwhp.org/

African-American Women: Online Archival Collections --- http://library.duke.edu/rubenstein/collections/digitized/african-american-women/

Women Artists of the American West --- http://www.cla.purdue.edu/WAAW/MainIndex.html

Women's Colleges --- http://en.wikipedia.org/wiki/Women%27s_colleges

Women at Harvard --- http://en.wikipedia.org/wiki/Harvard_University#Women
Radcliff  College--- http://en.wikipedia.org/wiki/Radcliffe_College

Cambridge University --- http://en.wikipedia.org/wiki/University_of_Cambridge#Women.27s_education

Society of Women's Health Research --- http://en.wikipedia.org/wiki/Society_for_Women%27s_Health_Research

Films Made by Women --- http://en.wikipedia.org/wiki/Women%27s_cinema

Lesbian Pulp Fiction --- http://en.wikipedia.org/wiki/Lesbian_pulp_fiction

Smithsonian Education: Women's History Teaching Resources
http://www.smithsonianeducation.org/educators/resource_library/women_resources.html

Teaching with Historic Places: Women's History Lesson Plans --- http://www.nps.gov/nr/twhp/mar99.htm

Algerian Women in France --- http://en.wikipedia.org/wiki/Algerian_women_in_France

Barack Obama Supreme Court Candidates --- http://en.wikipedia.org/wiki/Barack_Obama_Supreme_Court_candidates

Women in India --- http://en.wikipedia.org/wiki/Women_in_India

Women in Saudi Arabia --- http://en.wikipedia.org/wiki/Saudi_Arabia

Women in Libya --- http://en.wikipedia.org/wiki/Women_in_Libya

Feminism in Thailand --- http://en.wikipedia.org/wiki/Feminism_in_Thailand

Women in Taiwan --- http://en.wikipedia.org/wiki/Women_in_Taiwan

Gender Inequality in China --- http://en.wikipedia.org/wiki/Gender_inequality_in_China

China's Tiger Woman Billionaires ---
http://www.thedailybeast.com/newsweek/2012/03/04/amy-chua-profiles-four-female-tycoons-in-china.html

Gender Pay Gap in Russia --- http://en.wikipedia.org/wiki/Gender_pay_gap_in_Russia

Economic Inequality --- http://en.wikipedia.org/wiki/Economic_inequality

Gender Pay Gap --- http://en.wikipedia.org/wiki/Gender_pay_gap

From the Scout Report on March 1, 2013

The movement for equal pay for women continues to gain steam across the
United States

Equal pay for women battle gains traction in New York
http://www.metro.us/newyork/news/local/2013/02/21/equal-pay-for-women-battle-gains-traction-in-new-york/

Getting equal pay could become easier for women
http://www.abqjournal.com/main/2013/02/26/politics/legislature/getting-equal-pay-could-become-easier-for-women.html

State Senator Wendy Davis Wants to Bring Federal Fair Pay Laws for Women to
Texas
http://blogs.dallasobserver.com/unfairpark/2013/02/state_sen_wendy_davis_wants_to.php

Wage gaps destroy employee morale, productivity
http://www.leaderpost.com/business/productiveconversations/Wage+gaps+destroy+employee+morale+productivity/8018636/story.html?__lsa=d85d-e6d9

Here We Go Again: The Long (and Frustrating) Journey of Equal Pay for Women
http://www.huffingtonpost.com/marlo-thomas/equal-pay-for-women_b_2678611.html

Lilly Ledbetter Fair Pay Act of 2009
http://www.gpo.gov/fdsys/pkg/PLAW-111publ2/html/PLAW-111publ2.htm

National Association of Black Accountants --- http://www.nabainc.org/

Some Accounting History Sites

Bob Jensen's Summary of Accounting History and Accounting Theory --- http://www.trinity.edu/rjensen/theory01.htm
 

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

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




Humor March 1-31, 2013

John Cleese, Ringo Starr and Peter Sellers Trash Priceless Art (1969) ---
http://www.openculture.com/2013/03/john_cleese_ringo_starr_and_peter_sellers_trash_priceless_art.html

Something You Will Never See on a New Hampshire Golf Course ---
http://www.boreme.com/posting.php?id=31996

Shatner for Guns Commercial ---
http://stufffromjudy.posterous.com/best-commercial-shatner-ever-did-i-unconditio

Makes My Dog Look Stupid --- http://www.youtube.com/embed/PztO-OvzRyg?rel=0

Watch Jeff Gordon Scare The Crap Out Of A Random Used Car Salesman ---
http://jalopnik.com/watch-jeff-gordon-scare-the-crap-out-of-a-random-used-c-453384237

Princess Debit turned up pregnant after attending a dinner party at Count von Credit's castle.
Rumor has it that she's been counted.
Sorry to waste your time.


Forwarded by Auntie Bev

Question:
What is the truest definition of  Globalization?

Answer:
Princess Diana's death.

Question:
How come?

Answer :

An English princess with an Egyptian boyfriend
crashes
in a French tunnel,
riding in a
  German car with a
Dutch engine,
  driven by a Belgian  who was drunk
onScottish whisky,

(check the bottle before you
change the spelling),

followed closely by  Italian Paparazzi, on
Japanese motorcycles,

treatedby an American doctor, using
Brazilian medicines.

 


Makes My Dog Look Stupid --- http://www.youtube.com/embed/PztO-OvzRyg?rel=0

BBC Animal Voice Overs --- http://www.youtube.com/watch?v=3aAtFrWft2k&sns=em

 


Forwarded by Gene and Joan

DON'T WASH YOUR HAIR IN THE SHOWER! 

It's so good to finally get a health warning that is useful!  

IT INVOLVES THE SHAMPOO WHEN IT RUNS DOWN YOUR BODY WHEN YOU SHOWER WITH IT - A WARNING TO US ALL! 

I don't know why I didn't figure this out sooner. I use shampoo in the shower! When I wash my hair, the shampoo runs down my whole body, and printed very clearly on the shampoo label is this warning: "FOR EXTRA BODY AND VOLUME." 

No wonder I have been gaining weight! Well, I have gotten rid of that shampoo, and I am going to start showering with Dawn dish soap instead. Its label reads: "DISSOLVES FAT THAT IS OTHERWISE DIFFICULT TO REMOVE." 

Problem solved!  

If I don't answer the phone, I'll be in the shower


Forwarded by Auntie Bev

� 1. Take your shoe size.(only whole sizes)

� 2. Multiply it by 5.

� 3. Add 50.

� 4. Multiply by 20 ..

� 5. Add 1012.

� 6. Subtract the year u were born�

� The first digit is your shoe size while the last 2 digits are your age..

 


Forwarded by Auntie Bev

Florida

A Florida senior citizen drove his brand new Corvette convertible out of the dealership. Taking off down the road, he pushed it to 80 mph, enjoying the wind blowing through what little hair he had left. "Amazing," he thought as he flew down I-95, pushing the pedal even more.

Looking in his rear view mirror, he saw a Florida State Trooper, blue lights flashing and siren blaring. He floored it to 100 mph, then 110, then 120. Suddenly he thought, "What am I doing? I'm too old for this!" and pulled over to await the trooper's arrival.

Pulling in behind him, the trooper got out of his vehicle and walked up to the Corvette. He looked at his watch, then said, "Sir, my shift ends in 30 minutes. Today is Friday. If you can give me a new reason for speeding--a reason I've never before heard -- I'll let you go."

The old gentleman paused then said: "Three years ago, my wife ran off with a Florida State Trooper. I thought you were bringing her back.

"Have a good day, Sir," replied the trooper.

Georgia

The owner of a golf course in Georgia was confused about paying an invoice, so he decided to ask his secretary for some mathematical help. He called her into his office and said, "Y'all graduated from the University of Georgia and I need some help. If I wuz to give yew $20,000, minus 14%, how much would you take off?" The secretary thought a moment, and then replied, "Everthang but my earrings."

Louisiana

A senior citizen in Louisiana was overheard saying ... "When the end of the world comes, I hope to be in Louisiana ." When asked why, he replied, "I'd rather be in Louisiana 'cause everythang happens in Louisiana 20 years later than in the rest of the world."

Mississippi

The young man from Mississippi came running into the store and said to his buddy, "Bubba, somebody just stole your pickup truck from the parking lot!" Bubba replied, "Did y'all see who it was?" The young man answered, "I couldn't tell, but I got the license number."

South Carolina

A man in South Carolina had a flat tire, pulled off on the side of the road, and proceeded to put a bouquet of flowers in front of the car and one behind it. Then he got back in the car to wait. A passerby studied the scene as he drove by, and was so curious he turned around and went back. He asked the fellow what the problem was. The man replied, "I got a flat tahr." The passerby asked, "But what's with the flowers?" The man responded, "When you break down they tell you to put flares in the front and flares in the back. I never did understand it neither."

Tennessee

A Tennessee State trooper pulled over a pickup on I-65. The trooper asked, "Got any ID?" The driver replied, "Bout whut?"

Texas

The Sheriff pulled up next to the guy unloading garbage out of his pick-up into the ditch. The Sheriff asked, "Why are you dumping garbage in the ditch? Don't you see that sign right over your head."

"Yep," he replied. "That's why I'm dumpin' it here, 'cause it says: 'Fine For Dumping Garbage.' "


Forwarded by Bob Booth

Copper Wire Discovered

After having dug to a depth of 10 feet last year outside of New York City, New York scientists found traces of copper cable dating back 100 years. They came to the conclusion that their ancestors already had a telephone network more than 100 years ago.

 

Not to be outdone by the New Yorkers, in the weeks that followed, a Los Angeles, California archaeologist dug to a depth of 20 feet somewhere just outside Oceanside. Shortly after, a story in the LA Times read: "California archaeologists report a finding of 200 year old copper cable, have concluded that their ancestors already had an advanced high-tech communications network a hundred years earlier than the New Yorkers."

 

One week later, a newspaper in New Orleans, La reported the following: "After digging down about 30 feet deep near a Bayou in the community of

 Mamou, Louisiana, near the Hubba Hubba Club, Boudreaux, a self-taught archaeologist, reported that he found.....absolutely nothing.  Boudreaux has therefore concluded that 300 years ago, Louisiana had already gone wireless".

 

Just makes a person proud to be from Louisiana !!!


Forwarded by Auntie Bev

The Indian With One Testicle There once was an Indian who had only one testicle and whose given name was 'Onestone'. He hated that name and asked everyone not to call him Onestone. After years and years of torment, Onestone finally cracked and said,' If anyone calls me Onestone again I will kill them!'

The word got around and nobody called him that any more. Then one day a young woman named Blue Bird forgot and said, 'Good morning, Onestone.' He jumped up, grabbed her and took her deep into the forest where he made love to her all day and all night. He made love to her all the next day, until Blue Bird died from exhaustion. The word got around that Onestone meant what he promised he would do.

Years went by and no one dared call him by his given name until A woman named Yellow Bird returned to the village after being away. Yellow Bird, who was BlueBird's cousin, was overjoyed when she saw Onestone. She hugged him and said, 'Good to see you, Onestone.' Onestone grabbed her, took her deep into the forest, then he made love to her all day, made love to her all night, made love to her all the next day, made love to her all the next night, but

YellowBird wouldn't die!

Why ???

OH, come on... take a guess !!!

Think about it !

You're going to love this !!!

Everyone knows...

You can't kill Two Birds

withOneStone!!!

 


Forwarded by Gene and Joan

A Norwegian and a German entered a chocolate store. As they were busy looking, the German stole 3 chocolate bars.


As they left the store, the German said to the Norwegian, "Man I'm the best thief, I stole 3 chocolate bars and no one saw me. You can't beat that."

The Norwegian replied: "You want to see something better? Let's go back to the shop and I'll show you real stealing."

So they went to the counter and the Norwegian said to the shopkeeper, "Do you want to see magic?"

The shopkeeper replied, "Yes."

The Norwegian said, "Give me one chocolate bar."

The shopkeeper gave him one, and he ate it.

The Norwegian asked for a second bar, and he ate that as well. He asked for the third, and finished that one too.

The shopkeeper asked: "But where's the magic?"

The Norwegian replied: "Check in my friend's pocket, and you'll find all three bars of chocolate."

You just CAN'T beat a Norwegian!


Awful Puns Forwarded by Auntie Bev

Punography

When chemists die, they barium.

Jokes about German sausage are the wurst.

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

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

How does Moses make his tea? Hebrews it.

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

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

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

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

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

A dyslexic man walks into a bra.

PMS jokes aren't funny, period.

Why were the Indians here first ? They had reservations.

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

Energizer bunny arrested. Charged with battery.

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

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

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

When you get a bladder infection, urine trouble.

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

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

Broken pencils are pointless.

I tried to catch some fog. I mist.

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

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

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

I dropped out of communism class because of lousy Marx.

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

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

Haunted French pancakes give me the crepes.

Velcro - what a rip off!

Cartoonist found dead in home. Details are sketchy.

Venison for dinner? Oh deer!

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

 

 


 

Forwarded by Paula

Jack Daniels Fishing Story

I went fishing this morning, but after a short time I ran out of worms. Then I saw a cottonmouth with a frog in its mouth. Frogs are good bass bait. Knowing the snake couldn't bite me with the frog in its mouth, I grabbed it right behind the head, took the frog, and put it in my bait bucket.

Now the dilemma was how to release the snake without getting bit. So, I grabbed my bottle of Jack Daniels and poured a little whiskey in its mouth. Its eyes rolled back, and it went limp. I released the snake into the lake without incident and carried on fishing, using the frog.

Not long after, I felt a nudge on my foot. It was that damn snake ... with two more frogs.

Life is good.

 




Humor Between March 1-31, 2013 --- http://www.trinity.edu/rjensen/book13q1.htm#Humor033113

Humor Between February 1-28, 2013 --- http://www.trinity.edu/rjensen/book13q1.htm#Humor022813

Humor Between January 1-31, 2013 --- http://www.trinity.edu/rjensen/book13q1.htm#Humor013113

Humor Between December 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q4.htm#Humor123112

Humor Between November 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q4.htm#Humor113012

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

 




And that's the way it was on March 31, 2013 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/

 

 

February 28, 2013

Bob Jensen's New Bookmarks February 1-28, 2013
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/

FASB Accounting Standards Updates ---
http://www.fasb.org/cs/ContentServer?site=FASB&c=Page&pagename=FASB/Page/SectionPage&cid=1176156316498

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

2013 IFRS Blue Book (Not Free) ---
http://shop.ifrs.org/ProductCatalog/Product.aspx?ID=1717

Links to IFRS Resources (including IFRS Cases) for Educators ---
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting
 

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

Center for Financial Services Innovation --- http://cfsinnovation.com/

"Guide to PCAOB Inspections," Center for Audit Quality, 2012 ---
http://www.thecaq.org/resources/pdfs/GuidetoPCAOBInspections.pdf
Note this has a good explanation of how the inspection process works.

PCAOB Inspection Report Database ---
http://pcaobus.org/inspections/reports/pages/default.aspx

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

Subtle Distinctions in Technical Terminology
Machine Learning, Big Data, Deep Learning, Data Mining, Statistics, Decision & Risk Analysis, Probability, Fuzzy Logic FAQ ---
http://wmbriggs.com/blog/?p=6465


Humor Between February 1-28, 2013 --- http://www.trinity.edu/rjensen/book13q1.htm#Humor022813

Humor Between January 1-31, 2013 --- http://www.trinity.edu/rjensen/book13q1.htm#Humor013113

Humor Between December 1-31, 2012 --- http://www.trinity.edu/rjensen/book12q4.htm#Humor123112

Humor Between November 1-30, 2012 --- http://www.trinity.edu/rjensen/book12q4.htm#Humor113012

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




The Economist: World in 2013 (Annual summary of world economics trends from The Economist magazine) ---
http://www.economist.com/theworldin/2013


Video
"How Managers Should Read Financial Statements," Harvard Business Review Blog, February 19, 2013 --- Click Here
http://blogs.hbr.org/video/2013/02/how-managers-should-read-finan.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

CNBC Explains Accounting --- http://www.cnbc.com/id/100000341

Bob Jensen's threads on accounting theory


Common Core State Standards (CCSS) --- http://www.corestandards.org/
At Trinity University we would probably call these skill standards as opposed to other courses in the General Education Core such as Western Civilization and Science Gen. Ed. core courses. Colleges are more likely to agree on the skill standards than the other Gen. Ed. "standards." In the 21st Century colleges vary a great deal with respect to courses in the the Gen. Ed. smorgasbord.

"Ernst & Young Supports the CCSS for Education," by Deanna C. White, AccountingWeb, February 21, 2013 ---
http://www.accountingweb.com/article/ernst-young-supports-ccss-education/221179?source=education

 

Ernst & Young recently joined the ranks of seventy top business leaders in proclaiming their support for the Common Core State Standards (CCSS) for education. 
 
In an open letter that appeared in the February 12, 2013, edition of the New York Times, Stephen R. Howe Jr., Americas Managing Partner at Ernst & Young, was listed as a business leader from one of seventy top companies and corporations, including GE and GM, who offered their "collective support" for the CCSS.
 
The CCSS initiative, led by the National Governors Association Center for Best Practices and the Council of Chief State School Officers, has produced K-12 standards in the foundational subjects of math and English that meet the business community's expectations for US students. 
 
The CCSS set consistent, focused, and rigorous expectations for American students. Forty-six states and the District of Columbia have already adopted the standards.
 
"As business leaders we believe that ALL American children have the right to an education that prepares them to be successful in a competitive global economy," the business leaders jointly stated in the open letter. "We also understand that in order to compete in a knowledge-based global economy, we must improve the academic performance of our students."
 
The standards, according to the CCSS website, are "rigorous, internationally benchmarked" criteria designed to ensure that students "leave school with the knowledge and skills needed to succeed in college and careers." The CCSS are not a national curriculum nor are they federally mandated.
 
"The need to raise student achievement in the public education system is clear, as American students are leaving school without the skills and education needed to succeed. Once leading the world in academic scores and education attainment, the United States has fallen behind other top performing countries," the website states, adding this "weakens the United States' ability to produce a workforce that is fully prepared to compete in the local, national, and global economies." 

Continued in article

 


"Don’t Rely on the “Journal of Accountancy” for the Straight Skinny on IFRS," by Tom Selling, The Accounting Onion, February 19, 2013  ---
Click Here
http://accountingonion.com/2013/02/dont-count-on-the-straight-skinny-about-ifrs-from-the-journal-of-accountancy.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+typepad%2Ftheaccountingonion+%28The+Accounting+Onion%29

Jensen Comment
I've not yet been able to get this page to work fully at Tom's Accounting Onion site. But the title alone is pretty indicative of what Tom probably says about AICPA bias toward IFRS. The Journal of Accountancy is the main publication of the AICPA.

I've been saying all along that the Big Four is biased toward IFRS because of reduced auditing costs (only one set of accounting standards to worry about), hundreds millions of dollars to be made in training clients, selling training materials, and helping to write software that converts from FASB standards to IASB standards.

And whenever the Big Four orders jump, the AICPA has always replies "how high."

My long time criticisms of the biases of the Big Four and the AICPA with respect to IFRS can be found at
http://www.trinity.edu/rjensen/Theory01.htm#MethodsForSetting

The Big Four and the AICPA have always glossed over my main criticisms of replacing FASB standards with FASB standards:

  1. I think principles-based IFRS standards will make it too easy to have different accounting treatments of identical accounting transactions ---
    http://www.trinity.edu/rjensen/Theory01.htm#BrightLines

     
  2. I think that EU politics has always dominated the IASB and will probably continue to do so since the future of the FASB rides so heavily upon pleasing the many EU nations.
     
  3. In the long run there is a possibility that the mice will roar like they are now roaring in the United Nations. Enemies of the USA may combine forces to leverage the FASB into setting accounting standards and interpretations for purposes of hurting the USA and the rest of the free world rather than improved accounting and transparency.

Note that a nation is not supposed to adopt IFRS if it intends to cherry pick what standards will be enforced versus not enforced. It is not supposed to rewrite any of the standards for its own domestic enforcements. In other words, if a nation adopts IFRS it adopts the whole IFRS enchilada.


"Pinocchio Investors: How Investors Lie to Themselves," The Washington Post, by Barry Ritholtz, The Washington Post, February 24, 2013 ---
http://www.ritholtz.com/blog/2013/02/pinocchio-investors/

. . .

How exactly do investors lie to themselves? Here are just 8 ways I discuss in the column:

1. You know what your investment returns are
2. You can predict the future.
3. You know how costs, fees and taxes impact your returns.
4. You can pick fund managers.
5. You understand mean reversion.
6. You have a plan.
7. You can pick stocks.
8. You are saving enough for retirement.

What are you lying to yourself about?

Jensen Question

We might also start a similar thread on the AECM about Pinocchio teachers.


From PwC Direct on February 21, 2013

The FASB and IASB (the "boards") reached decisions at their February 20 meeting on disclosure requirements, transition, and effective date for the revenue recognition standard. These decisions substantively conclude the boards' redeliberations on this project. The boards' decisions are tentative and subject to change. Any remaining "sweep" issues will be discussed at . ..

Click the Download Button  
http://www.pwc.com/us/en/cfodirect/publications/in-brief/2013-11-in-brief-boards-conclude-key-revenue-redeliberations-with-decisions-on-disclosures-and-transition.jhtml?display=/us/en/cfodirect/publications/in-brief&j=55862&e=rjensen@trinity.edu&l=10702_HTML&u=3314177&mid=7002454&jb=0

Also see Ernst & Young's take on the revenue recognition standard ---
http://www.ey.com/UL/en/AccountingLink/Current-topics-Revenue-recognition


"The High Burden of State and Federal Capital Gains Taxes," by Kyle Pomerleau, The Tax Foundation, February 20, 2013 ---
http://taxfoundation.org/article/high-burden-state-and-federal-capital-gains-taxes

Long-term Capital Gains Rate
Rank Country/State Capital Gains Rate
1 Denmark 42.0%
2 California 33.0%
3 France 32.5%
4 Finland 32.0%
5 New York 31.4%
6 Oregon 31.0%
7 Delaware 30.4%
8 New Jersey 30.4%
9 Vermont 30.4%
10 Maryland 30.3%
11 Maine 30.1%
12 Ireland 30.0%
13 Sweden    30.0%
14 Idaho 29.7%
15 Minnesota 29.7%
16 North Carolina 29.7%
17 Iowa 29.6%
18 Hawaii 29.4%
19 District of Columbia 29.1%
20 Nebraska 29.1%
21 Connecticut 29.0%
22 West Virginia 28.9%
23 Ohio 28.7%
24 Georgia 28.6%
25 Kentucky 28.6%

Jensen Comment
It saddens me with all the focus on capital gains rates relative to what should be a more important issue --- price level adjusting long-term capital gains. I would prefer capital gains taxes at ordinary income rates after adjusting for inflation.

Arthur P. Hall, Issues in the Indexation of Capital Gains, Tax Foundation Special Report No. 47 (Apr. 1995), http://taxfoundation.org/sites/taxfoundation.org/files/docs/dafa29992e4cfa82276853f47607c84d.pdf.


Warning:  Although tax reform is unlikely over the next four years, miracles do happen. Some of the strategies suggested in the links below may be less advisable under serious revisions of our nation's tax law. Always stay up to date on tax reform. Even if there are no broad reforms, selected reforms are possible. For example, the advantage of not realizing long-term capital gains until after you die might be revised even if there are no other remarkable changes in the tax code.

The really-needed revision of the tax code for capital gains is to adjust these gains for inflation. Doing so, however, doesn't have a snowball's chance in Hell.

When I forward tax advice links like the ones below it does not mean that I agree with every piece of the advice or that I hold myself out as being a tax expert. Although I taught accounting for 40 years, I never taught tax accounting. I rely on tax software like Turbo Tax as much or more than you rely on such software.

If you really need help with your taxes, first visit the truly great IRS Website at www.irs.gov
If that does not do the job seek out a genuine tax expert for advice. Remember that all people who charge you for doing tax returns are not necessarily experts on tax planning and strategy. All tax experts are not equal any more than all physicians, lawyers, or college professors are all equal.

 

The Tax Policy Center has a good online tool for making before-and-after estimations ---
http://calculator2.taxpolicycenter.org/index.cfm

From The Wall Street Journal Accounting Weekly Review on February 23, 2013

The New Capital-Gains Maze
by: Laura Saunders
Feb 16, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Accounting, Capital Gains Tax, Investment Sales, Tax Law, Tax Planning, Taxation

SUMMARY: Amid the political drama surrounding the "fiscal cliff" negotiations, some investors overlooked significant tax changes kicking in this year. Most notable: those on long-term capital gains, or taxable income from the sale of investments held longer than a year. These are significant increases, and they raise the value of tax deferral and careful planning. Investors who have begun to consider these issues-and many haven't-admit to being confused. Fortunately for investors, there still are ways to minimize the hit-and even dodge it. Strategies include carefully timing investment sales, making charitable donations and family gifts with assets instead of cash, and minimizing certain income. With markets approaching record highs, investors need to know them. Topics include: lowering AGI, using "air pockets", giving appreciated assets to charity, strategizing family gifts, among others.

CLASSROOM APPLICATION: This article offers a nice update regarding the changes in the tax law and how taxpayers can plan to legally minimize taxes. You can use this article to discuss each of the individual topics discussed in the article, as well as to show students how valuable tax planning services are for many taxpayers.

QUESTIONS: 
1. (Introductory) What were the "fiscal cliff" negotiations? How was the law regarding the sale of investments impacted? What were the biggest changes noted in this article?

2. (Advanced) What is adjusted gross income? What are the suggestions offered in the article regarding AGI? Why is AGI an important number for taxpayers?

3. (Advanced) What is an "air pocket" for tax purposes? How can a taxpayer use a so-called air pocket to reduce tax liability?

4. (Advanced) Please choose and explain three of the other tax planning ideas featured in the article. How could these ideas reduce tax liability without changing the overall effect of the underlying transaction?

5. (Advanced) If you choose to be a tax professional, how would you market your services based on what you learned from reading this article?
 

Reviewed By: Linda Christiansen, Indiana University Southeast

 

"The New Capital-Gains Maze," by Laura Saunders, The Wall Street Journal, February 16, 2013 ---
http://professional.wsj.com/article/SB10001424127887324432004578302123138871136.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

Chances are your capital-gains taxes are going up this year—and if you aren't careful, you could end up paying more than necessary.

Amid the political drama surrounding the "fiscal cliff" negotiations, some investors overlooked significant tax changes kicking in this year. Most notable: those on long-term capital gains, or taxable income from the sale of investments held longer than a year.

Under the old system, there were often only two rates: zero and 15%, depending on your income. Now, there are three tax tiers: zero, 15% and 20%. More Weekend Investor

Value Stocks Are Hot—But Most Investors Will Burn Out Cash Shouldn't Be the Only Apple of Your Eye Is It Time to Hock the Art? Beyond Long-Term Care Thinking of 'Shorting' Treasurys? Tread Lightly

And that isn't all. There also are three backdoor tax increases that can push your effective rate even higher—to nearly 25%.

Experts say many taxpayers whose rate still is 15% could well owe one-third more than they would have last year. And many top-bracket taxpayers will owe nearly two-thirds more, even if their income is that high only because of a once-in-a-lifetime sale.

"These are significant increases, and they raise the value of tax deferral and careful planning," says Vanguard Group tax expert Joel Dickson.

Investors who have begun to consider these issues—and many haven't—admit to being confused.

"I'm trying to figure out whether it's even worth it to have a taxable account," says Matt Reiland, a 32-year-old oil-industry financial analyst in Farmington, N.M., who now is putting away $1,000 a month.

Fortunately for investors, there still are ways to minimize the hit—and even dodge it. Strategies include carefully timing investment sales, making charitable donations and family gifts with assets instead of cash, and minimizing certain income. With markets approaching record highs, investors need to know them.

To be sure, long-term capital gains still retain many of the advantages investors have cherished for decades.

Unlike wages, capital gains often can be timed. Losses on one investment can be "harvested" and used to offset gains on other investments, even in different years. Up to $3,000 of capital losses still are deductible against "ordinary" income such as wages. And whatever an investor's top rate on gains, it often is far below the rate on ordinary income, which now can be more than 41%.

It isn't just capital gains that are affected by the tax changes. The new provisions also apply to many dividends, and some apply to other investment income, including interest. But these types of income often are more difficult to time than long-term gains.

Where You Stand

This year's changes divide taxpayers into three groups. For joint filers with more than $450,000 of taxable income or single filers with more than $400,000, the tax rate on long-term gains is fairly clear, if painful.

It starts with a flat tax of 20% above those thresholds. Add to that the new "Pease limit," a complex backdoor increase tied to itemized deductions that is named after Donald Pease, a former Ohio congressman. In effect, the Pease limit raises a taxpayer's rate by about 1%, according to experts at the Tax Policy Center, a nonpartisan research group in Washington.

Finally, there is a new 3.8% flat tax on net investment income—unless the investor has sold an actively managed business—for a total of about 25%.

Thus, for a taxpayer already in the top bracket, the tax on a $500,000 gain could rise to about $125,000 this year from $75,000 in 2012.

For taxpayers in the next income tier—couples with $72,500 to $450,000 of taxable income and single filers with $36,250 to $400,000—the effective rate on a gain is harder to predict.

It begins with a 15% flat rate, but taxpayers who cross certain income thresholds owe more because of the 3.8% net investment income tax, the Pease limit and the Personal Exemption Phaseout, or PEP, a backdoor increase that limits personal exemptions.

Here's how it could play out: Say a couple with two children in college and a third soon to go has an adjusted gross income of $220,000. They sell long-held investments to help pay tuition, realizing a $175,000 gain. Although they are in the 15% bracket for long-term gains, just as they were in 2012, they'll owe about $5,500 more than they would have last year due to the new 3.8% tax.

This is where planning can help. If the couple can lower their income by, say, raising retirement-plan contributions or spreading the gain over several years, or both, they might reduce or avoid the extra taxes.

"If they cut this year's gain to $50,000, the $5,500 would drop about $750," says Roberton Williams, a tax specialist at the Tax Policy Center.

The last group are investors who owe zero tax on their long-term gains. They often avoid the 3.8% tax, the Pease limit and the Personal Exemption Phaseout as well.

For couples filing jointly, the zero rate extends up to $72,500 ($36,250 for singles). That might sound like a low cutoff, says Silicon Valley tax strategist Stewart Karlinsky, an emeritus professor at San Jose State University, "but it includes more people than we used to think."

That's because these investors often have large amounts of tax-free income, thanks to municipal bonds or Roth individual retirement accounts. If so, they might be able to realize gains selectively to stay within the zero rate.

Sound complicated? It is—and the alternative minimum tax can make it worse. But careful planning is often worth the effort. Here is what to do to minimize your gains pain this year.

Lower your adjusted gross income. An especially confusing feature of the new capital-gains regime is that while rates are tied to taxable income, for most taxpayers the backdoor increases are tied to adjusted gross income.

That's the number at the bottom of the front page of the 1040. It doesn't include itemized deductions on Schedule A, such as mortgage interest and charitable gifts. Taxable income does.

To avoid the backdoor taxes, it is important to minimize your adjusted gross income. Itemized deductions won't help, but other tax benefits can. Among them: deductible contributions to retirement plans such as IRAs or 401(k)s; moving expenses; business deductions or losses; capital losses; rental-property expenses; alimony payments; and health insurance premiums or health-savings-account contributions, according to Mr. Karlinsky.

Tax-free income from municipal bonds or Roth IRAs won't swell adjusted gross income, either. Converting to a Roth IRA will, however, raise it in the year of the conversion.

Take advantage of "air pockets." The tax code stacks income, deductions and net long-term gains in a way that shrewd taxpayers can exploit.

Here's an example: A retired couple has $70,000 of adjusted gross income before capital gains and $30,000 of itemized deductions. (They might also have tax-free income from munis and Roth IRAs.) According to tax rules, the deductions reduce their income to about $40,000.

This leaves them with an "air pocket" of about $33,000 before they cross from the zero rate to the 15% rate on long-term gains.

If they take a $50,000 gain, nearly $33,000 of it won't be taxable, while the rest would be taxed at 15%. If their income remains constant for two years and they can split the gain between the two years (selling at the end of December and beginning of January, for example), the entire gain could be tax-free.

This is a great tax-code freebie. "People in the zero bracket can even harvest gains and raise their cost basis without owing federal taxes," says Mitch Marsden, a planner at Longview Financial Advisors in Huntsville, Ala. Unlike with assets sold at a loss, there's no waiting period to repurchase assets sold at a gain.

Of course, the value of multiyear strategies depends in part on Congress not changing the law again.

Give appreciated assets to charity. Higher taxes raise the value of making charitable donations with appreciated assets such as shares of stock instead of cash. Under current law and within certain limits, the donor gets to skip the tax and yet take a near-full deduction for the gift.

Strategize family gifts. Are you thinking of giving cash to relatives or friends in the same year that you plan to sell a long-held asset? If your recipient is in a lower capital-gains bracket, consider giving him all or part of the asset instead. Taxpayers can give presents of up to $14,000 per individual per year free of gift tax, and the move can save on capital-gains tax as well.

For example, say a woman wants to give $14,000 to her granddaughter, who is between jobs. If she gives $14,000 of stock shares she bought for $3,000, the granddaughter could sell the shares and pay no tax if her taxable income is below $36,250 this year. But if the grandmother sells the shares herself, the tax bite could range from $1,650 to more than $2,500.

Hold on for dear life. The tax code still forgives capital gains on assets held until death; at that point the asset's full market value becomes part of the taxpayer's estate. Now that the estate-tax exemption is a generous $5.25 million per individual (and indexed for inflation), some investors will find it makes sense to hold appreciated assets until death in order to avoid higher capital-gains taxes.

Consider installment sales. Assets such as land or a business can be hard to sell piecemeal. But an owner could sell the entire asset in an installment sale and spread out a gain over several years, assuming the deal makes overall sense.

Remember the home exemption. Couples who sell a principal residence after living in it at least two years get to skip paying tax on up to $500,000 of gains ($250,000 for singles); only above that does the gain become part of income.

Beware of lower limits for trusts. The new 3.8% tax on capital-gains and other investment income takes effect at $11,950 of adjusted gross income for trusts—far lower than the $250,000 threshold for individuals.

But there is an out: The lower limit applies to income that's retained by the trust, while income that's paid out to beneficiaries is taxed at their own rates.

"This puts pressure on trustees to make distributions," says Diana Zeydel, an estate lawyer at Greenberg Traurig in Miami. Yet the point of some trusts is to retain gains and accumulate assets, or at least to keep the beneficiary on a short tether. These issues require expert help.

Don't be driven by taxes. Don't sell—or hold—an asset just to beat Uncle Sam. Don't do an installment sale if you can't trust the buyer to pay up. And don't make charitable or personal gifts solely for tax reasons.

Continued in article

The Tax Policy Center has a good online tool for making before-and-after estimations ---
http://calculator2.taxpolicycenter.org/index.cfm

Bob Jensen's tax helpers are at
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation

Bob Jensen's personal finance helpers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#SmallBusiness


"Which Governments Spend the Most Per Capita on Government Healthcare: France, Italy, the United States, Sweden, Canada, Greece, or the United Kingdom?" by Daniel J. Mitchell, Townhall, February 22, 2013
http://www.townhallmail.com/fnbzdpfbzzgwdbzbwbdhfwcnnywnnbyfrrhpldgnrnybys_msycbpyncdb.html

 

See bar chart at
http://www.cs.trinity.edu/~rjensen/temp/HealthCostPerCapita.jpg

. . .

There are three big reasons why there’s more government-financed healthcare spending in the United States.

1. Richer nations tend to spend more, regardless of how they structure their healthcare systems.

2. As you can see at the 1:18 mark of this video, the United States is halfway down the road to a single-payer system thanks to programs such as Medicare and Medicaid.

3. America’s pervasive government-created third-party payer system leads to high prices and costly inefficiency.

So what’s the moral of the story? Simple, notwithstanding the shallow rhetoric that dominates much of the debate, the United States does not have anything close to a free-market healthcare system.

That was true before Obamacare and it’s even more true now that Obamacare has been enacted.

Indeed, it’s quite likely that many nations with “guaranteed” health care actually have more market-oriented systems than the United States.

Avik Roy argues, for instance, that Switzerland’s system is the best in the world. And the chart above certainly shows less direct government spending.

And there’s also the example of Singapore, which also is a very rich nation that has far less government spending on healthcare than the United States.

Continued in article

Jensen Comment
Articles like this are controversial and misleading. Firstly, we may be comparing apples and kangaroos when it comes to the terms "health care" and "cost." Much of the USA health care "cost" gets buried in other accounts like "research" and "education." The many research universities in the USA are contributing tuition and state taxpayer money to fund biomedical science faculty and other science and engineering faculty who are doing medical research and development in one way or another. But these costs are treated as "education"  and "research" costs rather than medical costs.

An enormous proportion of what the USA includes in costs of medical care is really the cost of fraud that other nations, especially those with either free market or nationalized coverage, avoid much more efficiently and effectively. The frauds are especially high in Medicare billings for our aged and disabled such as billings for nonexistent medical equipment and $6,384 cost of an aspirin administered inside a hospital.

Much of what gets billed as "medical care" in the USA is the massive cost of malpractice insurance, costs which nations like Canada with national health care cover much more efficiently and effectively by leaving out the lawyers salivating over punitive damages.

In the USA and Mexico much of the cost of geriatric and disability care is borne by patient savings and family earnings that does not pass through governmental or third-party insurance "medical care" accounts.. In nations with nationalized medicine like Norway such costs are more apt to be called "medical costs."

In the USA most patients like me bear their own eye care and dental billings out-of-pocket and are not captured in governmental "medical care" accounts. In many other nations the costs of these services pass through governmental accounts.

The USA spends (usually under Medicare) hundreds of billions on patients that are terminally ill, often extending their lives uselessly for weeks or a few months in intensive care and cardiac care units. Most other nations save this money by letting nature run its course for dying patients and/or facilitating euthanasia. CBS Sixty Minutes ran a module on this under the title "The High Cost of Dying" in the USA.

Similar discrepancies arise for extremely premature and/or underweight new babies that are not saved in most nations outside the USA.

The above comparison of nations by Daniel Mitchell is mostly an example of the many attempts (such as poverty and unemployment) to make international comparisons on variables that are inconsistently defined and subject to enormous measurement error and variation between nations

 

"Sandwich Generation: What are our Ethical Obligations to Care for our Aged-Parents and Children?" by accounting professor Steven Mintz, Ethics Sage, January 25, 2013 ---
http://www.ethicssage.com/2013/01/sandwich-generation.html

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


An accounting professor's commentary in the Chronicle of Higher Education
Is it random coincidence that he wrote about the Governor of California and Nuts in separate articles on the same day?

"A Governor's Attack on Academic Freedom," by Steven Mintz (the Ethics Sage), Chronicle of Higher Education, February 18, 2013 ---
http://chronicle.com/article/A-Governors-Attack-on/137367/?cid=cr&utm_source=cr&utm_medium=en

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

"Accounting for Nuts (Literally): Diamond Foods Fraud Illustrates the Danger of overly-optimistic Earnings Projections," by Steven Mintz, Ethics Sage, February 18, 2013 ---
http://www.ethicssage.com/2013/02/accounting-for-nuts.html

Bob Jensen's threads on Diamond Foods (including a teaching case) ---
http://www.trinity.edu/rjensen/Fraud001.htm
Search on the phrase "Diamond Foods"


To get an F on your term paper, cite Fox News, but CNN and MSNBC are good for an A

"A Professor vs. Fox News," by Scott Jaschik, Inside Higher Ed, February 15, 2015 ---
http://www.insidehighered.com/news/2013/02/15/professors-syllabus-bars-students-using-fox-news-assignment

Jensen Comment
I certainly hope this instructor will not get a full-time appointment.
Some accounting are proud of the fact that they don't read the Wall Street Journal
I don't think they will give an F to a student who cites an article in the WSJ
 

Bob Jensen's threads on the liberal bias of the Academy ---
www.trinity.edu/rjensen/HigherEdControversies.htm


Reflections on the Last Decade of IFRS Parts 1 and 2 in the free Australian Accounting Review

2012 Volume 22 Issue 3 Special Edition Part 1 on the last decade of IFRS

Capsule Summaries of Part 2
http://www.iasplus.com/en/news/2012/november/10-years-of-ifrs-reflections-and-expectations

2012 Volume 22 Issue 4 Special Edition Part 2 on the last decade of IFRS

Capsule Summaries of Part 2
http://www.iasplus.com/en/news/2013/02/10-years-of-ifrss-ii

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

 

The Australian Accounting Review

  1. 2012 - Volume 22 Australian Accounting Review
  2. 2011 - Volume 21 Australian Accounting Review
  3. 2010 - Volume 20 Australian Accounting Review
  4. 2009 - Volume 19 Australian Accounting Review
  5. 2008 - Volume 18 Australian Accounting Review
  6. 2007 - Volume 17 Australian Accounting Review
  7. 2006 - Volume 16 Australian Accounting Review
  8. 2005 - Volume 15 Australian Accounting Review
  9. 2004 - Volume 14 Australian Accounting Review
  10. 2003 - Volume 13 Australian Accounting Review
  11. 2002 - Volume 12 Australian Accounting Review
  12. 2001 - Volume 11 Australian Accounting Review
  13. 2000 - Volume 10 Australian Accounting Review
  14. 1999 - Volume 9 Australian Accounting Review
  15. 1998 - Volume 8 Australian Accounting Review
  16. 1997 - Volume 7 Australian Accounting Review
  17. 1996 - Volume 6 Australian Accounting Review
  18. 1995 - Volume 5 Australian Accounting Review
  19. 1994 - Volume 4 Australian Accounting Review
  20. 1993 - Volume 3 Australian Accounting Review
  21. 1992 - Volume 1 Australian Accounting Review
  22. 1991 - Volume 1 Australian Accounting Review

References for Comparisons of IFRS versus U.S. GAAP

From Ernst & Young in November 2012
US GAAP versus IFRS: The basics 
While convergence was a high priority for the FASB and the IASB in 2012, differences continue to exist between US GAAP and IFRS. In this guide, we provide an overview by accounting area of where the standards are similar, where differences are commonly found in practice, and how and when certain differences are expected to disappear
http://www.ey.com/Publication/vwLUAssetsAL/IFRSBasics_BB2435_November2012/$FILE/IFRSBasics_BB2435_November2012.pdf

Jensen Comment
This is only a 54-page document. I still prefer the somewhat older but much longer PwC document.

Older links to such comparisons:

 

US GAAP versus IFRS: The basics
2011 Edition, 56 Pages
Free from Ernst & Young
http://www.ey.com/Publication/vwLUAssetsAL/IFRSBasics_BB2280_December2011/$FILE/IFRSBasics_BB2280_December2011.pdf

IFRS and US GAAP: Similarities and Differences
2011 Edition, 238 Pages
From PwC
http://www.pwc.com/us/en/issues/ifrs-reporting/publications/ifrs-and-us-gaap-similarities-and-differences.jhtml
Note the Download button!

From Deloitte
Comparisons of IFRS With Local GAAPS
http://www.iasplus.com/dttpubs/pubs.htm#compare1109
IFRS and US GAAP
July 2008 Edition, 76 Pages
http://www.iasplus.com/dttpubs/0809ifrsusgaap.pdf

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

One key quotation is on Page 165

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

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

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

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

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

 


"PwC's 2013 Top 10 Technology Trends for Business:  Report Reveals the Emerging and Disruptive Technologies that Are Reshaping Strategies, Business Models, and Enterprise Investments," SmartPros, February 11, 2013 ---
http://accounting.smartpros.com/x74571.xml

. . .

According to PwC, 10 significant trends will impact businesses this year:

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

 


"Tax Advice for the Second Obama Administration," by Paul L. Caron, SSRN, February 18, 2013 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2220496

Abstract:
Twenty-five of the nation’s leading tax academics, practitioners, journalists, and public intellectuals gathered in Malibu, California on the Friday before President Obama’s second inauguration to plead for tax reform. The papers published in this issue of the Pepperdine Law Review provide very different prescriptions for America’s tax ills. But there is a unanimous diagnosis that the country’s tax system is sick indeed. A re-elected president’s inauguration offers a particularly propitious moment to put politics aside and embark on a treatment plan. If our lawmakers are interested in healing our tax wounds, the ideas presented in these pages offer a good place to begin. They run the gamut from relatively minor procedures to total transplantation. But all would improve the health of our current tax system.

Bob Jensen's tax helpers are at
http://www.trinity.edu/rjensen/Bookbob1.htm#010304Taxation


"Tax Pays: HP Pays Ernst & Young Two Million To Testify," by Francine McKenna, re:TheAuditors, February 18, 2013 ---
http://retheauditors.com/2013/02/18/tax-pays-hp-pays-ernst-young-two-million-to-testify/

The issue of tax avoidance by corporations is a hot one. In the US and in the UK, legislators and pundits seeking “tax justice” have changed the discussion from one of tax breaks that stimulate “jobs and growth” to one of tax fairness to provide much needed funds for public works and public commitments in time of economic hardship.

In December 2012, I wrote in the UK publication Accountancy on the subject of offshore profit shifting by corporations such as Starbucks, Google, Amazon, and other US multinationals. The UK is mad as hell and not going to take it anymore. It seems US multinationals move profits out of the UK via circuitous supply chain routes leaving no profits, no tax liability and, therefore, no tax revenue there, for all their hoopla here about success abroad.

Shifting

Multinationals are under increasing scrutiny for income shifting and offshoring profits. Francine McKenna reports

US corporations with activities in relatively high tax UK avoid tax on profits by moving income to tax havens. Loopholes in the US tax code allow corporations to do this with impunity. Governments continue to prioritise a ‘competitive tax environment for business’ in the hope corporations will convert profits into economic growth and jobs. Tax justice and a fair spread of the deficit reduction burden have been ignored.

Multinationals headquartered in the US often reduce income taxes by shifting profits offshore. Profit shifting erodes the corporate tax base and reduces overall tax revenues. Lower revenues are squeezing governments all over the world trying to provide services during a prolonged period of economic uncertainty and high sovereign debt. There are now significant differences in the tax burden among corporate taxpayers and an overall unequal burden on all taxpayers in the US and in the UK.

Here’s the PDF of that article from the December 2012 issue of Accountancy.

So it was quite a shock for me to learn that, when the debate landed in the US, HP paid Ernst & Young, probably the preeminent tax advisor of the Big Four accounting firms at least for US multinationals, for testimony before the Senate Subcommittee on Investigations in September.

Maybe it doesn’t seem strange to you to see $2 million in “Other” fees to the auditor show up on the HP proxy. Maybe you weren’t aware Ernst & Young is already being investigated by the SEC for independence violations related to tax lobbying. According to Reuters, Ernst & Young provided tax lobbying services to audit clients.

The last time we had a big Big Four independence rules crackdown, it was 2004. It was Ernst & Young again, sanctioned for its systems integrator relationship with PeopleSoft, an audit client. Ernst & Young was suspended from accepting new public company audit clients for six months.

I bet you can’t tell me about an SEC or PCAOB enforcement order for a similar firm-level independence offense since. But they do occur with some regularity, in my observation. There was one in Australia against KPMG that resulted in an enforcement order. It was suspiciously similar to what I reported regarding tax services provided by  KPMG to audit client GE. The KPMG GE issue went away quietly.

And I reported over the holidays about PwC’s systems integration relationship with audit client Thomson Reuters, an inappropriate business alliance that’s very similar to the PeopleSoft case. An SEC inquiry of the potential independence was inadvertently confirmed by PwC, to my editors at Forbes, when a PwC spokesman complained to them about my recent reporting. PwC told Forbes editors the SEC had called them about it even though I had “not given them much time that morning to respond to the story.”  PwC did not request a retraction or a correction to the story, only a chance to talk me and Forbes out of it.

That’s not going to happen.

Here’s what Ernst & Young did for HP – and Microsoft – in September of 2012. Microsoft was also called by Senator Carl Levin to testify. Microsoft is a tax lobbying client of Ernst & Young.

Let’s hope EY didn’t charge Microsoft for the same appearance.

Continued in artilce.

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


"Will You Have to Pay Capital Gains Taxes on the Sale of Your Home?" by Carrie Schwab Pomerantz, Townhall, February 21, 2013 --- Click Here
http://finance.townhall.com/columnists/carrieschwabpomerantz/2013/02/21/will-you-have-to-pay-capital-gains-taxes-on-the-sale-of-your-home-n1515764?utm_source=thdaily&utm_medium=email&utm_campaign=nl

Bob Jensen's tax helpers are at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2220496


Individual Retirement Account (IRA) --- http://en.wikipedia.org/wiki/Individual_retirement_account

There are several types of IRA:

There are two other subtypes of IRA, named Rollover IRA and Conduit IRA, that are viewed by some as obsolete under current tax law (their functions have been subsumed by the Traditional IRA); but this tax law is set to expire unless extended. However, some individuals still maintain these arrangements in order to keep track of the source of these assets. One key reason is that some qualified plans will accept rollovers from IRAs only if they are conduit/rollover IRAs.

What was formerly known as an Educational IRA is now called a Coverdell Education Savings Account.

Starting with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), many of the restrictions of what type of funds could be rolled into an IRA and what type of plans IRA funds could be rolled into were significantly relaxed. Additional acts have further relaxed similar restrictions. Essentially, most retirement plans can be rolled into an IRA after meeting certain criteria, and most retirement plans can accept funds from an IRA. An example of an exception is a non-governmental 457 plan which cannot be rolled into anything but another non-governmental 457 plan.

The tax treatment of the above types of IRAs except for Roth IRAs are substantially similar, particularly for rules regarding distributions. SEP IRAs and SIMPLE IRAs also have additional rules similar to those for qualified plans governing how contributions can and must be made and what employees are qualified to participate.

 

"Should You Contribute to a Non-Deductible IRA?" by Laura Adams, Money Girl, February 12, 2013 ---
http://moneygirl.quickanddirtytips.com/what-is-a-non-deductible-ira.aspx

Roth IRA --- http://en.wikipedia.org/wiki/Roth_IRA

Jensen Warning
Deborah Jacobs may have overstated the case for a Roth IRA. Ordinary folks should not choose a Roth IRA without expert tax advice

Mega-Roths
Remarkably, despite warnings of future large revenue losses, Congress has put no cap on the amount that can accumulate in a Roth IRA. Still, the Yelp shares in Levchin’s Roth do raise a legal issue. Tax rules bar you from investing your IRA or Roth IRA in a business you control—such a “prohibited transaction” can render the IRA immediately taxable and ­possibly subject to penalties.
Deborah L. Jacobs (see below)

"How Facebook Billionaires Dodge Mega-Millions In Taxes," by Deborah L. Jacobs, Forbes, March 20, 2012 ---
http://www.forbes.com/sites/deborahljacobs/2012/03/20/how-facebook-billionaires-dodge-mega-millions-in-taxes/

In 2010 Max R. Levchin, chairman of social review site Yelp, sold 3.1 million shares of Yelp held in his Roth individual retirement account. Most of the $10.1 million he received was profit. But Levchin, a 36-year-old serial entrepreneur who started PayPal with ­billionaire Peter Thiel in 1998, won’t ever have to pay a penny of income tax on those gains. That’s because all earnings in a Roth IRA are tax free so long as its owner waits until age 59 1/2 to take money out.

Moreover, Securities & Exchange Commission filings show Levchin still has 3.9 million shares of Yelp, now trading near $22, in his Roth. So it appears his tax-free “retirement” kitty is worth at least $95 million—and maybe a lot more. We don’t know, for example, if Levchin’s Roth owned stock in social app company Slide, which he started in 2004 and sold to Google for $182 million in 2010. If Levchin doesn’t spend his mega-Roth in retirement, he can leave it to his kids or grandkids, who can, under current law, stretch out income-tax-free growth and withdrawals for decades.

Levchin isn’t the only tech titan who’s got a shrewd tax advisor. Buried in recent SEC filings for Facebook, Zynga and LinkedIn are other examples of legal moves the ultrarich use to shield big dollars from the ­taxman. These techniques are available to the merely well-off, too, but they produce the most dramatic savings when executed early in a hot company’s—or hot entrepreneur’s—life.

How early? Facebook billionaire cofounders Mark Zuckerberg and Dustin Moskovitz are both 27, unmarried and have no children we know of. Yet back in 2008 they both set up grantor retained annuity trusts (GRATs) that we estimate will allow them to transfer a total of at least $185 million of wealth to future offspring or others, gift tax free. That compares to a supposed gift-tax exemption of just $1 million in 2008 and $5.12 million today.

Both the Obama Administration and congressional Democrats have proposed new limits on GRATs. Meanwhile, you may want to copy the social tech wizards, if you have high-growth investments to shelter.

Mega-Roths

Remarkably, despite warnings of future large revenue losses, Congress has put no cap on the amount that can accumulate in a Roth IRA. Still, the Yelp shares in Levchin’s Roth do raise a legal issue. Tax rules bar you from investing your IRA or Roth IRA in a business you control—such a “prohibited transaction” can render the IRA immediately taxable and ­possibly subject to penalties.

It’s clear that if you own a small business, your IRA or Roth IRA can’t invest in it. But what if you are chairman or CEO of a private firm with many investors and buy its shares for your Roth? SEC filings show that in 2001, while CEO of ­PayPal, tech investor Thiel bought 1.7 million shares of that company for 30 cents a share through his Roth. In 2002 eBay bought out PayPal for $19 a share—an apparent $31.5 million tax-free profit for Thiel. It also appears from a letter we discovered in a federal court case that some of Thiel’s early investment in Facebook was also through his Roth IRA. He now sits on Facebook’s board.

Is this kosher? FORBES has been told reward-seeking informants are filing claims with the IRS Whistleblower Office, flagging such transactions as improper. But IRA expert Noel Ice says it’s a gray area, with little IRS or court guidance. Buying closely held stock for an IRA is probably okay, he says, so long as the IRA’s owner doesn’t have—when all his investments are combined—voting control of that company. Levchin, Thiel and the IRS wouldn’t comment.

The lesson for ordinary folks? Put investments with the highest growth potential in your Roth. Note: If you do want to put nonpublicly traded stock in an IRA or a Roth IRA, you’ll generally need to use a special custodian who handles “self-directed” IRAs. (The big brokers, banks and mutual fund companies that hold most IRAs generally limit investments to publicly traded stock, bonds, mutual funds and bank CDs.) Levchin and Thiel have used San Francisco-based Pensco Trust Co. to hold their Roth IRAs.

The Facebook GRATs

Thanks to a 2000 Tax Court decision ­involving a member of the billionaire Walton clan, which founded Wal-Mart, it’s now possible to transfer large amounts of wealth to heirs gift tax free using a grantor retained annuity trust. The person who wants to transfer wealth (the grantor) puts shares into the ­irrevocable trust and retains the right to ­receive an annual payment back from the trust for a period of time—say, 2 to 15 years. If the grantor survives that period, any property left in the trust when the annual payments end passes to family members.

The key is this: In calculating how much value will be left at the end—and thus how big a gift the grantor is making—the IRS doesn’t look at the performance of the actual stock in the trust. Instead, it assumes the trust assets are earning a paltry government-determined interest rate. With a zeroed-out, or “Walton” GRAT, the grantor receives an annuity that leaves nothing for heirs—if assets grow only at the IRS’ lowly interest rate. If they grow faster, the excess goes to heirs gift tax free. (If assets don’t grow, the grantor is no worse off, because the annuity can be paid by returning some shares each year to the grantor.)

Continued in article

 

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

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


"KRUGMAN: Sweden Has The Answers To Our Taxation Problems," by Kamelia Angelova, Business Insider, February 12, 2013 ---
http://www.businessinsider.com/paul-krugman-on-taxes-2013-2 

The above link is a video of Paul Krugman being interviewed. He seems to be holding an earlier Sweden as having some type of taxation and welfare spending program that's an ideal without mentioning that the current Sweden and other Nordic nations are  trying to change all that by:

Either Professor Krugman is ignorant of the changes taking place in Sweden (which I doubt) or he's selectively trying to mislead his audience. He should be more careful in selectively choosing examples he promotes as ideals. This is not, in my viewpoint, the type of selectivity we want in our Academy.

 

Special Report in The Economist magazine that the liberal television stations and newspapers are keeping secret
"Northern lights:  The Nordic countries are reinventing their model of capitalism," by Adrian Wooldridge, The Economist, February 2, 2013, pp. 1-6 ---
http://www.economist.com/news/special-report/21570840-nordic-countries-are-reinventing-their-model-capitalism-says-adrian

THIRTY YEARS AGO Margaret Thatcher turned Britain into the world’s leading centre of “thinking the unthinkable”. Today that distinction has passed to Sweden. The streets of Stockholm are awash with the blood of sacred cows. The think-tanks are brimful of new ideas. The erstwhile champion of the “third way” is now pursuing a far more interesting brand of politics.

Sweden has reduced public spending as a proportion of GDP from 67% in 1993 to 49% today. It could soon have a smaller state than Britain. It has also cut the top marginal tax rate by 27 percentage points since 1983, to 57%, and scrapped a mare’s nest of taxes on property, gifts, wealth and inheritance. This year it is cutting the corporate-tax rate from 26.3% to 22%.

Sweden has also donned the golden straitjacket of fiscal orthodoxy with its pledge to produce a fiscal surplus over the economic cycle. Its public debt fell from 70% of GDP in 1993 to 37% in 2010, and its budget moved from an 11% deficit to a surplus of 0.3% over the same period. This allowed a country with a small, open economy to recover quickly from the financial storm of 2007-08. Sweden has also put its pension system on a sound foundation, replacing a defined-benefit system with a defined-contribution one and making automatic adjustments for longer life expectancy.

Most daringly, it has introduced a universal system of school vouchers and invited private schools to compete with public ones. Private companies also vie with each other to provide state-funded health services and care for the elderly. Anders Aslund, a Swedish economist who lives in America, hopes that Sweden is pioneering “a new conservative model”; Brian Palmer, an American anthropologist who lives in Sweden, worries that it is turning into “the United States of Swedeamerica”.

There can be no doubt that Sweden’s quiet revolution has brought about a dramatic change in its economic performance. The two decades from 1970 were a period of decline: the country was demoted from being the world’s fourth-richest in 1970 to 14th-richest in 1993, when the average Swede was poorer than the average Briton or Italian. The two decades from 1990 were a period of recovery: GDP growth between 1993 and 2010 averaged 2.7% a year and productivity 2.1% a year, compared with 1.9% and 1% respectively for the main 15 EU countries.

For most of the 20th century Sweden prided itself on offering what Marquis Childs called, in his 1936 book of that title, a “Middle Way” between capitalism and socialism. Global companies such as Volvo and Ericsson generated wealth while enlightened bureaucrats built the Folkhemmet or “People’s Home”. As the decades rolled by, the middle way veered left. The government kept growing: public spending as a share of GDP nearly doubled from 1960 to 1980 and peaked at 67% in 1993. Taxes kept rising. The Social Democrats (who ruled Sweden for 44 uninterrupted years from 1932 to 1976 and for 21 out of the 24 years from 1982 to 2006) kept squeezing business. “The era of neo-capitalism is drawing to an end,” said Olof Palme, the party’s leader, in 1974. “It is some kind of socialism that is the key to the future.”

The other Nordic countries have been moving in the same direction, if more slowly. Denmark has one of the most liberal labour markets in Europe. It also allows parents to send children to private schools at public expense and make up the difference in cost with their own money. Finland is harnessing the skills of venture capitalists and angel investors to promote innovation and entrepreneurship. Oil-rich Norway is a partial exception to this pattern, but even there the government is preparing for its post-oil future.

This is not to say that the Nordics are shredding their old model. They continue to pride themselves on the generosity of their welfare states. About 30% of their labour force works in the public sector, twice the average in the Organisation for Economic Development and Co-operation, a rich-country think-tank. They continue to believe in combining open economies with public investment in human capital. But the new Nordic model begins with the individual rather than the state. It begins with fiscal responsibility rather than pump-priming: all four Nordic countries have AAA ratings and debt loads significantly below the euro-zone average. It begins with choice and competition rather than paternalism and planning. The economic-freedom index of the Fraser Institute, a Canadian think-tank, shows Sweden and Finland catching up with the United States (see chart). The leftward lurch has been reversed: rather than extending the state into the market, the Nordics are extending the market into the state.

Why are the Nordic countries doing this? The obvious answer is that they have reached the limits of big government. “The welfare state we have is excellent in most ways,” says Gunnar Viby Mogensen, a Danish historian. “We only have this little problem. We can’t afford it.” The economic storms that shook all the Nordic countries in the early 1990s provided a foretaste of what would happen if they failed to get their affairs in order.

There are two less obvious reasons. The old Nordic model depended on the ability of a cadre of big companies to generate enough money to support the state, but these companies are being slimmed by global competition. The old model also depended on people’s willingness to accept direction from above, but Nordic populations are becoming more demanding.

Small is powerful

The Nordic countries have a collective population of only 26m. Finland is the only one of them that is a member of both the European Union and the euro area. Sweden is in the EU but outside the euro and has a freely floating currency. Denmark, too, is in the EU and outside the euro area but pegs its currency to the euro. Norway has remained outside the EU.

But there are compelling reasons for paying attention to these small countries on the edge of Europe. The first is that they have reached the future first. They are grappling with problems that other countries too will have to deal with in due course, such as what to do when you reach the limits of big government and how to organise society when almost all women work. And the Nordics are coming up with highly innovative solutions that reject the tired orthodoxies of left and right.

The second reason to pay attention is that the new Nordic model is proving strikingly successful. The Nordics dominate indices of competitiveness as well as of well-being. Their high scores in both types of league table mark a big change since the 1980s when welfare took precedence over competitiveness.

The Nordics do particularly well in two areas where competitiveness and welfare can reinforce each other most powerfully: innovation and social inclusion. BCG, as the Boston Consulting Group calls itself, gives all of them high scores on its e-intensity index, which measures the internet’s impact on business and society. Booz & Company, another consultancy, points out that big companies often test-market new products on Nordic consumers because of their willingness to try new things. The Nordic countries led the world in introducing the mobile network in the 1980s and the GSM standard in the 1990s. Today they are ahead in the transition to both e-government and the cashless economy. Locals boast that they pay their taxes by SMS. This correspondent gave up changing sterling into local currencies because everything from taxi rides to cups of coffee can be paid for by card.

The Nordics also have a strong record of drawing on the talents of their entire populations, with the possible exception of their immigrants. They have the world’s highest rates of social mobility: in a comparison of social mobility in eight advanced countries by Jo Blanden, Paul Gregg and Stephen Machin, of the London School of Economics, they occupied the first four places. America and Britain came last. The Nordics also have exceptionally high rates of female labour-force participation: in Denmark not far off as many women go out to work (72%) as men (79%).

Flies in the ointment

This special report will examine the way the Nordic governments are updating their version of capitalism to deal with a more difficult world. It will note that in doing so they have unleashed a huge amount of creativity and become world leaders in reform. Nordic entrepreneurs are feeling their oats in a way not seen since the early 20th century. Nordic writers and artists—and indeed Nordic chefs and game designers—are enjoying a creative renaissance.

The report will also add caveats. The growing diversity of Nordic societies is generating social tensions, most horrifically in Norway, where Anders Breivik killed 77 people in a racially motivated attack in 2011, but also on a more mundane level every day. Sweden is finding it particularly hard to integrate its large population of refugees.

The Nordic model is still a work in progress. The three forces that have obliged the Nordic countries to revamp it—limited resources, rampant globalisation and growing diversity—are gathering momentum

Continued in article

Note that on Page 5 there's also a section entitled "More for Less" devoted to Welfare Capitalism.

Jensen Comment
It appears that among the Nordics only Norway will continue to afford socialism, but this is because oil-rich Norway is a leading OPEC nation less concerned with the need for private sector growth.

There are of course serious obstacles to applying the new Nordic capitalism to the USA. Firstly, the USA is not bound by the Arctic Ocean on the north and the North Sea on the south that greatly discourages illegal immigration and narcotics. Secondly, the Nordic countries have difficult languages that are not studied to a significant degree in other nations. For example, I'm told that if you weren't raised in Finland you can never understand the language. Thirdly, there's no existing infrastructure to absorb and aid illegal immigrants in Scandinavia. Scandinavians like my grandparents, Ole, Sven, and Lena emigrated from these hard and cold countries rather than immigrating to these lands.

Scandinavians have avoided the crippling costs of building up powerful military forces and have not tried to become the police force of the world.

Scandinavians also avoided the horrors in importing millions of slaves and the centuries of social costs and degradations that followed. Nor did they have to go to war, to a serious degree, with indigenous peoples to take over the land by trickery and force.

"The Nordic model for unemployment insurance," Sober Look, January 11, 2013 ---
http://soberlook.com/2013/01/the-nordic-model-for-unemployment.html 

Bob Jensen's comparisons of the American versus Denmark dreams ---
http://www.cs.trinity.edu/~rjensen/temp/SunsetHillHouse/SunsetHillHouse.htm

Bob Jensen's threads on why Vermont is trying to increase its unemployment rate ---
http://www.cs.trinity.edu/~rjensen/temp/Political/PoliticalQuotationsCommentaries.htm#VermontWelfare


"What’s Wrong with the Financial Services Industry?" by Barry Ritholtz, Ritholtz Blog, February 21, 2013 ---
http://www.ritholtz.com/blog/2013/02/whats-wrong-with-the-financial-services-industry/

If you hang around these parts for any length of time, you will occasionally run across a jeremiad of mine complaining about the Financial Services Industry.

I’ve been thinking about this more than usual lately. This has led to some correspondence with Helaine Olen, whose book Pound Foolish: Exposing the Dark Side of the Personal Finance Industry is next up in my queue. (Her appearance on the TDS yesterday is here). It is similar to the deep dive my colleague Josh Brown took in Backstage Wall Street.

My criticism is somewhat different than Helaine’s (though I am sympatico with much of her view). I break down the problems as follows:

 

Simplicity does not pay well: Investing should be relatively simple: Buy broad asset classes, hold them over long periods of time, rebalance periodically, get off the tracks when the locomotive is bearing down on you. The problem is its easier in theory than is reality to execute this.

Confusion is not a bug, its a feature:   Thus, the massive choice, the nonstop noise the confusing claims, all work to make this much more complex than it needs to be.

Too much money attracts the wrong kinds of people: Let’s face it, the volume of cash that passes through the Financial Services Industry is enormous. Few who enters finance does so for altruistic reasons.

Incentives are misaligned: As I’ve written previously, too many people are unwilling to get rich slowly. Hence, some of the wrong people work in finance, and some of the right people exercise bad judgment.

Too many people have a hand in your pocket:  The list of people nicking you as an investor is enormous. Insiders (CEO/CFO/Boards of Directors) transfer wealth from shareholders to themselves, with the blessing of corrupted Compensation Consultants. Active mutual funds charge way too much for sub par performance. 401(k)s are disastrous. NYSE and NASDAQ Exchanges have been paid to allow a HFT tax on every other investor. FASB and Accountants have doen an awful job, allowing corporations to mislead investors with junk balance statements. The Media’s job is to sell advertising, not provide you with intelligent advice. The Regulators have been captured.

What’s the net impact of all this on your investments ?

The Financialized US Economy: The above list reflects nearly half a century of the financialization of the broader US economy. Instead of serving industry, finance has trumped it. This led directly to the financial crisis and economic collapse of 2007-09.

Human Nature: Then there is your own behavioral issues. On top of everything else, you are governed by a brain that simply wasn’t built for this.

All of these add up to a system that is flawed, and often fails to do its job.

Continued in article

Large public accounting firms are probably not in favor of simplifying the tax code
February 17, 2013 message from Richard Sansing

This week's issue of The Economist has a special report on
off-shore finance. This article discusses the role of large
public accounting firms.


http://www.economist.com/news/special-report/21571556-accounting-firms-will-do-nicely-under-any-set-rules-merry-enablers

Jensen Content
Note that "simplicity does not pay well" in consulting!
I wonder to what extent large CPA firms want simplified accounting and auditing rules (to increase profits on audits) and highly complex regulations and financing alternatives (to increase profitability of consulting). Thus far in the 21st Century everything seems to becoming more complicated., which is probably why audits are not especially profitable relative to consulting.

However, unless a new regulation is put in place to rotate audit firms, auditing contributes heavily to fixed costs annually due to the tendency of clients to stick with the same auditing firms year after year. Consulting engagements come and go making them not especially reliable for paying fixed costs but making them profitable on top of the fixed costs paid for by audit engagements. Thant's my $.02.


Definition of Screwed:
avg mkt return ~12%, avg mutual fund ret ~9%, average investor ret ~ 2.6%. Timing, selection, and costs destroy

Finance Professor Jim Mahar

"Romancing Alpha (α), Breaking Up with Beta (β)," by Barry Ritholtz, Ritholtz, February 15, 2013 ---
http://www.ritholtz.com/blog/2013/02/alpha-beta/

Since it is a Friday (following Valentine’s Day), I want to step back from the usual market gyrations to discuss a broader topic: The pursuit of Alpha, where it goes wrong, and the actual cost in Beta.
 

For those of you unfamiliar with the Wall Street’s Greek nomenclature, a quick (and oversimplified) primer: When we refer to Beta (β), we are referencing a portfolio’s correlation to its benchmark returns, both directionally and in terms of magnitude.
 

We use a scale of 0-1. Let’s say your benchmark is the S&P500 — it has a β = 1. Something uncorrelated does what it does regardless of what the SPX does, and its Beta is = 0. We can also use negative numbers, so a Beta of minus 1 (-1) does the exact opposite of the benchmark.
 

Beta measures how closely your investments perform relative to your benchmark. If you were to do nothing else but buy that benchmark index (i.e., S&P500), you will have captured Beta (for these purposes, I am ignoring volatility).

The other Greek letter we want to mention is Alpha (α). Alpha is the risk-adjusted return of active management for any investment. The goal of active management is through a combination of stock/sector selection, market timing, hedging, leverage, etc. is to beat the market. This can be described as generating Alpha.

To oversimplify: Alpha is a measure of out-performance over Beta.

Why bring this up today?

Over the past few months, I have been looking at an inordinate number of portfolios and 401(k) plans that have all done pretty poorly. I am not referring to any one quarter of even year, but rather, over the long haul. There is an inherent selection bias built into this group — well performing portfolios don’t have owners considering switching asset managers. But even accounting for that bias, a hefty increase in the sheer number of reviews leads me to wonder about just how widespread the under-performance is.
 

One of the things that has become so obvious to me over the past few years is how unsuccessful various players in the markets have been in their pursuit of Alpha. We know that 80% or so of mutual fund managers underperform their benchmarks each year. We have seen Morningstar studies that show of the remaining 20%, factor in fees, and that number drops to 1%.
 

The overall performance of the highest compensated group of managers, the 2%+20% Hedge Fund community, has been similarly awful, as they have underperformed for a decade or more.

Continued in article

Bob Jensen's threads on how brokers and security analysts are rotten to the core ---
http://www.trinity.edu/rjensen/FraudRotten.htm


The USA's National Debt is Now Over $16 trillion and spinning out of control --- http://www.usdebtclock.org/
Who are the major investors in slightly over $11 trillion of that USA National Debt?

"Who Owns the U.S. Treasury Market?"  by Barry Ritholtz, Ritholtz, February 1, 2013 ---
http://www.ritholtz.com/blog/2013/02/
Note the pie charts.


Questions
What has been the percentage of tuition increase at AACSB schools since 2007-2008?
How much will a Stanford University versus Harvard University MBA diploma cost?

"Stanford Increases MBA Tuition," by Louis Lavelle, Bloomberg Business Week, February 13, 2013 ---
http://www.businessweek.com/articles/2013-02-13/stanford-increases-mba-tuition

. . .

The Stanford University Board of Trustees on Feb. 11 approved a 3.9 percent tuition increase for MBA students attending the Stanford Graduate School of Business. The annual cost will rise from $57,300 to $59,534 for the incoming class in 2013-14. Current MBA students will continue to pay $57,300 under a policy allowing students to pay the same tuition rate for each of their two years of study.

With the increase, the total cost of Stanford’s two-year MBA program will near at least $200,000. For a single student living on campus, the total will be $185,530 including housing and other living expenses, books, transportation, and insurance. For a student living off campus with a spouse or partner, the same list of expenses will total $221,290. A required study trip can cost up to $4,000 more.

Madhav Rajan, a senior associate dean who heads the Stanford MBA program, noted that the cost of a Stanford MBA is partially offset by grants. “The average scholarship (free money not loans) to entering MBAs this year was $25,562 and 50 percent of students got some amount of money,” he said in an e-mailed statement. “For what it is worth, we think that’s relevant in this context.”

At Harvard Business School, current tuition is $53,500 per year, putting the total cost of a Harvard MBA at $174,400 for a single student. Tuition and fees at Wharton total $62,034, with total costs for the two-year program of $184,000.

Stanford is hardly alone is raising tuition. A recent study by the Association to Advance Collegiate Schools of Business found that MBA tuition and fees at AACSB-accredited business schools in North America and Asia-Pacific have risen by 33 percent since 2007-08, with more modest increases reported in Europe and Latin America.

Continued in article

Jensen Comment
This is a better deal if you live on one raw potato a day and sleep under the stars on "The Farm." You would not want to be sleeping under the stars this time of year at Dartmouth, Yale, Harvard, or Wharton, especially Dartmouth early this morning.

Years ago when I was in Stanford's PhD program (fortunately on a free ride) one of my friends on campus was a brilliant physicist from France. He completed his examinations and dissertation in one year. His complaint before leaving was that before getting his diploma Stanford charged him for an additional two more years of tuition. Of course tuition was a pittance (something like $4,000 per year) in those years compared to the 21st Century.

Fortunately, my fellowship plus what I earned teaching a course in the Economics Department were sufficient for my room and board on campus. In those days Stanford had a big old house on campus that housed some business students, including me. An added plus was that the old house was in the shadows of the dorms for women.

I was not as brilliant as my French friend and stayed at Stanford over five years. Those were the days my friend!


Yet another illustration that accounting standards are seldom neutral in the economy. This illustration concerns how the City of Houston may declare bankruptcy due to new GASB pension accounting rules. I might add that I'm all for the new GASB rules.

"New accounting rules put City's net assets at risk," by Bill King, Houston Chronicle, February 15, 2013 ---
http://www.chron.com/opinion/king/article/New-accounting-rules-put-city-s-net-assets-at-risk-4283476.php

When an employer sponsors a defined benefit pension, the employer is deferring some of the payment to the employee for the services the employee is rendering. The employer is in reality borrowing money from the employee, taking the employee's services today in exchange, in part, for a payment in the future.

When defined benefit plans were first developed, the accounting rules did not require that the employer recognize that it was, in essence, incurring a liability for these future promises of compensation. Over time, the accounting rules have been tightened to reflect the financial reality of the transaction. Also, employers and employees now almost universally set money aside each year to fund these future benefits.

The problem, however, is that it is difficult to know how much money to set aside today for a benefit that will not be paid for several decades. Over the years, actuaries have developed mathematical models for estimating whether the money that has been set aside will be sufficient to pay the benefits that have been earned.

If these actuarial estimates show that the amount is insufficient, the plan is said to have an unfunded liability, that is, the employer owes the employees more than it has set aside.

For many years, private companies have been required to show these estimated liabilities on their financial statements. However, the accounting rules for governmental entities have been much less rigorous. As a result, governmental entities normally show only a fraction of the actual shortfall on their balance sheet.

For example, the city of Houston's last financial statement only showed about $2.5 billion in pension and retiree health care debts. But according to the actuarial studies the real debt is more than $5 billion.

However, that is about to dramatically change. The Government Accounting Standard Board (GASB), the group charged with promulgating accounting rules for governmental entities, issued two new rules late last year designed to bring the financial statements more in line with reality.

First, the GASB is going to require that the assets in the trust be valued at market. You may wonder why such a rule would be necessary, but retirement plans generally "smooth" the investment gains and losses over a five-year period. Almost all plans today are using this rule to defer loses incurred in recent years.

The second change mandated by the GASB relates to the assumed investment rate. Actuaries "discount" the amount an employer owes at a rate equal to what the plan expects to earn on the assets in its trust. The higher the assumed rate, the lower the estimated liability will be. All three of the Houston plans assume a rate of 8.5 percent.

This is the highest rate used by any plan in the country and is only used by a handful of plans. The new rule forces entities to use a more realistic discounting formula.

The effect of these rule changes is not trivial. Craig Mason, the city's chief pension officer, has estimated that the rule changes could add more than $2 billion to what the city now shows on its balance sheet for pension debt. And he is probably being conservative.

Considering that the city's net assets are now down to just over $3 billion and steadily going downhill, a $2 billion hit would put technical insolvency, (i.e., liabilities exceed assets) just around the corner.

It is important to note that the true underlying financial condition of the city will not change just because the GASB changes the accounting rules. The truth is that the city is probably already technically insolvent. GASB is just going to force us all to acknowledge that the emperor has no clothes.

Continued in article

The losing New York Times wants to dump the losing Boston Globe

From the CFO Morning Ledger on February 21, 2013

Pension liabilities loom as NYT puts Globe on the block. The New York Times is exploring a sale of the Boston Globe, its only remaining business outside the core NYT media brand, Bloomberg reports. Times Co. tried to sell the Globe as recently as 2009, but pension liabilities got in the way. At least one bid at the time reached about $33 million in cash, but fluctuating estimates on the Boston Globe’s pension liability — ranging from $110 million to $240 million — scuttled any deal. Bidders, who would assume the full pension liability, were unclear on the total value of the pension.

Bob Jensen's threads on the sad state of pension accounting in both the public and private sectors ---
http://www.trinity.edu/rjensen/Theory02.htm#Pensions


"The Inside Story of Diageo's Stunning Carbon Achievement ," by Andrew Winston, Harvard Business Review Blog, February 20, 2013 --- Click Here
http://blogs.hbr.org/winston/2013/02/the-inside-story-of-diageos-st.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Bob Jensen's threads on triple-bottom reporting ---
http://www.trinity.edu/rjensen/Theory02.htm#TripleBottom


Teaching Case from The Wall Street Journal Weekly Accounting Review on February 15, 2013

A New Rx for Tax Bills
by: Jonathan Rockoff
Feb 07, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Accounting, Corporate Tax, Effective Tax Rates, Intangible Assets, International Business, R&D Credit, Tax Planning, Tax Strategy, Taxation

SUMMARY: Drug makers are taking new steps to lower their taxes significantly, in a boon to their bottom lines. Many drug makers pay effective tax rates of 20% or higher. Firms that are seeking even lower rates don't specify their strategies, and the details can vary. But the efforts typically involve shifting revenue overseas where it can be taxed at a lower rate than in the U.S. Some companies also noted the tax benefit they will receive this year from a federal tax credit for research and development. Reductions in their tax rates could mean hundreds of millions of dollars in extra profit for drug makers, without having to sell more drugs or launch new ones.

CLASSROOM APPLICATION: This article is rich in examples of corporate tax strategies to minimize tax liability in a legal way. Students can see how structuring companies and deals can impact tax liability. One focus is the use of overseas affiliates by multinational companies, in addition to the savings from the research and development credit.

QUESTIONS: 
1. (Introductory) What strategies are drug manufacturers using to reduce tax liabilities? What is the potential magnitude of the tax savings for each of these companies mentioned in the article?

2. (Advanced) What are "effective tax rates"? How do those differ from marginal tax rates? How are effective tax rates affected by the tax strategies discussed in the article? How is corporate profitability affected by these strategies?

3. (Advanced) What are intangible assets? How are they used by multinational companies to save tax dollars? How are those ideas structured?

4. (Advanced) Why does the tax law allow for these types of tax planning? Are these good reasons for allowing these activities? Why or why not?
 

Reviewed By: Linda Christiansen, Indiana University Southeast

 

"A New Rx for Tax Bills," by Jonathan Rockoff, The Wall Street Journal, February 4, 2013 ---
http://professional.wsj.com/article/SB10001424127887324906004578288353281028598.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

Drug makers are taking new steps to lower their taxes significantly, in a boon to their bottom lines.

Bristol-Myers Squibb Co., BMY +1.27% in its recent earnings call, estimated its tax rate would be about 16% this year, excluding special items, down from 23% last year. Then Gilead Sciences Inc. GILD +0.48% said its rate could "decline over time" if a hepatitis C drug it is developing receives approval, because of steps the company has taken to lower taxes on the drug's sales. Also, Amgen Inc. AMGN -0.26% reported it paid an effective tax rate of 15.9% last year, and predicts an adjusted rate of 14% or 15% this year.

Many drug makers pay effective tax rates of 20% or higher. Firms that are seeking even lower rates don't specify their strategies, and the details can vary. But the efforts typically involve shifting revenue overseas where it can be taxed at a lower rate than in the U.S., experts say. Some companies also noted the tax benefit they will receive this year from a federal tax credit for research and development.

Reductions in their tax rates could mean hundreds of millions of dollars in extra profit for drug makers, without having to sell more drugs or launch new ones.

Bristol Chief Financial Officer Charles Bancroft said during an earnings call on Jan. 24 that Bristol's tax rate would drop, citing the company's double-counting of a federal tax credit for research and development in 2013; a change in its earnings mix amid generic competition to blockbuster drug Plavix; and a "restructuring that we did." Mr. Bancroft didn't go into further details, and a company spokeswoman cited the same factors.

For Bristol, the lower tax rate could raise profits by $200 million in 2013, estimates ISI Group analyst Mark Schoenebaum. After Bristol announced the reduced tax burden, some analysts raised their estimates for Bristol's earnings per share, and at least one increased his valuation for the stock.

"Can I restructure my taxes too?!" Sanford Bernstein's Tim Anderson titled his note on Bristol earnings. "At the guided level, this tax rate is now well below any other drug name we cover," he wrote. He also wrote that Bristol declined to explain why its tax rate "is now substantially lower" than its rivals or how it restructured some legal entities in order to lower its tax rate.

Meantime, Gilead Chief Financial Officer Robin Washington said during an earnings call Monday that the intellectual property for its hepatitis C compound "is domiciled in Ireland. Ms. Washington didn't go into further detail, and a Gilead spokeswoman declined further comment.

Gilead estimates its tax rate for 2013 to be 26% to 28%, using "non-GAAP" measures that don't conform to generally accepted accounting principles. By shifting revenue on the compound to Ireland, Gilead could cut its overall tax rate to 21% or 22%, Mr. Schoenebaum estimates.

The impact on Gilead's profit is only a projection since the compound, known as GS-7977, hasn't been approved. Yet the lower taxes could mean $500 million or more a year in extra profit if the drug's sales meet high expectations, Mr. Schoenebaum said. The drug is expected to be one of the world's top-selling medicines if approved, with analysts predicting world-wide sales of as much as $7 billion a year.

An Amgen spokesman said the biotech company's 2013 rates would be lowered in part by the federal tax credit for research and development for this and last year, and noted that the 2012 rate doesn't count the impact of excise taxes in Puerto Rico. Amgen provided its 2012 and estimated 2013 tax rates in its Jan. 23 earnings release.

The opportunity to cut tax rates is available to multinational companies with high-value "intangible assets," such as software, know-how or patent-protected drugs, said H. David Rosenbloom, director of the international tax program at New York University School of Law. The companies can shift part or all of these assets—along with the revenue they generate—to a country outside the U.S., like Ireland, with lower taxes.

A typical approach, Mr. Rosenbloom said, is for multinational companies to establish an affiliate overseas and agree to share with it the costs of an intangible product in development. The affiliate becomes the owner of the newly developed product and would receive its revenue outside the U.S.

Continued in article


A License to Steal from Foreign Students:  Would this anger the real Aristotle?
"Not What They Signed Up For?" by Elizabeth Redden, Inside Higher Ed, February 18, 2013 ---
http://www.insidehighered.com/news/2013/02/18/international-students-complain-about-quality-education-unaccredited-california

Jensen Comment
Maybe this is more of an excuse to enter the U.S. and then disappear in the crowd.


Question
How many recent fraudsters were just horsing around?

Hint:
Nothing can probably top horse breeder Rita Grundwell in Dixon Illionois
"Rita Crundwell, Ill. financial officer (Dixon, Illinois horse enthusiast) who allegedly stole $53 million, sentenced to 19.5 years in prison," by Casey Glynn, CBS News, February 14, 2013 ---
http://www.cbsnews.com/8301-504083_162-57569411-504083/rita-crundwell-ill-financial-officer-who-allegedly-stole-$53-million-sentenced-to-19.5-years-in-prison/

Now we have a former hot tempered NFL heavy hitter covered with Tax Court horse manure. Some of the players he hurt violently probably think this is sweet-smelling justice.

Answer
"Former NFL Tough Guy Bill Romanowski Gets Laid Out By Tax Court," by Tony Nitti, Forbes, February 20, 2013 --- Click Here
http://www.forbes.com/sites/anthonynitti/2013/02/20/former-nfl-pro-bowler-bill-romanowski-sacked-by-tax-court-yes-i-know-romanowski-played-defense-puns-are-hard/

During his 16-year NFL career, former 49ers/Eagles/Broncos/Raiders linebacker Bill Romanowski was no stranger to controversy. Whether he was breaking QB Kerry Collins’ jaw in a preseason game, spitting in the face of opposing wide receiver J.J. Stokes, or ending the career of a teammate with a punch to the eye during a training camp scuffle.

Romanowski had a habit of making news for all the wrong reasons; his propensity for poor decisions often overshadowing his consistently solid play.

It would appear Romanowski’s decision-making didn’t improve with retirement, because earlier today it was revealed that immediately after Romanowski stopped playing on Sundays, he got caught up in a tax shelter. As a result, the Tax Court denied $13 million worth of losses taken on the Romanowskis’ 2003 tax return from a purported horse-breeding business, holding the footballer liable for approximately $4.6 million in additional tax.

In 2003, Romanowski got hooked up with a Denver attorney who immediate began singing the praises of ClassicStar, a horse-breeding business. In short, the program involved leasing mares owned by ClassicStar, which in turn would provide boarding and care for the mares and breed the mares to stallions. Any foals produced from the breeding would belong to the Romanowskis.

In October 2003, an accountant of ClassicStar worked up an “NOL illustration,” indicating that in order to offset their taxable income from 1998 through 2002, the Romanowskis would need to generate a loss of $13,092,732 from their horse-breeding activity. Thus, it was decided that the Romanowskis would invest that amount in the program to produce foals.  (As an aside, let it be noted that basing an investment on the amount of loss necessary to wipe out previous tax liabilities, rather than a motivation for profits, will never be viewed favorably by the IRS.)

Soon after joining the program, things began to turn sour for the Romanowskis, and they were partly to blame. When they signed the mare lease agreement, the Romanowskis  had not negotiated or seen a list of the horse pairings they would receive for their breeding program. Rather, they relied on ClassicStar to pick the horse pairings they would receive.

This reliance on ClassicStar was clearly misplaced, because despite the fact that the Romanowskis were promised 68 pairings of thoroughbreds, the horses actually received were more Mr. Ed than Secretariat. In fact, only four of the 68 listed pairings were thoroughbred horses; the remaining pairings were quarter horses.

Even though over 90% of the horses on the schedule were not delivered as promised, the Romanowskis chose to continue with the program, explaining to the court that they had reached an oral agreement from ClassicStar under which it would substitute an unknown number of thoroughbred pairings in for the listed quarter horse pairings.

The Romanowskis received an income and expense summary for 2003 from ClassicStar which showed no income and total expenses of $13,092,732. The resulting loss offset their 2003 income, and net operating losses were carried back to 1998, 1999, 2000, 2001, and 2002, resulting in a federal tax refund of nearly $4 million.

The IRS denied the loss in full, arguing that the Romanowskis’ horse-breeding activity was not entered into for profit and was thus governed by the hobby-loss rules of Section 183.

As a reminder, if an activity constitutes a for-profit trade or business, expenses may generally be deducted in full under Section 162. To the contrary, if an activity is not entered into for profit, it is a hobby, and expenses can only be deducted to the extent of any income generated by the activity.

To help taxpayers and the IRS decide if an activity is entered into for profit or a hobby, the regulations under Section 183 (the so-called ”hobby loss rules”), provide  nine factors, which if answered in the affirmative, are indicative of a for-profit business.

1. The manner in which the taxpayer carries on the activity. Does he complete accurate books? Were records used to improve performance?

2. The expertise of the taxpayer or his advisers. Did the taxpayer study the activities business practices? Did he consult with experts?

3. The time and effort expended by the taxpayer in carrying on the activity. Does he devote much of his personal time and effort?

4. The expectation that the assets used in the activity may appreciate in value. Is the plan to generate profits through asset appreciation?

5. The success of the taxpayer in carrying on similar or dissimilar activities. Has he converted other activities from unprofitable to profitable?

6. The taxpayer’s history of income or losses with respect to the activity.  Has the taxpayer become profitable in a reasonable amount of time?

7. The amount of occasional profits. Even a single year of profits can be a strong indication that an activity is not a hobby.

8. The financial status of the taxpayer. Does the taxpayer have other income sources that are being offset by the losses of the activity?

9.  Does the activity lack elements of personal pleasure or recreation? If the activity has large personal elements it is indicative of a hobby.

In Romanowski, the Tax Court analyzed these factors and overwhelmingly concluded that the Romanowskis did not enter into the breeding arrangement with ClassicStar with the intent to make a profit. They Romanowskis kept no records; rather, they relied on ClassicStar to do everything. They neglected to fight for their bargained-for number of thoroughbreds, a clear indication, in the court’s eyes, that they were not carrying on the activity in a businesslike manner.

Continued in article

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


"Rita Crundwell, Ill. financial officer (Dixon, Illinois horse enthusiast) who allegedly stole $53 million, sentenced to 19.5 years in prison," by Casey Glynn, CBS News, February 14, 2013 ---
http://www.cbsnews.com/8301-504083_162-57569411-504083/rita-crundwell-ill-financial-officer-who-allegedly-stole-$53-million-sentenced-to-19.5-years-in-prison/

Jensen Comment
Since she will be in a Federal Club Fed she can't look forward to early parole. She also faces a number of state court trials that will heap pain on to misery.

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


SEC Will Debut New Software for Discovering Accounting Anomalies
"SEC developing new fraud detection technology," by Dina ElBoghdady, The Washington Post, February 15, 2013 --- Click Here
http://www.washingtonpost.com/business/economy/sec-developing-new-fraud-detection-technology/2013/02/15/ffb5f686-771c-11e2-aa12-e6cf1d31106b_story.html

The Securities and Exchange Commission plans to launch computer software this year to spot accounting anomalies, including potential fraud, in the financial statements that companies file with the agency.

The software would scan a firm’s financial disclosures, assess risk factors and generate a score based on a model developed by the agency, Craig Lewis, the SEC’s chief economist, said in a recent speech. The score would be used to identify outliers within a peer group.

“It is a model that allows us to discern whether a registrant’s financial statements stick out from the pack,” said Lewis, who also heads the agency’s risk, strategy and financial innovation division.

The software is scheduled to be available in nine months.

The effort is the most recent sign of the agency’s commitment to beef up its technological prowess as it tries to better police Wall Street and avoid oversight lapses such as the ones that allowed Bernard Madoff’s Ponzi scheme to go undetected for years.

The SEC has acknowledged that it lags behind the industries it regulates when it comes to technology, in part because of a tight budget that is subject to the whims of Congress. While nearly all financial regulators operate on fees collected from the industries they oversee, the SEC’s funding is decided by lawmakers on a year-to-year basis. Uncertainty about the budget makes it difficult to commit to technology or upgrade it.

The SEC took that into account when it embarked on its most ambitious technological endeavor in recent history — a software package that will stream real-time trade data from the exchanges into the agency’s headquarters. Rather than build the technology from scratch at great expense, the agency purchased it from a New Jersey firm called Tradeworx. The project, called Market Information Data Analytics, or MIDAS, is in the final testing phases.

The new software is based on a model that the SEC has used to evaluate hedge fund returns and identify fraud, mostly by looking for performance that was inconsistent with a fund’s investment strategy. The agency has brought seven cases based on information culled from that project since 2011.

“This success has only fed our ambition for what we can do with sophisticated data-driven monitoring programs,” Lewis said. The goal is to make use of the “veritable treasure trove of information” that the SEC regularly receives from companies.

The new software would focus on accounting anomalies.

Under the 2002 Sarbanes-Oxley law, the SEC must examine the financial filings from public companies every three years. But only recently have all companies been required to file those forms in a digital format with computer-readable tags that make it easy to search for and compare items of data, either for a single firm over time or across companies.

The new software would search for unusual accounting by looking at various risk factors such as frequent changes in auditors or delays in the release of earnings. But it would not be used solely to detect fraud. It could also pinpoint areas in which companies can improve the quality of their financial disclosures, Lewis said.

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


The law does not pretend to punish everything that is dishonest. That would seriously interfere with business.
Clarence Darrow --- Click Here  

"CEO in fraud case needs more than seven days prison: court," by Jonathan Stempel, Reuters, February 15, 2013 ---
http://www.reuters.com/article/2013/02/15/us-ceo-sentencing-decision-idUSBRE91E0W320130215

A former chief executive who pleaded guilty to wrongdoing in a scheme that ultimately helped drive his company into bankruptcy could have been sent to prison for 10 years. The trial judge thought seven days was fair.

Not long enough, a federal appeals court said on Friday.

The 6th U.S. Circuit Court of Appeals said Michael Peppel, the former chief executive of the audio-visual technology company MCSi Inc, must be resentenced for his 2010 guilty plea to charges of conspiracy to commit fraud, false certification of a financial report, and money laundering.

U.S. District Judge Sandra Beckwith in Cincinnati abused her discretion in sentencing Peppel to an "unreasonably low" week behind bars based almost solely on her belief that the defendant was "a remarkably good man," the appeals court said.

Prosecutors had charged Peppel in December 2006 over an alleged fraud they said had begun six years earlier, amid financial difficulties at his publicly traded, Dayton, Ohio-based company.

Peppel was accused of working with his chief financial officer to inflate results through sham transactions with a firm called Mercatum Ltd, and companies such as FedEx Corp (FDX.N) that were not implicated in wrongdoing. Prosecutors said he also sold $6.8 million of MCSi stock during this time.

By the end of 2003, MSCI was bankrupt, and a reported 1,300 people had lost their jobs.

Citing the need to punish Peppel and deter others, the government asked Beckwith at his October 2011 sentencing to impose a 97- to 121-month prison term. This was the length recommended, but not required, under federal guidelines.

But the judge said the five years since the indictment had been "punishing, literally and figuratively" for Peppel, who had begun working for an online pharmacy to support his five children. He also had a brother with multiple sclerosis.

"Michael's mistakes do not define him," Beckwith said. "I see it to be wasteful for the government to spend taxpayers' money to incarcerate someone that has the ability to create so much for this country and economy."

She also imposed a $5 million fine and the maximum three years of supervised release.

Circuit Judge Karen Nelson Moore, however, wrote for a unanimous three-judge appeals court panel that Beckwith was wrong to rely on "unremarkable aspects" of Peppel's life in imposing a "99.9975% reduction" to the recommended prison term.

"There is nothing to indicate that the support provided by Peppel to his family, friends, business associates, and community is in any way unique or more substantial than any other defendant who faces a custodial sentence," Moore wrote.

Beckwith was not immediately available for comment.

Ralph Kohnen, a lawyer for Peppel, on Friday said: "We expect that the judge will exercise the same common sense and fairness in imposing a similar sentence on remand."

Continued in article

 

Bob Jensen's threads on how White Collar Crime Pays Even if You Know You're Going to Get Caught ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays

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


From the CFO Morning Ledger on February 20, 2013

FCPA Resource Guide: 10 Issues to Consider

With the release of “FCPA: A Resource Guide to the U.S. Foreign Corrupt Practices Act,” executives have more information about how the Department of Justice and the SEC view compliance with the Foreign Corrupt Practices Act and companies' anti-corruption programs and efforts. Learn 10 overarching themes in the guide to consider when reviewing FCPA compliance programs and actions that might be taken to help strengthen them.

See http://deloitte.wsj.com/cfo/2013/02/20/fcpa-resource-guide-10-issues-to-consider/

 

Foreign Corrupt Practices Act Compliance Guidebook: Protecting Your Organization from Bribery and Corruption
Martin T. Biegelman and Daniel R. Biegelman
Wiley, 2010
ISBN: 978-0-470-52793-1


The President Is Raging Against a Budget Crisis He Created:  Obama invented the 'sequester' in the summer of 2011 to avoid facing up to America's spending," by John Boehner, The Wall Street Journal. February 19, 2013 ---
http://professional.wsj.com/article/SB10001424127887323495104578314240032274944.html?mod=djemEditorialPage_h&mg=reno64-wsj 

A week from now, a dramatic new federal policy is set to go into effect that threatens U.S. national security, thousands of jobs and more. In a bit of irony, President Obama stood Tuesday with first responders who could lose their jobs if the policy goes into effect. Most Americans are just hearing about this Washington creation for the first time: the sequester. What they might not realize from Mr. Obama's statements is that it is a product of the president's own failed leadership.

The sequester is a wave of deep spending cuts scheduled to hit on March 1. Unless Congress acts, $85 billion in across-the-board cuts will occur this year, with another $1.1 trillion coming over the next decade. There is nothing wrong with cutting spending that much—we should be cutting even more—but the sequester is an ugly and dangerous way to do it.

By law, the sequester focuses on the narrow portion of the budget that funds the operating accounts for federal agencies and departments, including the Department of Defense. Exempt is most entitlement spending—the large portion of the budget that is driving the nation's looming debt crisis. Should the sequester take effect, America's military budget would be slashed nearly half a trillion dollars over the next 10 years. Border security, law enforcement, aviation safety and many other programs would all have diminished resources.

How did the country find itself in this mess?

During the summer of 2011, as Washington worked toward a plan to reduce the deficit to allow for an increase in the federal debt limit, President Obama and I very nearly came to a historic agreement. Unfortunately our deal fell apart at the last minute when the president demanded an extra $400 billion in new tax revenue—50% more than we had shaken hands on just days before.

It was a disappointing decision by the president, but with just days until a breach of the debt limit, a solution was still required—and fast. I immediately got together with Senate leaders Harry Reid and Mitch McConnell to forge a bipartisan congressional plan. It would be called the Budget Control Act.

The plan called for immediate caps on discretionary spending (to save $917 billion) and the creation of a special House-Senate "super committee" to find an additional $1.2 trillion in savings. The deal also included a simple but powerful mechanism to ensure that the committee met its deficit-reduction target: If it didn't, the debt limit would not be increased again in a few months.

But President Obama was determined not to face another debt-limit increase before his re-election campaign. Having just blown up one deal, the president scuttled this bipartisan, bicameral agreement. His solution? A sequester.

With the debt limit set to be hit in a matter of hours, Republicans and Democrats in Congress reluctantly accepted the president's demand for the sequester, and a revised version of the Budget Control Act was passed on a bipartisan basis.

Ultimately, the super committee failed to find an agreement, despite Republicans offering a balanced mix of spending cuts and new revenue through tax reform. As a result, the president's sequester is now imminent.

Both parties today have a responsibility to find a bipartisan solution to the sequester. Turning it off and erasing its deficit reduction isn't an option. What Congress should do is replace it with other spending cuts that put America on the path to a balanced budget in 10 years, without threatening national security.

Having first proposed and demanded the sequester, it would make sense that the president lead the effort to replace it. Unfortunately, he has put forth no detailed plan that can pass Congress, and the Senate—controlled by his Democratic allies—hasn't even voted on a solution, let alone passed one. By contrast, House Republicans have twice passed plans to replace the sequester with common-sense cuts and reforms that protect national security.

The president has repeatedly called for even more tax revenue, but the American people don't support trading spending cuts for higher taxes. They understand that the tax debate is now closed.

The president got his higher taxes—$600 billion from higher earners, with no spending cuts—at the end of 2012. He also got higher taxes via ObamaCare. Meanwhile, no one should be talking about raising taxes when the government is still paying people to play videogames, giving folks free cellphones, and buying $47,000 cigarette-smoking machines.

Washington must get serious about its spending problem. If it can't reform America's safety net and retirement-security programs, they will no longer be there for those who rely on them. Republicans' willingness to do what is necessary to save these programs is well-known. But after four years, we haven't seen the same type of courage from the president.

The president's sequester is the wrong way to reduce the deficit, but it is here to stay until Washington Democrats get serious about cutting spending. The government simply cannot keep delaying the inevitable and spending money it doesn't have.

So, as the president's outrage about the sequester grows in coming days, Republicans have a simple response: Mr. President, we agree that your sequester is bad policy. What spending are you willing to cut to replace it?

Mr. Boehner, a Republican congressman from Ohio, is speaker of the House.


OECD report highlights ugly increase in profit-shifting trend

"The missing $20 trillion How to stop companies and people dodging tax, in Delaware as well as Grand Cayman," The Economist, February 16-20, 2013, Page 13 ---
http://www.economist.com/news/leaders/21571873-how-stop-companies-and-people-dodging-tax-delaware-well-grand-cayman-missing-20

. . .

Dodgy of Delaware

The archetypal tax haven may be a palm-fringed island, but as our special report this week makes clear, there is nothing small about offshore finance. If you define a tax haven as a place that tries to attract non-resident funds by offering light regulation, low (or zero) taxation and secrecy, then the world has 50-60 such havens. These serve as domiciles for more than 2m companies and thousands of banks, funds and insurers. Nobody really knows how much money is stashed away: estimates vary from way below to way above $20 trillion.

Not all these havens are in sunny climes; indeed not all are technically offshore. Mr Obama likes to cite Ugland House, a building in the Cayman Islands that is officially home to 18,000 companies, as the epitome of a rigged system. But Ugland House is not a patch on Delaware (population 917,092), which is home to 945,000 companies, many of which are dodgy shells. Miami is a massive offshore banking centre, offering depositors from emerging markets the sort of protection from prying eyes that their home countries can no longer get away with. The City of London, which pioneered offshore currency trading in the 1950s, still specialises in helping non-residents get around the rules. British shell companies and limited-liability partnerships regularly crop up in criminal cases. London is no better than the Cayman Islands when it comes to controls against money laundering. Other European Union countries are global hubs for a different sort of tax avoidance: companies divert profits to brass-plate subsidiaries in low-tax Luxembourg, Ireland and the Netherlands.

Reform should thus focus on rich-world financial centres as well as Caribbean islands, and should distinguish between illegal activities (laundering and outright tax evasion) and legal ones (fancy accounting to avoid tax). The best weapon against illegal activities is transparency, which boils down to collecting more information and sharing it better. Thanks in large part to America’s FATCA, small offshore centres are handing over more data to their clients’ home countries—while America remains shamefully reluctant to share information with the Latin American countries whose citizens hold deposits in Miami. That must change. Everyone could do more to crack down on the use of nominee shareholders and directors to hide the provenance of money. And they should make sure that information about the true “beneficial” owners of companies is collected, kept up-to-date and made more readily available to investigators in cases of suspected wrongdoing. There are costs to openness, but they are outweighed by the benefits of shining light on the shady corners of finance.

Want more tax? Lower the tax rate

Transparency will also help curb the more aggressive forms of corporate tax avoidance. As Starbucks’s experience has shown, companies that shift money around to minimise their tax bills endanger their reputations. The more information consumers have about such dodges, the better.

Moral pressure is not the whole answer, though: consumers get bored with campaigns, and governments should not bash companies for trying to reduce their tax bills, if they do so legally. In the end, tax systems must be reformed. Governments need to make it harder for companies to use internal (“transfer”) pricing to avoid tax. Companies should be made to book activity where it actually takes place. Several federal economies, including America, already prevent companies from exploiting the differences between states’ rules. An international agreement along those lines is needed.

Governments also need to lower corporate tax rates. Tapping companies is inefficient: firms pass the burden on to others. Better to tax directly those who ultimately pay—whether owners of capital, workers or consumers. Nor do corporate taxes raise much money: barely more than 2% of GDP (8.5% of tax revenue) in America and 2.7% in Britain. Abolishing corporate tax would create its own problems, as it would encourage rich people to turn themselves into companies. But a lower rate on a broader base, combined with vigilance by the tax authorities, would be more efficient and would probably raise more revenue: America, whose companies face one of the rich world’s highest corporate-tax rates on their worldwide income, also has some of the most energetic tax-avoiders.

These reforms would not be easy. Governments that try to lower corporate tax rates will be accused of caving in to blackmailing capitalists. Financial centres and incorporation hubs, from the City of London to Delaware, will fight any attempt to tighten their rules. But if politicians really want to tax the missing $20 trillion, that’s where they should start.


"FBI, IRS investigate account connected to Pittsburgh police chief's office," by Jonathan D. Silver and Liz Navratil, by Pittsburgh Post-Gazette, February 15, 2013 ---
http://www.post-gazette.com/stories/local/neighborhoods-city/fbi-irs-investigate-account-connected-to-pittsburgh-police-chiefs-office-675523/
Thank you Caleb Newquist for the heads up.

FBI, IRS investigate account connected to Pittsburgh police chief's office February 15, 2013 3:02 pm Larry Roberts/Post-Gazette file Pittsburgh Police Chief Nate Harper.

Pittsburgh Police Chief Nate Harper.

Click image to enlarge Share with others: 0 inShare Related Media:

FBI removes Pittsburgh police credit union files Feb. 13: FBI seizure of Pittsburgh police files linked to probe into use of funds

Investigators with both the FBI and IRS have been removing documents from the Greater Pittsburgh Police Federal Credit Union for the past week in connection with an account opened by the office of Pittsburgh police Chief Nate Harper, the president of the credit union's board of directors said this morning.

Frank Amity, a retired city homicide detective, said there have been multiple subpoenas served on credit union CEO Karen Janoski.

Ms. Janoski could not be reached for comment Thursday evening. This morning, a woman who appeared to be a credit union employee at the West End institution told a reporter that Ms. Janoski did not wish to be interviewed.

Mr. Amity said he has not seen the subpoenas.

"They're looking at an account that the chief's office opened up. What they're looking for, they don't tell us. There's just one account, as far as I know," Mr. Amity said. "It's opened by the chief's office, so I don't know what kind of an account they have there. It's not a personal account. There's other names on it."

Asked how he knew the account was connected to Chief Harper's office, Mr. Amity said, "Because it's opened by the people in the chief's office."

When asked about the FBI's visit to the credit union, Deputy police Chief Paul Donaldson said through spokeswoman Diane Richard, "I have no statement to make. It is our position that when a matter/incident is under investigation that no statement will come from the bureau."

Mr. Amity declined to say whether the account in question was active or closed, how much was in it, whose names are on it or who could withdraw money from it. He said he believes it was opened in the past five years. Mr. Amity said multiple people had access to the funds, which he characterized as "not a whole hell of a lot of money, I'll tell you that...It's not tens of thousands."

The 78-year-old financial institution on Chartiers Avenue in the city's Elliott neighborhood functions similarly to a bank with a clientele that includes active police officers.

A source familiar with the investigation told the Pittsburgh Post-Gazette that the visit by federal agents is connected to a subpoena served Monday on the City of Pittsburgh Law Department.

The law department arranged to have federal agents guided Tuesday around Pittsburgh police headquarters on the North Side, where the FBI removed boxes of documents from the bureau's special events and personnel and finance offices. Deputy Chief Paul Donaldson said he believes the FBI is investigating allegations of internal misappropriation of funds involving the police bureau's special events and personnel and finance offices.

Special events handles the coordination of officers' moonlighting. Private employers send the office checks typically made out to the police bureau or the city treasurer. The money includes payment for the officers, which is handled through their payroll department, and a surcharge known as a "cost recovery fee." That surcharge totaled nearly $800,000 last year. The checks are sent to the bureau's personnel and finance office. They are then supposed to be deposited in city accounts.

"We don't know anything. We complied with the subpoena, that's all. They've been in for about a week on and off. They're just giving us different subpoenas for different things," Mr. Amity said. "I don't know what the heck the account was used for."

Mr. Amity said there was a credit or debit card associated with the account.

Continued in article

Bob Jensen's threads on how White Collar Crime Pays Even if You Know You're Going to Get Caught ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays

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


Teaching Case from The Wall Street Journal Weekly Accounting Review on February 15, 2013

Foreign Risks Light Up for Philip Morris
by: Spencer Jakab
Feb 07, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Accounting, International Business, Managerial Accounting, Market Segmentation, Segment Analysis, Segment Reporting

SUMMARY: America is a nation of quitters. That isn't always a bad thing - smoking being a case in point. Decades of advertising bans, excise-tax increases and public-education campaigns have cut adults' per capita cigarette consumption from a peak of 4,345 in 1963 to less than a quarter of that. Adding insult to injury for tobacco companies, huge government settlements and countless private lawsuits have made what is left of the business burdensome and risky. But the rest of the world looks very different - a big reason for the spinoff of Philip Morris International Inc. from Altria Group Inc. in 2008. Business is strong, as Philip Morris is seen reporting fourth-quarter earnings per share of $1.22, up from $1.08 in the year-earlier period. Creating a separate company was a good idea. But investors' expectations may need adjustment.

CLASSROOM APPLICATION: This article illustrates how Altria has analyzed the global markets for one of its products (cigarettes) and is focusing on the parts of the world with the greatest profitability. This is a current, real-world example of how managerial accounting concepts, and market segmentation in particular, can improve profitability and valuations.

QUESTIONS: 
1. (Introductory) What challenges had Altria faced with its ownership of Altria Group Inc.? What did the company do in response to these challenges?

2. (Advanced) What is segment reporting? How is it calculated and used? Why is it valuable? How did Altria use segment analysis to analyze markets and strategize for Philip Morris products?

3. (Advanced) How does profitability compare across the various tobacco companies? How do those returns compare with companies in other industries?

4. (Advanced) What factors are limiting Philip Morris products in the U.S.? Which of these factors are within the control of Philip Morris? Which are outside of the company's control?

5. (Advanced) What other industries could benefit from similar strategies? What products would work well with segment reporting?
 

Reviewed By: Linda Christiansen, Indiana University Southeast
 

RELATED ARTICLES: 
Russia's Parliament Passes Anti-Smoking Bill on Final Reading
by Lukas Alpert
Feb 12, 2013
Online Exclusive

Curbs on Smokers Continue to Grow
by James Hagerty
Dec 28, 2013
Page: A6

EU Proposes Tougher Tobacco Rules
by Anna Molin
Dec 19, 2013
Online Exclusive

Altria Profit Up Amid Market-Share Gains
by John Kell
Jan 31, 2013
Page: B4

 

"Foreign Risks Light Up for Philip Morris," by Spencer Jakab, The Wall Street Journal, February 7, 2013 ---
http://professional.wsj.com/article/SB10001424127887324906004578288153914262178.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

America is a nation of quitters. That isn't always a bad thing—smoking being a case in point. Decades of advertising bans, excise-tax increases and public-education campaigns have cut adults' per capita cigarette consumption from a peak of 4,345 in 1963 to less than a quarter of that, according to the American Lung Association. Adding insult to injury for tobacco companies, huge government settlements and countless private lawsuits have made what is left of the business burdensome and risky.

But the rest of the world looks very different—a big reason for the spinoff of Philip Morris International Inc. PM -1.08% from Altria Group Inc. MO -1.93% in 2008. Business is strong, as Philip Morris is seen reporting fourth-quarter earnings per share of $1.22 Thursday, based on analysts polled by FactSet, up from $1.08 in the year-earlier period.

Creating a separate company was a good idea. But investors' expectations may need adjustment.

In theory, a tobacco company freed from the U.S. had way more growth potential and less risk. Take Russians, who are less litigious and, it seems, health conscious: The average Russian smokes around 2,700 cigarettes a year, as many cigarettes as an American did back in 1990, and the market is shrinking only slowly. India is at the opposite end of the spectrum, consuming less than 90 per capita. Plenty of open prairie there for the Marlboro Man.

Little wonder, then, that investors in Philip Morris since its spinoff have made a handsome annualized return of 21.5%, more than three times that of the S&P 500.

What is surprising is that purely domestic manufacturers have done nearly as well. Lorillard Inc. LO -2.16% has achieved an annualized return of 20.5% since its spinoff from Loews Corp. L 0.00% in 2008. Former Philip Morris owner Altria has returned 20.1% annualized.

At 16 times trailing earnings, Philip Morris maintains a 13% valuation premium over domestic companies. But while it is more diversified, the risks for Philip Morris actually look greater. While American laws could always get stricter, there are limits. The potential for adverse changes abroad seems greater. Some of Philip Morris's largest markets, such as Russia, are considering strict new rules.

The health gains and revenue potential from such moves are obvious, and Russia is far from the only country to grasp that. Where there's smoke, there's fire.

 


Teaching Case from The Wall Street Journal Weekly Accounting Review on February 15, 2013

Apple Cash Pile Sets Off a Battle
by: Jessica Lessin, Telis Demos, and David Benoit
Feb 08, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Accounting, Cash, Cash Management, Financial Accounting, Financial Ratios, Financial Statement Analysis, Preferred Stock

SUMMARY: For nearly 18 months, Tim Cook, CEO of Apple, has kept a stream of new products rolling, produced a string of robust quarterly results and introduced a dividend and stock buyback expected to cost $45 billion over three years. But an attack from one of Apple's prominent investors underscores how that approach may not be enough anymore, especially amid intensifying industry competition and the company's slowing growth.

CLASSROOM APPLICATION: The article should be a great one to catch our students' attention because it involves Apple. Whether someone loves Apple or hates it, one must admit that the company is interesting from a financial standpoint. You can use this article in a discussion about cash management, and it would be excellent for financial statement analysis.

QUESTIONS: 
1. (Introductory) What are the facts of David Einhorn's lawsuit against Apple? What are his demands? Is he in a position to make demands of Apple?

2. (Advanced) How would each of Apple's financial statements appear under Mr. Einhorn's plan versus Mr. Cook's plan? How do the financial statements differ? Draft the journal entries (just the accounts, no dollar amounts) for the various aspects of each of the plans.

3. (Advanced) What is the history of the price of Apple's shares? What are the reasons for these stock price changes? How many of the reasons are related directly to financial statement information rather than other factors?

4. (Advanced) What is the purpose of preferred stock? How does it differ from common stock? When is preferred stock an appropriate vehicle for a company?

5. (Advanced) Why is it good for a company to have a large amount of cash? What are the possible problems with having large amounts of cash? Why has Apple accumulated so much cash? Is this common among businesses or is it an unusual position?
 

SMALL GROUP ASSIGNMENT: 
Research Apple's financial statements for the past five years. Prepare a complete set of financial ratios and analyze. Compare over five years, studying trends. What is interesting about the company's financial situation? Is Mr. Einhorn justified in his position? Or is he misguided? Please offer support for your answer.

Reviewed By: Linda Christiansen, Indiana University Southeast
 

RELATED ARTICLES: 
Apple's Cash Conundrum: Pay Tax or Borrow?
by Steven Russolillo
Feb 11, 2013
Online Exclusive

Einhorn Squeezes Apple for Its Cash
by Telis Demos
Feb 12, 2013
Page: B1

Apple Defends Position on Cash
by Jessica Lessin and Thomas Gryta
Mar 13, 2013
Online Exclusive

 

"Apple Cash Pile Sets Off a Battle," by Jessica Lessin, Telis Demos, and David Benoit, The Wall Street Journal, February 8, 2013 ---
http://professional.wsj.com/article/SB10001424127887324590904578290440984350234.html?mod=djem_jiewr_AC_domainid&mg=reno64-wsj

Apple Inc. AAPL -0.09% Chief Executive Tim Cook is facing a new reality: delivering steady results from one of the world's most valuable companies is no longer good enough.

For nearly 18 months, Mr. Cook has kept a stream of new products rolling, produced a string of robust quarterly results and introduced a dividend and stock buyback expected to cost $45 billion over three years.

But an attack from one of Apple's prominent investors underscores how that approach may not be enough anymore, especially amid intensifying industry competition and the company's slowing growth.

On Thursday, hedge fund manager David Einhorn sued Apple in a New York federal court in an effort to block an Apple shareholder proposal that he argues could limit how the company could return some of its $137 billion cash pile to investors. Apple is proposing to require a shareholder vote before it can issue preferred stock, a kind of security that Mr. Einhorn is urging the company to adopt. Apple's board already has the right to issue such shares, but said in a filing it doesn't intend to do so.

The proposal comes to a vote at Apple's annual shareholder meeting on Feb. 27.

Mr. Einhorn, whose firm Greenlight Capital Inc. and its affiliates own about $610 million worth of Apple stock, argues that Apple should distribute a "perpetual preferred" stock that could pay a dividend yield of 4%. The shares would return cash to shareholders by paying a bigger yield than Apple's regular shares, which currently carry a 2.3% dividend yield, according to FactSet.

The preferred stock dividends would only require Apple to pay out small amounts over time, rather than tapping its cash reserves to spend a large sum at once in the form of a special dividend or stock buyback.

"It's a unique solution to a problem that's been intractable—how does Apple reward its shareholders?" Mr. Einhorn said in an interview. "This idea allows them to keep their cash and yet enables shareholders to recognize value."

Apple later fired back in a statement Thursday, asserting that passage of the proposed shareholder measure wouldn't prevent Apple from issuing preferred stock in the future. Apple said it would evaluate Greenlight's proposal to issue the security and that its management team and board have been in "active" discussions about returning more cash to shareholders.

Apple's statement didn't address the merits of Greenlight's lawsuit, which argues that Apple is violating a securities rule by bundling three items—including the preferred stock matter—under one proposal.

The fracas encapsulates the growing investor unease about Apple as the company stands at a growth crossroads.

When Mr. Cook took over as CEO in 2011, investors widely believed he would be more receptive to distributing some of its cash, something that his predecessor, Steve Jobs, had fiercely resisted. In March 2012, Mr. Cook announced Apple's first dividend since 1995 and a stock buyback, and made a dividend payout last August.

But that hasn't appeased many shareholders as Apple's historical growth streak has tempered amid signs that the company is losing its competitive edge in smartphones to Samsung Electronics Co. 005930.SE +0.54%

Concerns are also rising over an apparent lack of new game-changing products—like the iPad and the iPhone when they first debuted—which have previously driven Apple's growth. Mr. Cook has said the company continues to innovate at a rapid pace.

Last month, Apple reported a flat profit for its most recently ended quarter and executives predicted that revenue growth would continue to slow.

All of that has boiled over into a stock decline and increasing pleas by investors to put more cash to use.

Continued in article

Bob Jensen's threads and other teaching cases on dividends, payout ratios, and dividends yield ---
http://www.trinity.edu/rjensen/roi.htm#Dividends

Bob Jensen's threads on return on investment, other ratios, and financial statement analysis ---
http://www.trinity.edu/rjensen/roi.htm


"Proposed ASU on Classifying and Measuring Financial Instruments," Deloitte, The Wall Street Journal, February 15, 2013 ---
http://deloitte.wsj.com/cfo/2013/02/15/fasbs-proposed-asu-on-classifying-and-measuring-financial-instruments/

On February 14, the FASB released for public comment a proposed Accounting Standards Update (ASU)¹ on the recognition, classification, measurement and presentation of financial instruments.² Comments are due by May 15, 2013. Under the proposal, which affects all entities that hold financial assets or owe financial liabilities, a mixed measurement attribute approach would be applied to classification and measurement.

See Deloitte’s Heads Up for an overview of the proposed ASU, including a discussion of the proposed classification and measurement approach. Topics covered include scope, classification of financial assets; contractual cash-flow characteristics assessment; financial assets that fail to meet the SPPI criterion; financial assets that meet the SPPI criterion, including business model assessment and reclassications; financial liabilities; fair value option; presentation; and effective date and transition.

The Heads Up also includes an appendix discussing seven issues in a question-and-answer format: 

  1. The FASB’s objectives
  2. Impact of the proposed ASU
  3. Classification and measurement of financial assets
  4. Assessing the cash-flow characteristics of financial assets
  5. Business model assessment
  6. Subsequent sales and reclassifications 
  7. Comparison to IFRSs

A Dbriefs webcast is scheduled for February 20, 2013, at 2 p.m. ET  to provide an update on the status of the financial instruments project. Upcoming Deloitte Heads Up newsletters will provide additional analysis and insights related to the proposal. To receive those, please register at www.deloitte.com/us/subscriptions.

Jensen Comment
In particular note the role of Business Model Assessment in meeting the SPPI criterion.

 


R Programming Language --- http://en.wikipedia.org/wiki/R_%28programming_language%29
"Learn R with Two Tutorials," by Lincoln Mullen, Chronicle of Higher Education, February 8, 2013 ---
http://chronicle.com/blogs/profhacker/learn-r-with-twotorials/45843?cid=wc&utm_source=wc&utm_medium=en


"THE LEARNING TRIANGLE," by Joe Hoyle, Teaching Blog, February 12, 2013 ---
http://joehoyle-teaching.blogspot.com/2013/02/the-learning-triangle_12.html

"THERE WILL BE NO QUIZ," by Joe Hoyle, Teaching Blog, February 21, 2013 ---
http://joehoyle-teaching.blogspot.com/2013/02/there-will-be-no-quiz.html

 
"How You Test Is How They Will Learn," by Joe Hoyle, Teaching Blog, January 31, 2010 ---
 http://joehoyle-teaching.blogspot.com/2010/01/how-you-test-is-how-they-will-learn.html 

"Team Ambition," by Joe Hoyle, Teaching Blog, January 30, 2013 ---
http://joehoyle-teaching.blogspot.com/2013/01/team-ambition.html
Jensen Comment
This is more of a summary post about Joe's past postings to his blog. Joe tells me his readership spikes when a post a notice to the AECM.

 


Demand for Accounting Graduates Among the Highest of All Disciplines

"CPAs are sexy: Accountants in demand as regulatory climate tightens," Boston Business Journal, January 14, 2013 ---
http://www.masslive.com/business-news/index.ssf/2013/01/cpas_are_sexy_accountants_in_demand_as_r.html

The numbers are in, and accountants should be smiling.

The unemployment rate for accountants stands at just 4.1 percent. And Forbes.com recently listed accountants and auditors at No. 2 on its list of Top Jobs for 2013, just behind software developers.

Meanwhile, the Class of 2012 Student Survey Report, released last year by the National Association of Colleges & Employers, found that 68 percent of the most recent accounting majors received job offers, the highest percentage of any major.

“The job demand is there, and it’s steady,” said Barbara Iannoni, academic/career development specialist at the Massachusetts Society of Certified Public Accountants Inc.

In fact, demand for accounting professionals has picked up and continues to strengthen, said Bill Driscoll, the New England District president for staffing firm Robert Half International. And Driscoll says the demand for new talent is coming from all areas.

“It’s private industry, it’s public, it’s really across the board. You don’t have to be in a CPA to be in demand,” he said. “It’s accounting that’s in demand right now. You can be a comptroller, financial analyst, or auditor without being a CPA.”

Driscoll said that for applicants with a mix of public and private company experience — something most CPAs have — the job opportunities are even more plentiful.

“In the economic environment we still find ourselves in, anyone in the accounting department who can analyze where the dollars go, who can help companies stretch every dollar, are in high demand,” he said.

Nonetheless, companies today still have high expectations for those they hire; they want accountants who know more than numbers, Driscoll said.

“Everybody needs number crunchers, but particularly with the events of the last four or five years, if you can blend communication skills and leadership skills with accounting skills or a CPA, that will open up all sorts of opportunities and career progressions for you,” he said.

Industry leaders said most college students on the accounting track still aim to get a CPA designation, which requires meeting state-set academic and experience requirements as well as passing a one-time state-administered CPA test. Once certified, a CPA also must meet regular licensing requirements.

It’s no easy process. According to Scott Moore, senior manager of the College and University Initiatives at the American Institute of CPAs, only 40 percent of test takers nationwide actually pass.

“It shows a lot of dedication and self-discipline to pass the exam. That really tells you something about the person,” Moore said.

That’s one of the reasons the CPA remains such a hot commodity in the job market, he said.

Another reason: the ever-expanding list of regulations that companies face. It’s a state of affairs that took a big leap forward in 2002 with the passage of the Sarbanes-Oxley Act. The Dodd-Frank financial reform act of 2010, which is still being phased in through dozens of yet-to-be-written regulations, has only made CPAs all the more valuable, Moore said.

“The work that a CPA does has evolved. There’s not so much a need to do hard core number crunching because (computers) can do that, so it’s more interpretation versus creation of information, and that interpretation is more important to the business. CPAs have really taken on that role,” said Moore, noting that CPAs are increasingly filling a number of C-level positions at major companies.

Continued in article

Jensen Comment
There are some caveats. Undergraduate accounting majors must now take a fifth year or more (most enter masters degree programs) in order to sit for the Uniform National CPA Examination. And starting salaries are lower than salaries of engineers.

And most graduates going to work for CPA firms have a low probability of surviving in those firms after 5-10 years. But this is not usually too bothersome since the main reason many accounting graduates first enter public accounting is for the great training and client exposures. Most of them did not want to stay in public accounting because of the requisite travel, long hours, and performance pressures. Those that leave public accounting after a few years go with clients who offer 9-5 hours, less travel, and much less pressure. And many leave to become full-time parents between the early parts and late parts of their accounting careers.

The bummer is that corporations fail offer nearly as many entry-level jobs as public accounting firms. Corporations and agencies like the FBI prefer to hire job applicants with some years of accounting experience. Aside from public accounting, the IRS is one of the best sources of entry-level job applications. And both the training and experience in the IRS are excellent for changing jobs later on.

"NASBA Releases CPA Examination Statistics:  New publications feature detailed reports and statistical data from the 2012 Uniform CPA Examination," PRWeb, February 12, 2013 ---
http://www.prweb.com/releases/2013/2/prweb10421484.htm?PID=6147589

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


This year, NASBA will fund and award a maximum of three grants totaling up to $25,000 for one-year research projects. Faculty and postdoctoral researchers at U.S. academic institutions are encouraged to submit proposals for consideration.
"NASBA Offers Accounting Research Grants," Accounting Today, February 12, 2013 ---
http://www.accountingtoday.com/news/NASBA-Offers-Accounting-Research-Grants-65672-1.html

Jensen Comment
In light of the lengthy thread we had on the role of ethics education on ethics behavior, perhaps the time is ripe to propose a study of the impact on ethics behavior and education of the increased frequency of ethics modules on CPA examinations. One question might be how to best examine ethics issues on these examinations.


"Gangster Bankers: Too Big to Jail:  How HSBC hooked up with drug traffickers and terrorists. And got away with it," by Matt Taibbi, Rolling Stone, February 14, 2013 ---
http://www.rollingstone.com/politics/news/gangster-bankers-too-big-to-jail-20130214

The deal was announced quietly, just before the holidays, almost like the government was hoping people were too busy hanging stockings by the fireplace to notice. Flooring politicians, lawyers and investigators all over the world, the U.S. Justice Department granted a total walk to executives of the British-based bank HSBC for the largest drug-and-terrorism money-laundering case ever. Yes, they issued a fine – $1.9 billion, or about five weeks' profit – but they didn't extract so much as one dollar or one day in jail from any individual, despite a decade of stupefying abuses.

People may have outrage fatigue about Wall Street, and more stories about billionaire greedheads getting away with more stealing often cease to amaze. But the HSBC case went miles beyond the usual paper-pushing, keypad-punching­ sort-of crime, committed by geeks in ties, normally associated­ with Wall Street. In this case, the bank literally got away with murder – well, aiding and abetting it, anyway.

Daily Beast: HSBC Report Should Result in Prosecutions, Not Just Fines, Say Critics

For at least half a decade, the storied British colonial banking power helped to wash hundreds of millions of dollars for drug mobs, including Mexico's Sinaloa drug cartel, suspected in tens of thousands of murders just in the past 10 years – people so totally evil, jokes former New York Attorney General Eliot Spitzer, that "they make the guys on Wall Street look good." The bank also moved money for organizations linked to Al Qaeda and Hezbollah, and for Russian gangsters; helped countries like Iran, the Sudan and North Korea evade sanctions; and, in between helping murderers and terrorists and rogue states, aided countless common tax cheats in hiding their cash.

"They violated every goddamn law in the book," says Jack Blum, an attorney and former Senate investigator who headed a major bribery investigation against Lockheed in the 1970s that led to the passage of the Foreign Corrupt Practices Act. "They took every imaginable form of illegal and illicit business."

That nobody from the bank went to jail or paid a dollar in individual fines is nothing new in this era of financial crisis. What is different about this settlement is that the Justice Department, for the first time, admitted why it decided to go soft on this particular kind of criminal. It was worried that anything more than a wrist slap for HSBC might undermine the world economy. "Had the U.S. authorities decided to press criminal charges," said Assistant Attorney General Lanny Breuer at a press conference to announce the settlement, "HSBC would almost certainly have lost its banking license in the U.S., the future of the institution would have been under threat and the entire banking system would have been destabilized."

It was the dawn of a new era. In the years just after 9/11, even being breathed on by a suspected terrorist could land you in extralegal detention for the rest of your life. But now, when you're Too Big to Jail, you can cop to laundering terrorist cash and violating the Trading With the Enemy Act, and not only will you not be prosecuted for it, but the government will go out of its way to make sure you won't lose your license. Some on the Hill put it to me this way: OK, fine, no jail time, but they can't even pull their charter? Are you kidding?

But the Justice Department wasn't finished handing out Christmas goodies. A little over a week later, Breuer was back in front of the press, giving a cushy deal to another huge international firm, the Swiss bank UBS, which had just admitted to a key role in perhaps the biggest antitrust/price-fixing case in history, the so-called LIBOR scandal, a massive interest-rate­rigging conspiracy involving hundreds of trillions ("trillions," with a "t") of dollars in financial products. While two minor players did face charges, Breuer and the Justice Department worried aloud about global stability as they explained why no criminal charges were being filed against the parent company.

"Our goal here," Breuer said, "is not to destroy a major financial institution."

A reporter at the UBS presser pointed out to Breuer that UBS had already been busted in 2009 in a major tax-evasion case, and asked a sensible question. "This is a bank that has broken the law before," the reporter said. "So why not be tougher?"

"I don't know what tougher means," answered the assistant attorney general.

Also known as the Hong Kong and Shanghai Banking Corporation, HSBC has always been associated with drugs. Founded in 1865, HSBC became the major commercial bank in colonial China after the conclusion of the Second Opium War. If you're rusty in your history of Britain's various wars of Imperial Rape, the Second Opium War was the one where Britain and other European powers basically slaughtered lots of Chinese people until they agreed to legalize the dope trade (much like they had done in the First Opium War, which ended in 1842).

A century and a half later, it appears not much has changed. With its strong on-the-ground presence in many of the various ex-colonial territories in Asia and Africa, and its rich history of cross-cultural moral flexibility, HSBC has a very different international footprint than other Too Big to Fail banks like Wells Fargo or Bank of America. While the American banking behemoths mainly gorged themselves on the toxic residential-mortgage trade that caused the 2008 financial bubble, HSBC took a slightly different path, turning itself into the destination bank for domestic and international scoundrels of every possible persuasion.

Three-time losers doing life in California prisons for street felonies might be surprised to learn that the no-jail settlement Lanny Breuer worked out for HSBC was already the bank's third strike. In fact, as a mortifying 334-page report issued by the Senate Permanent Subcommittee on Investigations last summer made plain, HSBC ignored a truly awesome quantity of official warnings.

In April 2003, with 9/11 still fresh in the minds of American regulators, the Federal Reserve sent HSBC's American subsidiary a cease-and-desist­ letter, ordering it to clean up its act and make a better effort to keep criminals and terrorists from opening accounts at its bank. One of the bank's bigger customers, for instance, was Saudi Arabia's Al Rajhi bank, which had been linked by the CIA and other government agencies to terrorism. According to a document cited in a Senate report, one of the bank's founders, Sulaiman bin Abdul Aziz Al Rajhi, was among 20 early financiers of Al Qaeda, a member of what Osama bin Laden himself apparently called the "Golden Chain." In 2003, the CIA wrote a confidential report about the bank, describing Al Rajhi as a "conduit for extremist finance." In the report, details of which leaked to the public by 2007, the agency noted that Sulaiman Al Rajhi consciously worked to help Islamic "charities" hide their true nature, ordering the bank's board to "explore financial instruments that would allow the bank's charitable contributions to avoid official Saudi scrutiny." (The bank has denied any role in financing extremists.)

Continued in a long article

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

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


Deloitte's New Site for International Accounting Teaching, Scholarship, and  Research ---
http://www.iasplus.com/en/news/2013/02/research-and-education

We have created a new page on IAS Plus that is tailored to help users easily locate academic accounting material and resources relevant for educational research that is available on IAS Plus and other useful sites.

Bookmark this site ---
http://www.iasplus.com/en/resources/research-and-education

Bob Jensen's helpers for accounting educators ---
http://www.trinity.edu/rjensen/default3.htm

Bob Jensen's helpers for accounting researchers ---
http://www.trinity.edu/rjensen/default4.htm

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


Suggestion for a Website of Actual Financial Contracts

While examining the following accounting student, education, practitioner, client, and research helper site it dawned on me that a wonderful site to be added would be a site of real contracts taken from practice (names of people and companies could be hidden). Examples would include account factoring contracts, lending contracts, derivative financial instrument contracts, employee option contracts, employee stock compensation contracts and on and on and on. The important criterion would be that these are actual contracts and not just excerpts or hypothetical contracts.

What a great addition this would make in the following Website where following each contract could be suggested accounting journal entries and disclosures under IFRS versus U.S. GAAP.

Deloitte's New Site for International Accounting Teaching, Scholarship, and  Research ---
http://www.iasplus.com/en/news/2013/02/research-and-education

If I were younger I would start such a site at my own Website. However, I think large public accounting firms have comparative advantages since they could draw on actual contracts of clients.

What a service this would be for education and research as well as for practitioners.


Deloitte (DTTL) and the International Association for Accounting Education and Research (IAAER) today announced the Deloitte IAAER Scholarship Programme, naming five associate professors from Brazil, Indonesia, Poland, Romania and South Africa as the programme’s inaugural scholars.
IAS Plus
February 13, 2013
http://www.iasplus.com/en/news/2013/02/deloitte-scholars

Mentors will be assigned to each scholar to support them as they increase their exposure to internationally recognised accounting scholars, best practices in accounting and business education and research, and a global peer network.

Ongoing mentorship is a critical element of the Deloitte IAAER Scholarship Programme and some well-known and highly accomplished accounting experts have volunteered their support. These include former member of the Financial Accounting Standards Board, Katherine Schipper (Duke University); former member of the International Accounting Standards Board, Mary Barth (Stanford University); Chika Saka (Kwansei Gakuin University); Sidney Gray (University of Sydney); and Ann Tarca (University of Western Australia).

The scholars, who must be a sitting lecturer, assistant, or associate professor holding a PhD (or comparable degree) in a faculty that teaches accounting, auditing, or financial reporting, are chosen for three years and attend IAAER co-sponsored conferences, workshops, and consortia as well as the IAAER World Congress.

In the long term, the programme aims at supporting better accounting education and improving the quality of financial reporting and auditing. The next round of scholarships will open in 2016, with applications considered in 2015.

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

Bob Jensen's helpers for accounting educators ---
http://www.trinity.edu/rjensen/default3.htm

Bob Jensen's helpers for accounting researchers ---
http://www.trinity.edu/rjensen/default4.htm

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

 


I am forwarding this AECM message to the current AAA Leadership, including Karen Pincus, Mary Barth, and Julie Smith David. For a very long time, the AAA has not been a good old boys club.

The contributions of accountics scientists to the AAA Commons to date have been almost nothing ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm

Bob Jensen has contributed around 100 accountics science postings, but these are only a small proportion of his 1.500 posts and 15,000 comments on the Commons ---
http://commons.aaahq.org/people/12462cc690/profile

 

David Boynton
There are quite a few accountics science postings on the AAA Commons thanks to David Boynton. David is on the staff of the AAA. As of January 19, 2013 David has made 470 posts to the Commons. Nearly all of them are accountics science postings.

To see a listing of David's postings on the AAA Commons, do the following:

  1. Go to the AAA Commons at http://commons.aaahq.org/pages/home
     
  2. Sign in as an AAA Member.
    I truly wish the full Commons was available to non-members, but if wishes were horses beggars would ride.
     
  3. On the right side you will see a picture link to David Boyton. Click on this link.
     
  4. Near the top of David's profile you will see a link to his Posts. Click there to see a listing of his postings to the Commons.

 

Proposal for a Quant Corner
I propose that the current leadership of the AAA post a Quant Corner Forum on the Commons. The purpose would be to have accountics scientists post a discussion of their existing working papers (e.g., on SSRN) and forthcoming papers in TAR, JAR, JAE, and other quant journals.  A restriction would be that these authors discuss their research without the use of equations and statistical inference tables at a level that non-quants can understand.

Commons users could then comment on selected Quant Corner postings. Ideally the authors would then reply back in a dialog that is not being accomplished in the accountics science journals themselves. For example, TAR has not published commentaries in years.

The model for the Quant Corner Forum could be the FASB's FASRI blog --- http://www.fasri.net/ 
Note in particular how the accountics scientists discuss their research in plain English beyond a mere abstract.

The problem with the FASRI blog is that it's limited to research related to accounting standard setting.

I envision the Quant Corner to expand to all research topics of accountics scientists.

Below is a quotation from one of my January 18 messages from another thread on the AECM"

Hi Richard (Sansing),


Perhaps the secret lies in the race between the Turtle and the Hare.


Accountics scientists don't have to become like Bob Jensen thousands of postings and tens of thousands of comments on the Commons. But they could become steady in terms of posts and comments much like you are (gratefully to me) a steady commenter on the AECM.


It would be terrific if Mary Barth posted a an Accountics Science Forum (much like Zane's Writing Forum) on the AAA Commons. Then authors could post notices of their forthcoming TAR, JAR, JAE, and other publications as well as postings to SSRN. This might encourage AAA members to then comment on these forthcoming publications. In a way this offsets the lack of published commentaries in TAR, JAR, and JAE.


I'm certain that it will have a different name than Accountics Science Forum. But it could be called something like Quant Corner. The FASB has a blog to serve as a model, but accountics science postings to that blog are much too infrequent ---
http://www.fasri.net/


In other words the the Quant Corner on the Commons could be modeled after the FASRI blog, but the accountics science journal editors and referees should remind authors to make postings to the Quant Corner.


Thank you Richard for being tolerant of my rantings on the AECM.


Respectfully,
Bob Jensen

On January 18, 2013 Richard Campbell replies as follows:

Why not have the AAA have an online comment section for each of the AAA journals?

The Wall Street Journal has that for all their Blogs.

January 19, 2013 reply from Bob Jensen

Thanks for replying Richard.  I've actually thought about that, but I prefer the FASRI-style lead ins where authors provide more of a personal chat about their forthcoming research articles. These chats are more than the abstracts that now appear on articles. And the dialog should avoid the equations and statistical inference tables.

There could be a suggested outline for author lead in chats. I like the format that's extremely common on Wikipedia where there are sections like you see at http://en.wikipedia.org/wiki/Balanced_scorecard

Yes we could even request that authors fill in a Criticisms section for their own research article.

What's interesting is that readers like me would be drawn to the Quant Corner Forum in large measure just to see how accountics scientists criticize their own research.

Respectfully,
Bob Jensen


What drove the 30-year mortgage rate higher?
Sober Look, February 12, 2013
http://soberlook.com/2013/02/what-drove-30yr-mortgage-rate-higher.html


"(Israeli) Business Profs Who Doubt Value of Business Major, Inside Higher Ed, February 14, 2013 ---
http://www.insidehighered.com/quicktakes/2013/02/14/business-profs-who-doubt-value-business-major

It's not unheard of for professors to question the value of undergraduate education in business. It's more rare if you teach in -- let alone lead -- an undergraduate program in business, but that's what has happened at Tel Aviv University. Haaretz reported that Shmuel Ellis, chair of the undergraduate Department of Management, recently sent out an e-mail telling those who are undecided about their major not to pick business. He suggested they consider fields in the humanities, social sciences or biological sciences. "Study of academic disciplines prepares students to think scientifically in these fields and form the foundation for advanced studies in graduate degree programs," he said.

The comments have angered some students studying business. Adding to the anger is that Ellis was defending comments from Moshe Zviran, vice dean of the graduate business program, who recently questioned the value of undergraduate education in business. Zviran said that business study only makes sense at the graduate level. "Business administration is an excellent degree but needs to be studied at the appropriate time," he said.

Continued in article

Jensen Comment

Israel CPA Firm Directory --- http://www.worldwide-tax.com/israel/israccountants.asp

It appears that many Israeli accountants have U.S. CPA certificates.
Does Israel even have its own practice certifications for accountants?


Tens of Millions in Tornado Damage at Southern Miss ---
http://www.insidehighered.com/quicktakes/2013/02/14/tens-millions-tornado-damage-southern-miss

Jensen Comment
This is really bad, but not quite as destructive as the damage inflicted upon New Orleans universities by Katrina. Recovery over years to come entailed terminating most of the employees of those universities.


"FASB Kicks Off XBRL Guidance Series," by Tammy Whitehouse, Compliance Week, February 11, 2013 ---
http://www.complianceweek.com/fasb-kicks-off-xbrl-guidance-series/article/279960/

XBRL Tags to be Used on a SEC Accountancy Fraud RoboCop
From the CFO.com Morning Ledger Newsletter on February 14, 2014

SEC readies fraud ‘RoboCop.’ The FT’s Adam Jones warns CFOs that “accountancy’s answer to RoboCop will soon be watching you.” Jones examines the SEC’s plans to roll out an early warning system using XBRL tags this year. The data-mining software is partly based on a model the SEC developed to trawl through hedge fund returns for signs of Bernard Madoff-style “chicanery.” The accounting version will analyze whether a company “sticks out from the pack” in areas such as accruals. Craig Lewis, director of the SEC’s division of risk, strategy and financial innovation, said it would be about nine months before it was rolled out, although it could appear sooner.

"SEC to roll out ‘RoboCop’ against fraud," by Adam Jones, Financial Times, February 13, 2013 ---
http://www.ft.com/intl/cms/s/0/f446a8bc-75c9-11e2-9891-00144feabdc0.html#axzz2KrTO4g2h

Bob Jensen's OLAP, XML,  and XBRL threads are at
http://www.trinity.edu/rjensen/XBRLandOLAP.htm

 


"Federal Tax Crimes, 2013," by John A. Townsend, SSRN, February 5, 2013 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2212771

Abstract:     
This is the 2013 01 edition of the Federal Tax Crimes book that I started many years ago for use in a Tax Fraud and Money Laundering course at the University of Houston Law School. With some colleagues, we substantially revised that earlier version into a separately targeted book, titled Tax Crimes published by LEXIS-NEXIS. The full title of the LEXIS-NEXIS book is John Townsend, Larry Campagna, Steve Johnson and Scott Schumacher, Tax Crimes (LEXIS-NEXIS Graduate Tax Series 2008).

This pdf text offered here is a self-published version of my original text that I have kept up since publication of the LEXIS-NEXIS book. The LEXIS-NEXIS book is more suitable for students in a classroom setting and is targeted specifically for graduate tax students. This pdf book I make available here is not suitable for students in a class setting, but is more suitable for lawyers in practice, covering far more topics and with far more detail and footnotes that may be helpful to the busy practitioner. It cannot be used fruitfully for the target audience of the LEXIS-NEXIS book.

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

 


"The Dissertation Can No Longer Be Defended," by Stacey Patton, Chronicle of Higher Education, February 11, 2013 ---
http://chronicle.com/article/The-Dissertation-Can-No-Longer/137215/

The dissertation is broken, many scholars agree. So now what?

Rethinking the academic centerpiece of a graduate education is an obvious place to start if, as many people believe, Ph.D. programs are in a state of crisis. Universities face urgent calls to reduce the time it takes to complete degrees, reduce attrition, and do more to prepare doctoral candidates for nonacademic careers, as students face rising debt and increased competition for a shrinking number of tenure-track jobs.

As a result, many faculty and administrators wonder if now may finally be the time for graduate programs to begin to modernize on a large scale and move beyond the traditional, book-length dissertation.

That scholarly opus, some say, lingers on as a stubborn relic that has limited value to many scholars' careers and, ultimately, might just be a big waste of time.

"It takes too long. It's too isolating," says William Pannapacker, an associate professor of English at Hope College and a critic of graduate education who writes frequently for The Chronicle. Producing a dissertation is particularly poor preparation, he adds, for graduates whose first jobs are outside of academe—now roughly half of new Ph.D.'s with postgraduation employment commitments. "It's a hazing ritual passed down from another era, retained because the Ph.D.'s before us had to do it."

Scholars cite numerous reasons for why the dissertation is outdated and should no longer be a one-size-fits-all model for Ph.D. students.

Completing a dissertation can take four to seven years because students are typically required by their advisers to pore over minutiae and learn the ins and outs of preceding scholarly debates before turning to the specific topic of their own work. Dissertations are often so specialized and burdened with jargon that they are incomprehensible to scholars from other disciplines, much less applicable to the broader public.

The majority of dissertations, produced in paper and ink, ignore the interactive possibilities of a new-media culture. And book-length monographs don't always reflect students' career goals or let them demonstrate skills transferable beyond the borders of academe.

Nontraditional Approaches

Some universities have started to make changes. Graduate programs in history, literature, philosophy, anthropology, and sociology the City University of New York, Michigan State University, and the University of Virginia, among other campuses, have put significant amounts of money into digital-humanities centers and new-media and collaborative research programs that can support students who want to work on nontraditional dissertations. They hold digital boot camps and have hired faculty with the expertise to train graduate students who want to do digital work.

Others allow students to write three or four publishable articles instead of one book-length text. Or they encourage students to shape their dissertations for public consumption. History students at Texas State University and Washington State University, for example, work on projects that can be useful to museums, historical societies, and preservation agencies.

Some graduate programs allow students to work collaboratively. Doctoral students in history at Emory University and Stanford University, among others, work together on projects with help from faculty, lab assistants, computer technicians, and geographers, who use digital techniques like infrared scans and geolocation mapping to build interactive maps that, for example, tell the history of cities and important events in visually creative ways.

These programs seek not only to move students beyond the single-author monograph but also to improve upon the isolating dissertation experience and to replace the hierarchical committee structure with the project-management style of collaboration that is required by many employers.

"The economic realities of academic publishing, coupled with exciting interpretive and methodological possibilities inherent in new media and digital humanities, mean that the day of the dissertation as a narrowly focused proto-book are nearly over," Bethany Nowviskie, director of digital research and scholarship at the University of Virginia Library, said in an e-mail.

While such efforts to modernize and digitize the dissertation are good, they do not go far enough to revamp doctoral education, many scholars say. To reduce time to degree and make other key improvements, they argue, broader changes in need to be considered.

"You can't separate the dissertation from its context," says William Kelly, president of ­CUNY's Graduate Center. "We need to look at the degree as a whole and be student-centered."

Faculty and administrators, he says, should find ways to help students move more efficiently through graduate school from Day 1. Changes in the dissertation process are key, including focusing course requirements and exams more squarely on preparing students to write those dissertations, as long as that task remains necessary.

To help more students complete their Ph.D. programs, and to do so more quickly, CUNY has unveiled a five-year fellowship program that will aid 200 new doctoral students. Participants will have their teaching obligations reduced from two courses to one course per semester during their second, third, and fourth years. Their annual stipends will be increased to $25,000 from $18,000, in the hope that they will spend less time on teaching, grading papers, and outside work, and more on their own research.

The graduate center will also reduce enrollment across its graduate programs by one-fourth by 2015, to put more resources toward helping students succeed. CUNY now enrolls 4,200 doctoral students.

At the University of Washington, starting this fall, students in a doctoral program in Hispanic studies will be required to enroll in a new course that will help guide them in beginning preliminary work on their dissertation prospectus. They will also be trained in public forms of scholarship, so that their work will be more attractive to employers outside higher education.

The program will also alter exams, to make them directly relevant to students' dissertations. The tests will comprise three elements: an annotated bibliography of the books that are relevant to student's research projects, a 10- to 15-page dissertation prospectus, and a 90-minute oral exam.

Stanford has recently proposed changes in its dissertation requirements, in an effort to reduce the time that students spend in Ph.D. programs to five years, from an average of nine years now. The plans include adopting a four-quarter system and providing students with financial support during the summer, so they can use that time to make progress on their dissertations.

Departments would be required to provide clearer guidelines about writing dissertations and to offer students alternatives to the traditional format, so that their academic work will match up with their career goals. Advisers would be called on to do a better job of providing students with timely and effective feedback.

A 21st-Century Dissertation

To the extent that dissertations have changed already, technological advances have been largely responsible. The rise of the digital humanities has opened up new interpretive and methodological possibilities for scholars and has challenged conventional understandings of the dissertation. Graduate students looking to take advantage of the interactivity of online platforms are doing digital dissertations that integrate film clips, three-dimensional animation, sound, and interactive maps.

One of those students is Sarita I. Alami, a fifth-year doctoral student in the history department at Emory. She is looking at the rise and fall of American prison newspapers from 1912 to 1980 and how prisoners used journalism to shape their experiences behind bars. Many novels and memoirs about prison life have been written for people outside prison. But Ms. Alami wants to provide a lens into prison culture through the words of inmates themselves, particularly how they discussed prison conditions and national and international politics.

She has done the usual work of reading scholarly articles and books. She's spent time in prison archives analyzing thousands of newspapers to see how their coverage changed over time. But she is also taking advantage of a digital microfiche scanner that Emory recently acquired. Its algorithmic software processes large amounts of text and returns useful keywords, allowing her to better analyze prisoners' use of language over time.

For example, at the height of the black-power era, she saw the use of words like "pig," "whitey," and "solidarity." "That was black-power rhetoric centered around prison activism," she says, "and it captures the anger, prison revolts, and rashes of violence discussed by outside media."

Much of her work, while taking advantage of new methods of analysis, will still result in a text-heavy, book-length document. But a big component of her dissertation, she says, will be a searchable online repository of prison periodicals, graphs, online exhibits, and explanatory text. On a Web site, she is documenting her research experience and introducing others to new digital tools.

Amanda Visconti, a doctoral student in her third year at the University of Maryland at College Park, entered the graduate program in English with a background in Web development, information studies, and user testing. She hasn't yet started on her dissertation—which will be digital—but has experimented with a prototype digital edition of Ulysses, which allows users to read the novel's first two episodes with explanatory annotations and images that appear when the reader moves his or her mouse over words that might be confusing.

"Digital editions do a lot of things, but I'm interested in making them more participatory, meaning that readers get an interactive, engaged experience instead of a passive reading experience," Ms. Visconti says. "Producing a traditional, book-style dissertation wouldn't help me do the scholarly work I need to do. And it wouldn't present that work to others in a way they could test, use, and benefit from."

Alex Galarza, a fourth-year Ph.D. student in history at Michigan State, is working on a digital dissertation on soccer clubs of the 1950s and 60s in Buenos Aires, examining how they were connected to political, economic, and social changes in the city. Rather than produce a written text that readers would engage with only passively, he wants people to be able to interact with his work, to dig behind his documents to see the sources he's using and draw their own conclusions.

A more traditional approach to his dissertation, he says, wouldn't provide an experience nearly as collaborative. He and a faculty mentor created the Football Scholars Forum, an online "scholarly think tank" that includes a group library, film database, audio archive, academic directory, syllabus repository, and online forum where researchers discuss monographs, articles, films, and pedagogy.

Mr. Galarza is a graduate fellow at Michigan State's digital-humanities center, which has 15 full-time employees, and he has received $2,000 in travel grants to attend digital-humanities workshops. Other than the scholars he meets at digital-humanities conference circuits and institutes, though, he doesn't hear many graduate students talk about incorporating digital methods into their dissertations. Most of his peers, he says, are neither exposed to those methods nor encouraged to try them.

Had he not received encouragement from faculty mentors at Michigan State, he says, he, too, probably would be writing a traditional dissertation. "If you don't have a program, mentor, and peers that are demonstrating that these are real possibilities," he says, "then it's hard to part from what everyone else around you and what your adviser tells you to do."

Barriers to Change

If most people agree that, after decades of debate, it's time to finally do more to revamp the dissertation, then why isn't such change widespread? The majority of graduate students are still sticking to the monograph version of the dissertation, producing static texts that are hundreds of pages in length and take roughly five or six years to complete.

The barriers to change are many, faculty members say. Graduate students themselves are part of the time-to-degree problem. More and more Ph.D. candidates intentionally linger in departments, in order to write exquisite theses, which they hope will help them stand out in a brutal job market.

What's more, many programs are behind the curve on technology, and many do not have professors with the skills to train students to do digital dissertations. On more than a few campuses, little, if any, technical support or clear guidelines exist for students doing digital dissertations. Nor do the usual dissertation books and workshops provide much help to those students.

Meanwhile, some scholars say the traditional approaches to the dissertation aren't necessarily in need of overhaul at all, even if digital and other nontraditional formats may be preferable for some projects. Anthony T. Grafton, a historian at Princeton University, argues that some of the proposals for changing the dissertation and reducing time to degree could affect the quality of students' projects.

"For me, the dissertation makes intellectual sense only as a historian's quest to work out the problem that matters most to him or her, an intellectual adventure whose limits no one can predict," he says. "There's no way to know in advance how long that will take. Cut down the ambition and scale, and much of the power of the exercise is lost."

Many other professors say that until the tenure process no longer requires the publication of book-length works, scholars in the pipeline will continue to follow the traditional formula for writing dissertations. Some students complain that when they create a digital dissertation, they must also produce a text version. Many campus libraries have not ironed out the wrinkles in terms of submission, guidelines, and repositories. And the extra work, of course, doesn't tend to lessen the time to degree.

Ms. Visconti, the Maryland student, says she has had to defend her decision to do a nontraditional dissertation to academics who don't seem to think that digital projects on their own are scholarly enough. Some people assume, she says, that projects like hers are just Web sites where scholarship get published electronically; those professors don't seem to understand how digital work can produce new tools for analysis that allow researchers to ask new questions.

Continued in article

Jensen Comment
Much of this article is not relevant for science, engineering, accounting, finance and other disciplines. What makes more sense in those disciplines is to distinguish between dissertation  research that is aimed at an academic audience versus research that is aimed at a clinical audience such as practitioners. Presently, doctoral students pretty much have to write a dissertation for an academic audience. Accordingly, the practitioners in those professions get shorted.

For example in accountancy a doctoral student might focus redesigning internal controls for a particular in a company where auditors identified some weaknesses in such controls in recent audits. This might be more of a case method research study that currently is unacceptable in most accountics science dominated accounting doctoral programs. There would still be a "dissertation" write up, but it could be quite non-traditional with heavy modules of multimedia such as security videos and their analysis along with writing of security software code.

Essays on the Sad State of Academic Accounting Research ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm#Essays


"A Sensible Change in Taxing Derivatives," by Victor Fleisher,  by Victor Fleischer, The New York Times, February 7, 2013 ---
http://dealbook.nytimes.com/2013/02/07/a-sensible-change-in-taxing-derivatives/?nl=business&emc=edit_dlbkpm_20130207

Jensen Comment
Although this article praises a proposal to charge year-end income taxes on the basis of net fair value increases of a derivatives portfolio rather than only taxing gains and losses based upon accumulated cash settlements there are some genuine and controversial problems. For example, if an option not yet settled is in-the-money at the end of the tax year, the owner would pay taxes as if it was settled at the end of the tax year. The investor would then have to cough up the cash from somewhere else to pay the taxes due this and other unsettled derivatives. And the taxpayer might then have to wait until the next year end to get a refund on derivatives that were settled for less (maybe zero) after paying the tax accrual.

The tax could also defeat the purpose of hedging. Often derivatives are acquired to hedge future transactions that are not taxable ahead of time such as when Southwest Airlines buys call options to hedge forecasted transactions to buy jet fuel a year from now. If spot prices soar for the jet fuel, the gains at the time of settlement of the options offsets the rise in prices above the strike price. Having to pay taxes on the option prices before the jet fuel is purchased causes a loss in the time value of money between when the taxes must be paid and the jet fuel is purchased. Perfect hedges then become less than perfect due to taxing value changes rather than cash settlements.

It might also be tempting for the government to extend this concept to other types of non-derivative financial instruments. For example, if an investor owns Apple Corporation shares that have appreciated in value by 100% during the year the taxpayer may have to pay taxes in cash for the stock price appreciation of stock not yet sold from the portfolio. It's easy to imagine where investors might have to sell long-term investments just to pay taxes on the value increases not yet realized.

Then there's the question of asymmetry. If taxpayers have to pay cash for value increase might they also receive cash from the IRS for losses in portfolio values? This could be devastating for the government in times of economic crashes.

The ideal of taxing value changes in derivatives before settlement dates sounds like a bad idea to me.


"CPA convicted for role in $40 million Ponzi scheme," WCNC.com, February 11, 2013 ---
http://www.wcnc.com/news/business/CPA-convicted-for-role-in-40-million-Ponzi-scheme--190747591.html

CHARLOTTE, N.C. (AP) -- An accountant has been convicted for his role in a $40 million Ponzi scheme that defrauded investors in North Carolina, Virginia and Ohio.

A federal jury in Charlotte convicted Jonathan D. Davey of Newark, Ohio, on four counts of investment fraud conspiracy and tax evasion. Prosecutors say Davey administered several hedge funds in the Black Diamond Ponzi scheme, soliciting more than $11 million from victims in the case.

The 48-year-old accountant, who was convicted Friday, is the 11th defendant convicted in the 2007 fraud, which prosecutors say deprived about 400 victims of more than $40 million. Prosecutors say Davey used a shell company in Belize to funnel money toward construction of his mansion in Ohio.

Davey faces a maximum sentence of 50 years in prison and $1 million in fines.

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

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


The Advantage of a Shredded Paper Trail
From the CFO Morning Ledger Newsletter on February 11, 2012

S&P left paper trail, but not Moody’s. The reason the DOJ may be going after Standard & Poor’s and not rival Moody’s may be because S&P left a paper trail and Moody’s didn’t. Former Moody’s employees tell the WSJ that Moody’s took careful steps to avoid creating a trove of potentially embarrassing employee messages like those that came back to haunt S&P in the U.S.’s lawsuit. Moody’s analysts had limited access to instant-message programs and were directed by executives to discuss sensitive matters face to face. The crackdown on communications came after a 2005 investigation by then-New York Attorney General Eliot Spitzer into Moody’s ratings on some mortgage-backed deals.

Bob Jensen's threads on the credit rating agency scandals ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

Credit Rating Firms --- http://en.wikipedia.org/wiki/Credit_rating_firms
Credit Rating Firms were rotten to the core --- http://www.trinity.edu/rjensen/FraudRotten.htm#CreditRatingAgencies

In 2008 it became evident that credit rating firms were giving AAA ratings to bonds that they knew were worthless, especially CDO bonds of their big Wall Street clients like Bear Stearns, Merrill Lynch, Lehman Bros., JP Morgan, Goldman, etc. ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

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

Credit rating agencies gave AAA ratings to mortgage-backed securities that didn't deserve them. "These ratings not only gave false comfort to investors, but also skewed the computer risk models and regulatory capital computations," Cox said in written testimony.
SEC Chairman Christopher Cox as quoted on October 23, 2008 at http://www.nytimes.com/external/idg/2008/10/23/23idg-Greenspan-Bad.html

"CREDIT RATING AGENCIES: USELESS TO INVESTORS," by Anthony H. Catanch Jr. and J. Edward Ketz, Grumpy Old Accountants Blog, June 6, 2011 --- http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/113

 

"DOJ vs. Rating Firms,"  by David Hall, CFO.com Morning Ledger, February 5, 2013

The government is taking its get-tough-on-Wall-Street stance to the next level with the DOJ’s lawsuit against Standard & Poor’s. The suit alleges that S&P from September 2004 through October 2007 “knowingly and with the intent to defraud, devised, participated in, and executed a scheme to defraud investors in” CDOs and securities backed by residential mortgages, the WSJ reports at the top of A1 today. The two sides have been discussing a possible settlement for months, but the penalties the DOJ was targeting – more than $1 billion – made S&P squeamish. The firm was also worried that if it admitted wrongdoing, as the DOJ wanted, that could leave it vulnerable to other lawsuits.

S&P and other rating firms have argued in the past that their opinions are protected by the First Amendment — and judges have thrown out dozens of suits based on that argument, the Journal says. This case will test that argument against the Justice Department’s view that the First Amendment wouldn’t protect a ratings firm if it defrauded investors by ignoring its own standards.

Neil Barofsky, the former inspector general for the Troubled Asset Relief Program, said the DOJ move looks like an effort to get “some measure of accountability” for the financial crisis, which was “something that’s been really lacking across the board.” And Jeffrey Manns, a law professor at George Washington University, tells Reuters that the suit sends a message to “the rating industry at large that the government is serious about holding rating agencies responsible, and that they must be much more careful.”

http://online.wsj.com/public/page/cfo-journal.html

Jensen Comment
The DOJ actions do not worry the credit rating firms nearly so much as the hundreds of billions of potential tort lawsuits awaiting in the wings, lawsuits by damaged investors who relied on those phony credit ratings.

The credit rating firms, in turn, will blame CPA audit firms who gave clean audit opinions on junk.

Bob Jensen's threads on the credit rating agency scandals ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

 

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


From PwC on February 6, 2013
Financial and Other Guarantees
The FASB decided at its February 6 meeting that certain guarantees issued by non-insurers, including certain financial guarantees issued by banks and other financial institutions, should be included in the scope of the proposed insurance contracts standard. The FASB's tentative decision will be exposed for comment as part of its insurance contracts exposure draft. The exposure draft is expected by the end of the second quarter of 2013.
http://www.pwc.com/en_US/us/cfodirect/assets/pdf/in-brief/in-brief-2013-06-fasb-guarantees.pdf


Soon Canada will not have a penny to its name
"A penniless Canada: Mint begins years-long process of collecting and melting down 82-million kg in coins," National Post, February 4, 2013 ---
http://news.nationalpost.com/2013/02/04/canadian-penny-last-day/

Jensen Comment
In the U.S. the value of pennies and nickels is far less than the cost of minting the coins. Nickels for example cost about a dime to mint.

In addition to doing away with coins as a waste of good metal, we should even phase out of currency in an attempt to discourage crime . But there are worries in doing so ---
http://www.globalresearch.ca/the-cashless-society-is-almost-here-and-with-some-very-sinister-implications/5313515


Question (FEI)
Which industries have the most goodwill on their balance sheets, which industries' goodwill was hardest hit, and the impact of impairments on each industry's total assets?

"Goodwill Impairment Holds Steady," by Bill Sinnett, FEI's FERF Research Blog, February 1, 2013 --- Click Here
http://www.financialexecutives.org/KenticoCMS/FEI_Blogs/FERF-Research-Blog/November-2012/2012-Goodwill-Impairment-Study.aspx#axzz2JwlCV2io

he 2012 Goodwill Impairment Study, done by Duff & Phelps, examines the general and industry trends of goodwill impairment for U.S. companies and includes the results of a survey of FEI members.
 
New in this year’s study are ten industry sector spotlights which highlights key goodwill impairment metrics, as well as cross-tabulation analyses which evaluate the relationships between FEI member responses to two or more questions.
 
     2012 Study Highlights

 
Click here to download the 2012 Goodwill Impairment Study ---
https://www.financialexecutives.org/KenticoCMS/Research/Research-Publications/publication.aspx?prd_key=00eb4c43-bc03-43e0-9cc6-c24275a9c4b6
 

"Study by UK researchers shows inconsistency in IFRS application," by Ken Tysiac, Journal of Accountancy, January 26, 2013 ---
http://journalofaccountancy.com/News/20137251.htm

Jensen Comment
The same most likely can be said about principles-based standards in general ---
http://www.trinity.edu/rjensen/Theory01.htm#BrightLines

 

Bob Jensen's threads on impairment ---
http://www.trinity.edu/rjensen/Theory02.htm#Impairment

From IAS Plus on January 21, 2011 Jan 21, 2013

ESMA report shows room for improvement regarding disclosures related to goodwill impairment ---
http://www.iasplus.com/en/news/2013/01/esma-report-on-disclosures-related-to-goodwill-impairment

The European Securities and Markets Authority (ESMA) has published a review of 2011 IFRS financial statements related to impairment testing of goodwill. The report shows that significant impairment losses of goodwill were limited to a handful of issuers. According to ESMA, this raises the question as to whether the level of impairment disclosed in 2011 financial reports appropriately reflects the difficult economic operating environment for companies. ESMA also finds that although the major disclosures related to goodwill impairment testing were generally provided, in many cases these were boilerplate and not entity-specific. ESMA expects issuers and their auditors to consider the findings of the review when preparing and auditing the 2012 IFRS financial statements.

A Curious Case of Negative Goodwill
"NEED PROFIT? BUY SOMETHING!" by Anthony H. Catanach Jr. and J. Edward Ketz, Grumpy Old Accountants Blog, July 30, 2012 ---
http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/733

We first voiced our concern about an obscure accounting rule that allows companies to “create” profits when purchasing other businesses in the “Curious Case of Miller Energy’s 10-K and Its Huge Bargain Purchase.” The offending tenet relates to the treatment of something called “negative goodwill” which purportedly is created when a company makes an acquisition, and pays less than what the assets are worth. This fantastic “bargain purchase” creates a negative goodwill anomaly because the acquirer supposedly gets more assets than it pays for, as in this example:

Continued in article

Jensen Comment
Yet another illustration of how the FASB and IASB made a black hole out of bottom-line earnings.

Bob Jensen's threads on impairment issues ---
http://www.trinity.edu/rjensen/Theory02.htm#Impairment


Interest-Rate Swaps Scream "Buyer Beware"
The Financial Services Authority found that some U.K. banks misled corporate customers in the sales of interest-rate swaps, but the problem is not confined to one country.
by Vincent Ryan
CFO.com, February 1, 2013
http://www3.cfo.com/article/2013/2/credit_interest-rate-swaps-fsa-otc-overhedging-break-cost-cftc-sec

Jensen Comment
FAS 133 and IAS 39 generally assume that interest rate swaps have no front-end costs or coercion. That appears to be no longer the case. Banks have such a penchant for ruining good things.

Timeline of Financial Scandals, Auditing Failures, and the Evolution of International Accounting Standards ---- http://www.trinity.edu/rjensen/FraudCongress.htm#DerivativesFrauds 

Anti-Fraud Collaboration Launches Website with Access to Anti-Fraud Tools
Center for Audit Quality
January 24, 2013
News Release --- http://www.thecaq.org/newsroom/release_01242013.htm

Anti-Fraud Collaboration Site --- http://www.antifraudcollaboration.org/

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


Conflict Minerals --- http://en.wikipedia.org/wiki/Conflict_mineral

Auditors worry about lack of guidance on conflict-mineral rules ---
http://blogs.wsj.com/cfo/2013/01/29/conflict-mineral-reports-present-challenges-for-auditors/?mod=wsjpro_hps_cforeport
From the CFO Global CPA Newsletter Report on February 6, 2013

Securities and Exchange Commission rules on conflict minerals, many of them African spoils of war, affect the supply chain of thousands of U.S. companies. However, auditors are uncertain how to meet the requirements. They are concerned that an insufficient audit could lead to fines and open a company to liability.

Jensen Comment
Conflict minerals will remain a huge problem for both business firms and their accountants, but it is somewhat of a lesser problem now that automobile companies are starting to drop dreams of manufacturing battery-powered cars in favor of other alternatives such as hydrogen fuel cells.


"Free Spreadsheet-Based Form 1040 Available for 2012 Tax Year," by David H. Ringstrom, AccountingWeb, February 1, 2013 ---
http://www.accountingweb.com/article/free-spreadsheet-based-form-1040-available-2012-tax-year/220959?source=technology

Jensen Comment
This might be a great application (using hypothetical taxpayers) for students learning spreadsheets as well as basics of income tax reporting.

I used a similar approach when teaching students how to use Webledger software ---
http://www.trinity.edu/rjensen/Webledger.htm

For example, the term project report for a team of my students is available at
http://www.trinity.edu/rjensen/acct5342/projects/Netledger.pdf
This project was conducted when students could get free WebLedger accounts. I don't think that's possible these days.


 Are Herbalife's financial statements nutritious?

Grumpy Old Accountants
Tony promised he would notify the AECM about his new postings.
I think he's forgetting his promise.
the Grumpy Old Accountants Blog carries on in the style of Abe Briloff. For decades Abe grubbed around the details of financial statements to find violations of accounting standards, auditing standards, and reporting integrity in general. Tony is trying to carry on alone with this blog --- which is a huge job because it's not easy to pour over financial statements at a professional level.

"What Do Herbalife's Financials Tell Us?," Anthony H. Catanach Jr., Grumpy Old Accountants, January 30, 2013 ---
http://grumpyoldaccountants.com/blog/2013/1/30/what-do-herbalifes-financials-tell-us 

Once again I'm asking Tony to let us know when he posts a new tidbit on the GOA Blog.

Ponzi/Pyramid Schemes --- http://www.trinity.edu/rjensen/FraudRotten.htm#Ponzi


CNET, CES and Crowd-sourced audits: Independence does matter ---
http://uwcisa-assurance.blogspot.com/2013/02/cnet-ces-and-crowd-sourced-audits.html
Thank you Jerry Trites for the heads up.


"How to Add and Subtract Roman Numerals," by Jason Marshall, The Math Dude, February 1, 2013 ---
http://mathdude.quickanddirtytips.com/how-to-add-and-subtract-roman-numerals.aspx

Jensen Comment
This may be useful if your teaching about financial derivative instruments history. Options trading dates back to Roman times ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds


In many cases, this will involve a significant change in the way a firm used to account for expenditures in their income statement and on their balance sheet.
"Property Tax Rules Puzzle Finance Staffs," by Kathleen Hoffelder, CFO.com, February 1, 2013 --- Click Here
http://www3.cfo.com/article/2013/1/tax_repair-regs-tangible-property-tax-ernst-young-irs?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+cfo%2Fdaily_briefing+%28Latest+Articles+from+CFO.com%29

CFOs and their finance staffs have had since March to digest guidance from the Internal Revenue Service and the U.S. Department of Treasury in how to apply new tax regulations regarding a corporation’s tangible property, including equipment and such things as elevators or desks. But the rules are so complicated it has many still scratching their heads months later.

“It’s intimidating for many companies. And the level of effort needed to analyze what is the best strategic approach to implement, to quantify the effects of changing, and to actually implement the changes is more than many companies can spend or are willing to spend,” says Thomas Yeates, national director of cost segregation at Ernst & Young.

The new tangible-property rules are an attempt to provide more specific tax requirements for taxpayers. But they now require many corporations to reclassify property improvements formally deemed tax deductions or capital expenditures. In many cases, this will involve a significant change in the way a firm used to account for expenditures in their income statement and on their balance sheet.

Generally, the new regulations mandate that costs to enhance or improve tangible property have to be capitalized and those costs incurred to simply repair and keep tangible property in working order would be allowed to be deducted. Previously, determining which category improvements to a property would fall into was fuzzy. The new rules include three tests to determine whether an expense is deemed a “betterment,” a “restoration," or an "adaptation”of the property to a new and different use.

But nothing is as simple as it sounds when it comes to tax codes. The new tangible-property guidance, for instance, includes no fewer than 19 accounting-method changes that exist within the tangible property rules’ section 481(a) tax adjustments.

The 481(a) adjustments must be applied, for instance, when a corporation changes its accounting method from deducting to capitalizing an expense, when a firm acquires new tangible property, or disposes of property. Since there are myriad of ways to account for such an expense, this is an area that has typically perplexed corporation for years.

Speaking at a New York State Society of CPAs tax conference this week, Yeates quoted what IRS officials have said in the past about "dispositions" in the tangible-property regulations— that it “will be the battlefield that will remain after the final regs.” That’s because, as he puts it, “there is not a lot of guidance.”

In IRS terminology, anything deemed a sale, exchange, retirement, physical abandonment, or destruction of an asset falls into the "disposition" area. Under the new tangible-property rules, the retirement of the structural components of a building is also now included, where it was not in the past.

But, according to Yeates, the language--and not just the structural change in the new guidance for dispositions--is what's confusing. Under the new tangible property regulations, taxpayers must use a reasonable valuation method for dispositions that is “consistently applied.” Determining what that means may be easier said than done, he says.

Some IRS officials interpret the ‘consistently applied’ language to mean that once an asset has a disposition (as in the case of a roof repair being claimed as a full replacement) applied to it once, that is the way it is defined for every disposition thereafter, he says.

The guidelines do improve some things for corporate taxpayers, however. Previously a taxpayer could not actually claim a “partial” disposition on the replacement of a roof for example, hindering a taxpayer's ability to claim another disposition on that same asset in the future. The new regulations now permit corporations to write off structural components of an asset that have been replaced, for example.

But the complex language of that beneficial provision of the guidance is in itself puzzling to corporations, according to Yeates. “This is a troubling issue… and will continue to cause confusion until more guidance is out,” he says.

Continued in article


"Does Everyone Lie? Are we a Culture of Liars?" by accounting professor Steven Mintz, Ethics Sage, February 1, 2013 ---
http://www.ethicssage.com/2013/02/does-everyone-lie.html

"The Lying Culture," by J. Edward Ketz & Anthony H. Catanach Jr.,  SmartPros, February 2011 ---
http://accounting.smartpros.com/x71398.xml

From time to time, it is good to stop and assess one's progress in life. Such an evaluation helps people to figure out how they are doing and to make strategic decisions to take advantage of upcoming opportunities and to meet future challenges. When we do this for the accounting profession, we shake our heads because accounting shenanigans remain abundant and the seeds for further scandals are sown, watered, and fertilized.

The kernel of this problem is simple: company managers and their advisers are liars. Ok, not all of them, but so many are liars that the business community is in danger of falling on its own petard. Maybe this is because American society has a problem with the truth, as exemplified by our political, military, bureaucratic, sports, and entertainment leaders. We often hear the mantra, “the truth shall make you free,” but our leaders apparently desire to enslave others through their destructively self-serving, lying behaviors.

One obvious current example is the toxic assets still held by banks in the wake of the financial crisis of 2008. These investments have real values lower than their carrying values, but banks refuse to write them down, citing mush about earnings volatility and the adverse effects of mark-to-market accounting. They reject fair value accounting because it would reveal the precarious position of the banking industry. In short, banks are lying about asset values and really are not well capitalized.

Continued in article

 
"Who is Telling the Truth?  The Fact Wars:  ," as written on the Cover of Time Magazine
 "Blue Truth-Red Truth: Both candidates say White House hopefuls should talk straight with voters. Here's why neither man is ready to take his own advice ,"
 by Michael Scherer (and Alex Altma), Time Magazine Cover Story, October 15, 2012, pp. 24-30 ---
 http://www.cs.trinity.edu/~rjensen/temp/PresidentialCampaignLies2012.htm

The Cheating Culture: Why More Americans Are Doing Wrong to Get Ahead [Paperback]
by David Callahan (Author)
http://www.amazon.com/The-Cheating-Culture-Americans-Doing/dp/0156030055/ref=cm_cr_pr_product_top

Customer Reviews
The Cheating Culture: Why More Americans Are Doing Wrong to Get Ahead
http://www.amazon.com/The-Cheating-Culture-Americans-Doing/product-reviews/0156030055?pageNumber=2

Review by Stephen A. Lajoie (Seattle, WA USA)

I was interested in this book because I have observed increased incidents of cheating on college campuses. Cheating has become bold, blatant and unpunished.

The author makes the case that cheating has increased since 1974. The thesis of the author is that the greed of the political conservatives has caused the epidemic of cheating, and the author even cites a sound-bite from President Reagan, where Reagan says that he hopes that people can still get rich in this country, to support this claim.

The book is an interesting read for the data on how cheating has become socially acceptable among the middle class, but the author's thesis that political conservatives, due to their greed, have caused it is not well made. I would accuse him of neglectful induction: he doesn't examine non-capitalist countries like the former Soviet Union for examples of cheating. He claims that there was a golden age of honesty, and as an example of that points to big law firms that use to only hire the all white upper class sons of wealthy members of the law firm, but now, due to diversity laws, hire the top graduates out of law school. The new high pressure work environment and the drive to get to the top is the cause of cheating in billing. The author claims this is due to post 1974 conservative greed. Yet, the author ignored that sweat shop conditions have existed in the past, and that this law firm is nothing more than a yuppie sweat shop. Further, isn't hiring only the white upper class son's of the partners a way of cheating as well? The author does not address that.

The idea that corporate greed has caused cheating in schools is simply backwards, a confusion of cause and effect. One cheats in school and then goes into the business world, where one cheats in business. People do not, generally, go from cheating in business to cheating in high school.

Cheats have done well in big business since forever; this is nothing new since the Reagan administration. The author does not examine the relationship between the decline of religion and the increase in cheating, either; which is very neglectful induction. It simply does not follow that corporate greed is the root cause of the increase in cheating among the middle class.

Jensen Comment
There are many nations where students cheat much more commonly and blatantly than the United States. Plagiarism is extreme in the Soviet Union where even President Vladimir Putin plagiarized his entire Ph.D. thesis ---
http://www.trinity.edu/rjensen/Plagiarism.htm#Celebrities

It's not clear that Vladimir Putin even read his own thesis
Large parts of an economics thesis written by President Vladimir Putin in the mid-1990s were lifted straight out of a U.S. management textbook published 20 years earlier, The Washington Times reported Saturday, citing researchers at the Brookings Institution. It was unclear, however, whether Putin had even read the thesis, which might have been intended to impress the Western investors who were flooding into St. Petersburg in the mid-1990s, the report said. Putin oversaw the city's foreign economic relations at the time.
"Putin Accused of Plagiarizing Thesis," Moscow Times, March 27, 2006 ---
http://www.themoscowtimes.com/stories/2006/03/27/011.html

The Psychology of Plagiarism in Russia ---
http://psychologyinrussia.com/volumes/pdf/2009/27_2009_voiskunskii.pdf

"German Education Minister Stripped of Doctorate," Inside Higher Ed, February 7, 2013 ---
http://www.insidehighered.com/quicktakes/2013/02/06/german-education-minister-stripped-doctorate 

A panel at Heinrich Heine University has decided to strip Germany's education minister, Annette Schavan, of her doctorate because the committee found her dissertation to be plagiarized, the Associated Press reported. Schavan denies the charges and plans to appeal. A former defense minister in Germany resigned in 2011 after revelations that he had copied portions of his doctoral thesis.

Jensen Comment
In days of old the writings of students were considered the works of their major professors who sometimes helped themselves to these works without even acknowledging the original authors. This no longer is the case in modern times.

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

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


"High-Profile Plagiarism Prompts Soul-Searching in German Universities," by Paul Hockenos, Chronicle of Higher Education, February 25, 2013 ---
http://chronicle.com/article/High-Profile-Plagiarism/137515/?cid=wb&utm_source=wb&utm_medium=en

Rarely do political scandal and academe collide so publicly as they have now, in Europe. In February, Germany's education minister stepped down after Heinrich Heine University, in Düsseldorf, revoked her doctorate because her thesis lifted passages from other sources without proper attribution.

Her departure came after scandals over plagiarized work took down a German defense minister, the president of Hungary, and a Romanian education minister. But it is the storied German university system, not politics, that has suffered the real body blows, say education experts.

The front-page news has shaken higher education in Germany, where, in addition to the two former federal ministers, several other national and local political figures have been accused of academic fraud. The incidents have left many wondering: Is there something rotten at the heart of German academe, the esteemed heir of Humboldt and Hegel?

For two centuries, the German university as envisioned by the 19th-century philosopher Wilhelm von Humboldt has been the model for research institutions in Europe, the United States, and beyond. Humboldt's notions of academic freedom, the autonomy of the university, and placing scientific pursuit at the heart of higher education continue to carry weight today. But his legacy in Germany may be growing somewhat tarnished.

"The reputation of German universities is suffering, and it looks like it will suffer for some time to come," says Wolfgang E.J. Weber, director of the Institute for European Cultural History, in Augsburg, Germany, and author of a book on the history of the European university.

As a result of the scandals, he says, his historian colleagues from elsewhere in Europe no longer consider the German system to be the gold standard. Noting that the allegations of academic fraud have affected doctoral graduates in the humanities and liberal arts, Mr. Weber worries that if financing for disciplines in those areas suffers as a result, "the negative consequences could be long-term."

In Germany academic titles play a role in politics far greater than they do in the United States. Doctoral and other titles, sometimes as many as three or four, are prominently displayed on the business cards, door plaques, and letterheads of politicians. Some call it posturing—a modern-day "nobleman's title"—while others defend it as a meaningful distinction based on merit.

"In the German context, the academic title means more than just an expertise, say, in economics or law, that can be valuable to policy making or another field," says Thomas Rommel, rector of the European College of Liberal Arts of Bard, in Berlin, and author of a book about plagiarism in general. "It connotes personal achievement, an element of determination and grit to pursue a specialized topic for three years and see it through."

Whether one is impressed by the degree or not, the Ph.D. has become a facet of the German résumé that lures ambitious politicians and professionals who have no intention of entering academe. That has led to a proliferation of Ph.D.'s—roughly 25,000 a year awarded since 2000, more per capita than any other country in the world, according to the Federal Statistical Office of Germany. By comparison, American universities award 50,000 doctorates a year, but in a country with a population four times as large as Germany's.

Germany's output of Ph.D. recipients probably won't slow down, but the plagiarism cases have shined a spotlight on academe's time-honored methods for supervising and awarding doctorates, especially to candidates who are not full-time academics.

"In theory," says Martin Spiewak, education editor at the German weekly newspaper Die Zeit, "the professional with hands-on experience in a given field, like a politician, can through a dissertation bring something new into the world of scholarship that others can then profit from. It could be a unique, constructive link between the professional and the academic worlds."

Continued in article

Jensen Comment
Centuries ago Oxford was a collection of colleges rather than a university. When I lectured at Humboldt University in Berlin a few years ago, it was claimed that the idea of a university as opposed to a collection of colleges was conceived at Humboldt ---
http://en.wikipedia.org/wiki/University

Prior to the 20th Century the works of students became the works of their professors and were sometimes published without even giving credit to the original authors. Of course times have changed, although they perhaps changed a bit slower in Germany.

It was hard to sleep at night in my hotel because skyscrapers were being built 24/7 with lots of noise, loud radios, and men yelling loudly in Russian. Apparently Russian workers were imported to do a lot of the construction work. I thought it was ironic that the Russians destroyed Berlin and then were called back to rebuild it.

"German Education Minister Stripped of Doctorate," Inside Higher Ed, February 7, 2013 ---
http://www.insidehighered.com/quicktakes/2013/02/06/german-education-minister-stripped-doctorate 

A panel at Heinrich Heine University has decided to strip Germany's education minister, Annette Schavan, of her doctorate because the committee found her dissertation to be plagiarized, the Associated Press reported. Schavan denies the charges and plans to appeal. A former defense minister in Germany resigned in 2011 after revelations that he had copied portions of his doctoral thesis.

Jensen Comment
In days of old the writings of students were considered the works of their major professors who sometimes helped themselves to these works without even acknowledging the original authors. This no longer is the case in modern times.

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

 


"What is the Value of Ethics Education? Are Universities Successfully Teaching Ethics to Business Students?," by Accounting Professor Steven Mintz, Ethics Sage, February 12, 2013 ---
http://www.ethicssage.com/2013/02/what-is-the-value-of-ethics-education.html

. . .

This is "academic-speak" for we do not want to hold the schools accountable for ethics education. AACSB's failure to set specific goals for business ethics education speaks volumes about the political pressure from accredited schools that were brought to bear on any new standards that require specific education. Academic administrators do not want to be tied down to a specific course of action or program; they want a more "flexible" approach. The result is a meaningless standard that fails to address the critical problems that face us today in graduating business students who become tomorrow's future abusers of the capitalist system because of narcissitic behavior.

So, what should be done about the failure of business ethics education over the years to stem the rising tide of corporate fraud and wrongdoing? I believe the emphasis of business ethics education has to change from teaching philosophical reasoning methods that rarely work in practice to a more values-based approach that emphasizes ethical leadership. Ethical leadership is a must in any discipline -- accounting, finance, information systems, management and marketing. Therefore, all college instructors should buy into the need to slant their teaching methods to incorporate leadership -- ethical leadership.

Jensen Comment
Those of us that have had to deal with cheating students over the years, including those who cheated in ethics classes, discover that ethics behavior or lack thereof is very, very complicated. Unethical behavior and cheating is very situational and opportunistic. Sometimes lapses arise when there are heavy demands on time such as those demands of varsity athletics, troubled marriages, child illness, etc. Sometimes lapses arise from a follow-the-herd situation such as that recently observed among 125 students in a recent Harvard political science course.

In my opinion, most lapses in ethics do not arise from ignorance about the ethics guidelines. Therefore, teaching about it is not likely to have much incremental benefit in preventing ethics lapses at the individual level. There may be some benefit in terms of awareness and better writing of ethics guidelines. And studying what happens when violations of ethics have severe consequences may instill some fear. For example, expelling half the 125 students who were caught cheating in one political science class probably made the remaining students at Harvard University sit up and take notice that the Harvard's Student Honor Code is not toothless.

"Anton Chekhov on the 8 Qualities of Cultured People," by Maria Popova, Brain Pickings, January 29, 2013 ---
http://www.brainpickings.org/index.php/2013/01/29/anton-chekhov-8-qualities-of-cultured-people/

Jensen Comment
I suspect there are not many cultured people in the world because of Criterion Number 4.

"Does Everyone Lie? Are we a Culture of Liars?" by accounting professor Steven Mintz, Ethics Sage, February 1, 2013 ---
http://www.ethicssage.com/2013/02/does-everyone-lie.html

"The Lying Culture," by J. Edward Ketz & Anthony H. Catanach Jr.,  SmartPros, February 2011 ---
http://accounting.smartpros.com/x71398.xml


Ethical Video Dilemmas for use in the classroom from KPMG --- Click Here

http://emailcc.com/collect/click.aspx?u=yBkk0yFkQBUYhLtB0iEBFmUseoUsqrE3Dvx/pWbQzRFv6VS1ngkmZHUQgfaiTiOzbtC9dsBLaDuNzSN3elnG7KqpqZ4gUCv1aVtnb7PdTsGsnf7V+NKo0sTNSGcmspf9&rh=ff000e36e0e62e7a3efaa54b8d4999362097bc09


"UK's "Big Four" accountants under fire from watchdog," by Huw Jones, Reuters, February 22, 2013 ---
http://www.reuters.com/article/2013/02/22/us-britain-accounting-idUSBRE91L0C920130222

Companies in Britain could be forced to switch accountants to break up the cozy relationships between the "Big Four" and their clients, blamed for masking weaknesses exposed by the financial crisis.

The "Big Four" - KPMGKPMG.UL, PwC PWC.UL, Ernst & Young ERNY.UL and Deloitte DLTE.UL - check the books of nearly all listed companies in Britain and around the world, and have often served the same clients for decades.

The UK's Competition Commission proposed that companies put out their audit work to tender every five to seven years, and change accounting firms every seven to 14 years - roughly in line with changes being discussed at the European Union level.

Investors would also play a role in selecting an auditor, according to plans put forward by the commission, which published preliminary findings from a probe it began in 2011.

The industry was put under scrutiny after auditor "complacency" was blamed by UK lawmakers for deepening the financial crisis.

The Competition Commission found that 31 percent of the top 100 companies in the UK and a fifth of the next 250 firms had had the same auditor for over 20 years.

Competition in the UK is restricted by factors that make it hard for companies to switch accountants, the Competition Commission found, and there is a tendency for auditors to focus on satisfying management rather than shareholder needs, it said.

The findings add weight to a draft European Union law which contains plans for boosting competition in the 27-country bloc's audit market which would override UK changes.

The United States is also mulling auditor rotation as the sector faces questions for giving banks a clean bill of health just before governments had to step in and rescue them in the 2007-09 financial crisis.

Critics have said the Big Four should separate out their audit and advisory units, a step the draft EU law looks at.

"The real issue we have identified is stickiness in the market," Laura Carstensen, who chaired the probe, told Reuters. "The question of break-up was not on our list."

There was "significant dissatisfaction" among big investors, the commission said, but changing the "long standing and entrenched" system would take time.

Its proposals go further than a recent change introduced by Britain's Financial Reporting Council (FRC), which requires companies to consider changing accountants every decade. The FRC said it was pleased the Commission was looking at taking more steps to enhance competitiveness and switching.

PIRC, which represents pension funds and fund managers, said mandatory rotation was the best way to ensure auditor independence and large shareholders increasingly favored this.

The commission also proposes banning "Big Four only" clauses, meaning banks could not insist on a borrower using one of the four top audit firms.

"GROSSLY UNDERESTIMATED"

The Big Four insist there is strong competition and point to downward pressure on fees and some recent switchings of auditors among big companies.

PwC said the Competition Commission had "grossly underestimated" the critical role the audit committees at client firms play in protecting shareholder interests.

Ernst & Young said it was pleased the watchdog found no collusion, abuses or excess profits but rejected accusations that the audit market was not serving shareholders, as did Deloitte and KPMG.

"In addition, we believe that competition between audit firms is healthy and robust and that the evidence supports this," E&Y said.

But second tier audit firms, such as Mazars, BDO and Grant Thornton, welcomed the findings after having argued it would not be worthwhile expanding unless there was some intervention to help prise open the market.

Continued in article

"Big four accountants 'insufficiently independent and sceptical' of City:  Competition Commission criticises Ernst & Young, Deloitte, KPMG and PwC for 'higher prices, lower quality and less innovation'," by Josephine Moulds and David Feeney, The Guardian, February 22, 2013 ---
http://www.guardian.co.uk/business/2013/feb/22/big-four-accountancy-competition-commission-audits

Jensen Comment
I doubt that the U.K. has the jurisdiction to trust-bust these large international auditing firms. However, the U.K. may be the first to force audit firm rotation in auditing. The U.K. has more problems than just audit firms. Among all the giant banks in the world, the U.K. has some of the most criminally-inclined banks that money launder for Iran and the large drug cartels. And then there's the massive LIBOR scandal that will cost U.K. banks billions in fines. If we start putting bankers in prison, the place to start is the U.K.

The U.K. could force its big companies to give more audit work to smaller firms. But this may have negative repercussions on the cost of capital for those firms to say nothing of the formidable startup costs for any small firm to take on giant companies like giant banks and insurance companies headquartered in the U.K.

A simpler solution would be for the U.K. to become more litigious and make the large auditing firms more vulnerable to billion-dollar audit negligence tort cases. The costs will, of course, be passed on the U.K. clients, but if this is what the U.K. wants in order to have more professional and independent audits then this is the route that I would recommend.

As a parting question, do the Brits spell skeptical as sceptical?
I do know that they spell judgment as judgement.


"Are languages important for accountants?" by Mark P. Holtzman, Accountinator Blog, February 21, 2013 ---
http://accountinator.com/2013/02/21/1151/

Jensen Comment
Increasingly in this global world I've been an advocate of language skills in general and for accounting graduates in particular. Years ago I had a student at Trinity University who had a minor in Russian. My personal opinion is that he probably would not have become a Big Four partner in the Houston Office. However, when he was transferred to the Moscow office of that Big Four firm he made partner in record time.

Accounting and auditing firms in Texas have enormous opportunities for client work in Mexico and most points south where Spanish is generally the native tongue. I had another student who I never predicted would get a job with a Big Four firm because I always thought of him more as a baseball star than a good student in accounting. However, Trinity University is a special university for language skills. This baseball player landed a job in the San Antonio office of the Big Four. Furthermore he was single and more than willing to take on very long engagements with clients south of the Rio Grande. This student also had a very engaging personality --- one of the funniest guys I ever met. He probably should've followed in the footsteps of an accountant named Bob Newhart.

Trinity University has a relatively popular Chinese language program and quite a few of my former students found it to their advantage to minor in Chinese.

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



Question
Is Apple's iWatch for real or a phony stock price "pump and dump" ploy?

"Dick Tracy Alert, The iWatch," by Accounting Professor Dennis Elam's Blog, February 12, 2013 ---
http://professorelam.typepad.com/my_weblog/2013/02/dick-tracy-alert-the-iwatch.html

"Who's Manipulating Apple Stock With This iWatch Story?" by Dan Lyons, ReadWriteWeb, February 11, 2013 ---
http://readwrite.com/2013/02/11/whos-manipulating-apple-stock-with-this-iwatch-story

That was the cry from Apple fanbloggers last month when the Wall Street Journal reported that Apple had reduced component orders, a possible sign of softening demand for Apple products. That story broke nine days before Apple was to report its earnings, and sent the stock reeling downward.

But if that was the case, then who’s manipulating Apple stock now, with this sudden barrage of “leaks” about the iWatch?

Does no one else think it’s kind of remarkable that this unreleased product suddenly starts showing up in dozens of blog posts and press stories? And that these leaks happened, coincidentally, right after Apple’s stock endured a brutal slide from just above $700 in September to a low of $435 in January?

The last stock plunge took place after Apple reported disappointing earnings for the holiday quarter, and ended up treading water in the $450 range. That was Jan. 28.

Note what happens next. On Feb. 5, the Wall Street Journal reports that after taking a beating on Wall Street, Apple has been “subtly increasing some of its PR,” doing things like sending reporters “more favorable third-party reports on the company.”

In other words: Apple wanted to get the stock back up, and so its flacks were reaching out to reporters and briefing them on background, trying to convince them that things at Apple were better than what Wall Street believed.

Anatomy Of A Pump

Meanwhile, just as Apple’s flacks have started working the phones, we start to hear drumbeats about a miraculous new product. Wow! What a coincidence.

And what is this product? Why, it's an amazing, life-changing, paradigm-shifting, stolen-from-the-future gorgeously designed product, a product that you've always wanted and needed though you never thought about it before, a product that will once again put Apple ahead of everyone else: The iWatch.

Bits and pieces about Apple doing a watch have been floating around since at least last year. But suddenly, in the past few weeks, just as Apple has started briefing reporters, this story starts heating up.

It begins with things like this post on Jan. 30 by MG Siegler of TechCrunch. Siegler, who basically operates as an unpaid Apple PR guy, says he’s getting a Pebble smartwatch, and then on goes for a couple thousand words about how huge this whole smartwatch thing could be and boy does he want one and man wouldn’t a smartwatch just change everything and wow, I bet Apple and Google are looking at this space, don’t you?

Then on Feb. 5 comes this even more incredibly overlong piece by Bruce Tognazzini, a former Apple interface designer, who suddenly, for no apparent reason, feels prompted to wax on for thousands and thousands of words about all the amazing things that Apple’s iWatch (he’s already given it a name and says it “will fill a gaping hole in the Apple ecosystem”) might do.

The Story Goes Mainstream

Then, on Sunday, the drumbeats turned into something more, when two major newspapers both ran iWatch stories.

One scoop came from Jessica Lessin at the Wall Street Journal, the same reporter who wrote about Apple doing more briefings with reporters. (Weird, right?) Another scoop came from Nick Bilton at the New York Times, whose story ran online on Sunday and then had a nice big spot on the front of Monday morning’s Times business section.

A big section-front story on a Monday morning in the New York Times! What fortuitous timing! You’d almost think it had been planned. Bilton’s story cited as sources “people familiar with the company’s explorations, who spoke on condition that they not be named because they are not allowed to publicly discuss unannounced products.” Wonder who that could be?

Continued in article

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


"What is the Value of Ethics Education? Are Universities Successfully Teaching Ethics to Business Students?," by Accounting Professor Steven Mintz, Ethics Sage, February 12, 2013 ---
http://www.ethicssage.com/2013/02/what-is-the-value-of-ethics-education.html

. . .

This is "academic-speak" for we do not want to hold the schools accountable for ethics education. AACSB's failure to set specific goals for business ethics education speaks volumes about the political pressure from accredited schools that were brought to bear on any new standards that require specific education. Academic administrators do not want to be tied down to a specific course of action or program; they want a more "flexible" approach. The result is a meaningless standard that fails to address the critical problems that face us today in graduating business students who become tomorrow's future abusers of the capitalist system because of narcissitic behavior.

So, what should be done about the failure of business ethics education over the years to stem the rising tide of corporate fraud and wrongdoing? I believe the emphasis of business ethics education has to change from teaching philosophical reasoning methods that rarely work in practice to a more values-based approach that emphasizes ethical leadership. Ethical leadership is a must in any discipline -- accounting, finance, information systems, management and marketing. Therefore, all college instructors should buy into the need to slant their teaching methods to incorporate leadership -- ethical leadership.

Jensen Comment
Those of us that have had to deal with cheating students over the years, including those who cheated in ethics classes, discover that ethics behavior or lack thereof is very, very complicated. Unethical behavior and cheating is very situational and opportunistic. Sometimes lapses arise when there are heavy demands on time such as those demands of varsity athletics, troubled marriages, child illness, etc. Sometimes lapses arise from a follow-the-herd situation such as that recently observed among 125 students in a recent Harvard political science course.

In my opinion, most lapses in ethics do not arise from ignorance about the ethics guidelines. Therefore, teaching about it is not likely to have much incremental benefit in preventing ethics lapses at the individual level. There may be some benefit in terms of awareness and better writing of ethics guidelines. And studying what happens when violations of ethics have severe consequences may instill some fear. For example, expelling half the 125 students who were caught cheating in one political science class probably made the remaining students at Harvard University sit up and take notice that the Harvard's Student Honor Code is not toothless.


"In a Memphis Cheating Ring, the Teachers Are the Accused," by Motoko Rich, The New York Times, February 2, 2013 ---
http://www.nytimes.com/2013/02/02/education/in-memphis-cheating-ring-teachers-are-the-accused.html?hpw&_r=0

In the end, it was a pink baseball cap that revealed an audacious test-cheating scheme in three Southern states that spanned at least 15 years.

Test proctors at Arkansas State University spotted a woman wearing the cap while taking a national teacher certification exam under one name on a morning in June 2009 and then under another name that afternoon. A supervisor soon discovered that at least two other impersonators had registered for tests that day.

Ensuing investigations ultimately led to Clarence D. Mumford Sr., 59, who pleaded guilty on Friday to charges that accused him of being the cheating ring’s mastermind during a 23-year career in Memphis as a teacher, assistant principal and guidance counselor.

Federal prosecutors had indicted him on 63 counts, including mail and wire fraud and identify theft. They said he doctored driver’s licenses, pressured teachers to lie to the authorities and collected at least $125,000 from teachers and prospective teachers in Arkansas, Mississippi and Tennessee who feared that they could not pass the certification exams on their own.

Mr. Mumford pleaded guilty to two counts of the indictment, just a week after he rejected a settlement offer. At the time, he said that its recommended sentence of 9 to 11 years was “too long a time and too severe”; the new settlement carries a maximum sentence of 7 years.

Mr. Mumford appeared in Federal District Court here on Friday wearing a dark suit and a matching yellow tie and pocket handkerchief. He said little more than “Yes, sir” in answer to questions from Judge John T. Fowlkes.

Another 36 people, most of them teachers from Arkansas, Mississippi and Tennessee, have been swept up in the federal dragnet, including Clarence Mumford Jr., Mr. Mumford’s son, and Cedrick Wilson, a former wide receiver for the Pittsburgh Steelers. (Mr. Wilson paid $2,500 for someone to take a certification exam for physical education teachers, according to court documents.)

In addition to the senior Mr. Mumford, eight people have pleaded guilty to charges stemming from the investigation into the ring, and on Friday, a federal prosecutor, John Fabian, announced that 18 people who confessed to paying Mr. Mumford to arrange test-takers for them had been barred from teaching for five years.

The case has rattled Memphis at a tumultuous time. The city’s schools are merging with the suburban district in surrounding Shelby County, exposing simmering tensions over race and economic disparity. The state has also designated 68 schools in the city as among the lowest-performing campuses in Tennessee, and is gradually handing control of some of them to charter operators and other groups. And with a $90 million grant from the Bill and Melinda Gates Foundation, the district is overhauling how it recruits, evaluates and pays teachers.

District officials say that the test scandal does not reflect broader problems, and that none of the indicted teachers still work in the Memphis schools. (At least one teacher is working in Mississippi.) “It would be unfair to let what may be 50, 60 or 100 teachers who did some wrong stain the good work of the large number of teachers and administrators who get up every day and go by the book,” said Dorsey Hopson, the general counsel for Memphis City Schools who this week was named the district’s interim superintendent.

“A teacher’s job is very hard. I know it is,” said Threeshea Robinson, a mother who waited last week to pick up her son, a fourth grader at Raleigh-Bartlett Meadows Elementary School, where a teacher who has pleaded guilty taught until last fall. “But I would not want a doctor who did not pass all his tests operating on me.”

The tests involved are known as Praxis exams, and more than 300,000 were administered last year by the nonprofit Educational Testing Service for people pursuing teaching licenses or new credentials in specific subjects like biology or history.

By and large, they are considered easy hurdles to clear. In Tennessee, for example, 97 percent of those who took the exams in the 2010-11 school year passed.

Robert Schaeffer, the public education director of FairTest, the National Center for Fair and Open Testing, said that the testing service had had problems with cheating before.

Ray Nicosia, the executive director of the testing service’s Office of Testing Integrity, said episodes of impersonation were rare.

Continued in article

"Dishonest Educators," by Walter E. Williams, Townhall, January 9, 2013 --- Click Here
http://townhall.com/columnists/walterewilliams/2013/01/09/dishonest-educators-n1482294?utm_source=thdaily&utm_medium=email&utm_campaign=nl

Nearly two years ago, U.S. News & World Report came out with a story titled "Educators Implicated in Atlanta Cheating Scandal." It reported that "for 10 years, hundreds of Atlanta public school teachers and principals changed answers on state tests in one of the largest cheating scandals in U.S. history." More than three-quarters of the 56 Atlanta schools investigated had cheated on the National Assessment of Educational Progress test, sometimes called the national report card. Cheating orders came from school administrators and included brazen acts such as teachers reading answers aloud during the test and erasing incorrect answers. One teacher told a colleague, "I had to give your kids, or your students, the answers because they're dumb as hell." Atlanta's not alone. There have been investigations, reports and charges of teacher-assisted cheating in other cities, such as Philadelphia, Houston, New York, Detroit, Baltimore, Los Angeles and Washington.

Recently, The Atlanta Journal-Constitution's blog carried a story titled "A new cheating scandal: Aspiring teachers hiring ringers." According to the story, for at least 15 years, teachers in Arkansas, Mississippi and Tennessee paid Clarence Mumford, who's now under indictment, between $1,500 and $3,000 to send someone else to take their Praxis exam, which is used for K-12 teacher certification in 40 states. Sandra Stotsky, an education professor at the University of Arkansas, said, "(Praxis I) is an easy test for anyone who has completed high school but has nothing to do with college-level ability or scores." She added, "The test is far too undemanding for a prospective teacher. ... The fact that these people hired somebody to take an easy test of their skills suggests that these prospective teachers were probably so academically weak it is questionable whether they would have been suitable teachers."

Here's a practice Praxis I math question: Which of the following is equal to a quarter-million -- 40,000, 250,000, 2,500,000, 1/4,000,000 or 4/1,000,000? The test taker is asked to click on the correct answer. A practice writing skills question is to identify the error in the following sentence: "The club members agreed that each would contribute ten days of voluntary work annually each year at the local hospital." The test taker is supposed to point out that "annually each year" is redundant.

CNN broke this cheating story last July, but the story hasn't gotten much national press since then. In an article for NewsBusters, titled "Months-Old, Three-State Teacher Certification Test Cheating Scandal Gets Major AP Story -- on a Slow News Weekend" (11/25/12), Tom Blumer quotes speculation by the blog "educationrealist": "I will be extremely surprised if it does not turn out that most if not all of the teachers who bought themselves a test grade are black. (I am also betting that the actual testers are white, but am not as certain. It just seems that if black people were taking the test and guaranteeing passage, the fees would be higher.)"

There's some basis in fact for the speculation that it's mostly black teachers buying grades, and that includes former Steelers wide receiver Cedrick Wilson, who's been indicted for fraud. According to a study titled "Differences in Passing Rates on Praxis I Tests by Race/Ethnicity Group" (March 2011), the percentages of blacks who passed the Praxis I reading, writing and mathematics tests on their first try were 41, 44 and 37, respectively. For white test takers, the respective percentages were 82, 80 and 78.

Continued in article

"What Will They Learn?" by Walter E. Williams, Townhall, August 26, 2009 --- http://townhall.com/columnists/WalterEWilliams/2009/08/26/what_will_they_learn 

"Does Everyone Lie? Are we a Culture of Liars?" by accounting professor Steven Mintz, Ethics Sage, February 1, 2013 ---
http://www.ethicssage.com/2013/02/does-everyone-lie.html

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

 


2012 Harvard Cheating Scandal --- http://en.wikipedia.org/wiki/2012_Harvard_cheating_scandal

"Dozens of students withdraw in Harvard cheating scandal." Reuters, February 1, 2013 ---
http://www.reuters.com/assets/print?aid=USBRE9101AF20130201

As many as 60 students have been forced to withdraw from Harvard University after cheating on a final exam last year in what has become the largest academic scandal to hit the Ivy League school in recent memory.

Michael Smith, Harvard's Dean of the Faculty of Arts and Sciences, sent an email on Friday saying that more than half of the students who faced the school's Administrative Board have been suspended for a time.

Roughly 125 undergraduates were involved in the scandal, which came to light at the end of the spring semester after a professor noticed similarities on a take-home exam that showed students worked together, even though they were instructed to work alone.

The school's student newspaper, The Harvard Crimson, has reported that the government class, Introduction to Congress, had 279 students enrolled.

"Somewhat more than half of the Administrative Board cases this past fall required a student to withdraw from the College for a period of time," Smith wrote. "Of the remaining cases, roughly half the students received disciplinary probation, while the balance ended in no disciplinary action."

The cases were resolved during the fall semester, which ended in December, Smith said. Suspensions depend on the student, but traditionally last two semesters and as much as four semesters.

In the last few months, the university has also worked to be clearer about the academic integrity it expects from students.

"While all the fall cases are complete, our work on academic integrity is far from done," Smith added.

"Half of students in Harvard cheating scandal required to withdraw from the college," by Katherin Landergan, Boston.com, February 1, 2013 ---
http://www.boston.com/yourcampus/news/harvard/2013/02/half_of_students_in_harvard_cheating_scandal_required_to_withdraw_from_the_college.html

In an apparent disclosure about the Harvard cheating scandal, a top university official said Friday that more than half of the Harvard students investigated by a college board have been ordered to withdraw from the school.

In an e-mail to the Harvard community, Dean of the Faculty of Arts and Sciences Michael D. Smith wrote that more than half of the students who were brought before the university's Administration Board this fall were required to withdraw from for a period of time.

Of the remaining cases, approximately half the students received disciplinary probation, while the rest of the cases were dismissed.

Smith's e-mail does not explicitly address the cheating scandal that implicated about 125 Harvard students. But a Harvard official confirmed Friday that the cases in the email solely referred to one course.

In August, Harvard disclosed the cheating scandal in a Spring 2012 class. It was widely reported to be "Government 1310: Introduction to Congress."

“Consistent with the Faculty’s rules and our obligations to our students, we do not report individual outcomes of Administrative Board cases, but only report aggregate statistics,” the e-mail said. "In that tradition, the College reports that somewhat more than half of the Administrative Board cases this past fall required a student to withdraw from the College for a period of time. Of the remaining cases, roughly half the students received disciplinary probation, while the balance ended in no disciplinary action.''

Smith wrote that the first set of cases were decided in late September, and the remainder were resolved in December.

The e-mail said that "The time span of the resolutions in this set had an undesirable interaction with our established schedule for tuition refunds. To create a greater amount of financial equity for all students who ultimately withdrew sometime in this period, we are treating, for the purpose of calculating tuition refunds, all these students as having received a requirement to withdraw on September 30, 2012."

In a statement released when the cheating scandal became public, Harvard president Drew Faust said that the allegations, “if proven, represent totally unacceptable behavior that betrays the trust upon which intellectual inquiry at Harvard depends. . . . There is work to be done to ensure that every student at Harvard understands and embraces the values that are fundamental to its community of scholars.”

As Harvard students returned to classes for the current semester, professsors included explicit instructions about collaboration on the class syllabus.

On campus Friday afternoon, students reacted to the news.

Michael Constant, 19, said he thinks the college wanted to make a statement with its decision. But when over half of the students in a class cheat, not punishing them is the same as condoning the behavior.

“I think it’s fair,” Constant said of the board’s disciplinary action. “They made the choice to cheat.”

Georgina Parfitt, 22, said the punishment for these students was too harsh, and that many students in the class could have been confused about the policy.

Parfitt said she does not know what the college is trying to achieve by forcing students to leave.

Continued in article

Jensen Question
The question is why cheat at Harvard since almost everybody who tries in a Harvard course receives an A. We're left with the feeling that those 125 or so students who cheated just did not want to try?

The investigation revealed that 91 percent of Harvard's students graduated cum laude.
Thomas Bartlett and Paula Wasley, "Just Say 'A': Grade Inflation Undergoes Reality Check:  The notion of a decline in standards draws crusaders and skeptics," Chronicle of Higher Education, September 5, 2008 --- http://chronicle.com/weekly/v55/i02/02a00104.htm?utm_source=wb&utm_medium=en

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


"Internal Audit At JPMorgan Chase: Not High Profile Enough Yet," by Francene McKenna, re:TheAuditors, January 31, 2013 ---
http://retheauditors.com/2013/01/31/internal-audit-at-jpmorgan-chase-not-high-profile-enough-yet/

Earlier this week I wrote a column at Forbes.com about the new Chief Auditor, or CAE, at JPMorgan Chase. Silly me, I thought after all that had happened at the bank last year for example, billions in losses from the “whale” trade, investigations into Libor and AML illegal acts, multiple lawsuits including by the New York Attorney General for foreclosure fraud – it was time to take a close look at the function and maybe make some changes.

The “Task Force Report”, a bank internal investigation into the “whale” trade losses says the bank did shake things up.

The Firm has put in place a new CIO leadership team. Matthew Zames, who had served as co-Head of Fixed Income in the Investment Bank, replaced Ms. Drew as the Firm’s Chief Investment Officer. He occupied that role from May 14, 2012 through September 6, 2012. Mr. Zames is now the co-Chief Operating Officer of the Firm and oversees, among other things, both the CIO and Treasury functions. Craig Delany replaced Mr. Zames as Chief Investment Officer and currently reports to him. Other key appointments include Marie Nourie (CFO for CIO); Chetan Bhargiri (Chief Risk Officer for CIO, Treasury and Corporate); Brendan McGovern (CIO Global Controller, a position that had been open since January 2012); Diane Genova (General Counsel for CIO and General Counsel for Markets in the Corporate and Investment Bank); Pat Hurst (Chief Auditor); and Ellen Yormack (Senior Audit Manager).

I thought the bank had replaced their Chief Audit Executive. I asked two different JPM spokespersons, in writing over the course of five days including a weekend, about the change, including questions about the fate of Lauren Tyler, the current CAE. They did not correct my mis-impression nor provide any further information about Hurst or a comment on my story.

I published the story after getting no response – and no further information about Hurst’s qualifications to be Chief Auditor – from the two spokespersons. That got the bank’s attention finally and I had to make a quick correction. (It seems people instantly flooded Lauren Tyler with calls thinking she had stepped down. Testament to the power of the pen, and Forbes.com, I guess.)

(Correction: I pursued a comment from two JPM spokespersons since Friday, Jennifer Zuccarelli and Mark Kornblau. They did not correct my impression, based on the Task Force Report, that Pat Hurst got a promotion to overall Chief Auditor.  Joe Evangelisti, chief bank spokesman, has now informed me, after this was published, that Pat Hurst is General Auditor for the Corporate division only, not the whole bank. Lauren Tyler is still Chief Auditor of the whole bank. I apologize for the error.)

My first thought was that I’d been “punked” – deliberately allowed to print incorrect information by the bank so they could undermine my credibility with a correction. The alternative – that two senior corporate communications folks would not immediately know who the bank’s General Auditor was and spot my erroneous impression that a change had been made – was too incredible to imagine.

You be the judge. I corrected the column and although it looks a bit messy, I think the rest of the information there on the bank’s lack of information about the CAE and the internal audit function and as well as what its Audit Committee charter says about the board’s lack of authority over the CAE speaks volumes.

There’s also a good quote from IIA CEO Richard Chambers about how things should be.

Do a little experiment. See if you can easily find the name of the Chief Audit Executive for each of the systemically important US banks on the banks websites.  (No peeking at the annual report.)

I dare you.

That quick test should tell you how much work banks still need to do to put internal audit in its proper place, as well as comply with new Fed rules about its structure, role and responsibilities in large banks.

JP Morgan Chase’s Audit Committee Charter says it, “shall review and concur in the appointment, replacement, reassignment, or dismissal of the General Auditor.” It’s not apparent to whom JPMorgan Chase’s Chief Auditor reports. But it’s clear from the charter that the Audit Committee does not approve the hiring, firing or reassignment of a Chief Auditor but merely reviews and concurs. That doesn’t sound tight enough to me.

Read the rest at Forbes.com.

Update: JPMorgan Chase did replace its Chief Compliance Officer Martha Gallo and its Chief Risk Officer, John Hogan.  According to New York Times DealBook:

Continued in article

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


The Professional's Guide to Fair Value: The Future of Financial Reporting
by James P. Catty
Wiley 2012 Edition
ISBN: 978-1-1180-0438-8

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


"White House Delivers New Open-Access Policy That Has Activists Cheering," by Jennifer Howard, Chronicle of Higher Education, February 22. 2013 ---
http://chronicle.com/article/White-House-Delivers-New/137549/

The Obama administration announced on Friday a major new policy aimed at increasing public access to federally financed research. The policy, delivered in a memorandum from John P. Holdren, director of the White House Office of Science and Technology Policy, applies to federal agencies that spend more than $100-million a year to support research and development.

In the memo, Mr. Holdren directed those agencies to develop "clear and coordinated policies" to make the results of research they support publicly available within a year of publication. The new policy also requires scientific data from unclassified, federally supported research to be made available to the public "to search, retrieve, and analyze." Affected agencies have six months to decide how to carry out the policy.

The White House's announcement emphasized the practical and economic benefits of sharing research. "Scientific research supported by the federal government catalyzes innovative breakthroughs that drive our economy," Mr. Holdren's memo stated. "The results of that research become the grist for new insights and are assets for progress in areas such as health, energy, the environment, agriculture, and national security."

The memo also nodded to scientific publishers, saying the Obama administration recognizes that publishers provide "valuable services," such as coordinating peer review, "that are essential for ensuring the high quality and integrity of many scholarly publications." The memo called it "critical that these services continue to be made available."

In a statement issued on Friday, the Association of American Publishers praised the new policy, which it said "outlines a reasonable, balanced resolution of issues around public access to research funded by federal agencies."

Tom Allen, the group's president and chief executive officer, said that, "in stark contrast to angry rhetoric and unreasonable legislation offered by some," the Office of Science and Technology Policy had chosen "a fair path that would enhance access for the public" while recognizing "the critical role publishers play" in the process.

Mr. Allen cautioned, however, that the policy's success depended on "how the agencies use their flexibility to avoid negative impacts to the successful system of scholarly communication that advances science, technology, and innovation."

'New Business Models'

It was clear that a number of federal agencies already had preparations under way for how they would observe the new policy. For instance, the National Science Foundation immediately sent out a statement affirming its commitment to the principle of public access, saying it had already established a timetable for consultation and planning. It noted that the "implementation details" were likely to vary by discipline "and that new business models for universities, libraries, publishers, and scholarly and professional societies could emerge."

Friday's announcement capped a lengthy process of consultation with various stakeholders that sought public input on access to federally financed research and data. More than 65,000 people have signed a petition on the White House's We the People Web site calling for free online access to scientific-journal articles based on taxpayer-supported research.

In a separate statement, Mr. Holdren responded directly to the petitioners. "The Obama administration agrees that citizens deserve easy access to the results of research their tax dollars have paid for," he wrote. "Your petition has been important to our discussions of this issue."

Continued in article

 

Jensen Comment
Don't start searching for free issues of TAR, JAR, JAE, AOS, etc. The USA has almost never deemed accounting research worthy of government funding. We may like to think of accountics science as science, but the government does not agree.

In the old days, some business schools like the ones at Carnegie-Mellon and Stanford received military research grants that allowed a few business school researchers to milk the government tit, but I've not heard about any such grants in recent years. These grants were sometimes in the areas of operations research where assorted accounting professors had some expertise.

There are government grants in health care that some accounting researchers, especially in the Harvard Business School, have participated in teams of researchers. I suspect they are continuing to do so.

At the University of Denver, my good friend and accounting professor Jim Sorensen received a number of government research grants over the years, some of which I think were human services costing research grants ---
http://daniels.du.edu/faculty-staff/james-sorensen/
In various ways Jim shows accounting researchers that they don't get government research grants because they don't know how to go about getting government grants --- and they don't try. Jim has always had a low-key knack for nosing out government and other funding for research. He's always been willing to try.

Years ago Jim Sorensen, Bob Swieringa, John Simmons, Bob Jensen, and Keith Shwayder were together in the DU's MBA program. Two went on for PhD degrees at Ohio State and three received PhD degrees from Stanford. Only Keith additionally ended up in prison ---
http://caselaw.findlaw.com/us-9th-circuit/1262881.html

Bob Jensen's threads on how Commercial Scholarly and Academic Journals and Oligopoly Textbook Publishers Are Ripping Off Libraries, Scholars, and Students ---
http://www.trinity.edu/rjensen/FraudReporting.htm#ScholarlyJournals


"Does an 'A' in Ethics Have Any Value? B-Schools Step Up Efforts to Tie Moral Principles to Their Business Programs, but Quantifying Those Virtues Is Tough," by Melissa Korn, The Wall Street Journal, February 6, 2013 ---
http://professional.wsj.com/article/SB10001424127887324761004578286102004694378.html?mg=reno64-wsj

Business-school professors are making a morality play.

Four years after the scandals of the financial crisis prompted deans and faculty to re-examine how they teach ethics, some academics say they still haven't gotten it right.

Hoping to prevent another Bernard L. Madoff-like scandal or insider-trading debacle, a group of schools, led by University of Colorado's Leeds School of Business in Boulder, is trying to generate support for more ethics teaching in business programs. [image] Richard Mia

"Business schools have been giving students some education in ethics for at least the past 25 or 30 years, and we still have these problems," such as irresponsibly risky bets or manipulation of the London interbank offered rate, says John Delaney, dean of University of Pittsburgh's College of Business Administration and Katz Graduate School of Business. Related

Can Globalization Be Taught in B-School? B-Schools Give Extra Help for Foreign M.B.A.s

He joined faculty and administrators from Massachusetts' Babson College, Michigan State University and other schools in Colorado last summer in what he says is an effort to move schools from talk to action. The Colorado consortium is holding conference calls and is exploring another meeting later this year as it exchanges ideas on program design, course content and how to build support among other faculty members.

But some efforts are at risk of stalling at the discussion stage, since teaching business ethics faces roadblocks from faculty and recruiters alike. Some professors see ethics as separate from their own subjects, such as accounting or marketing, and companies have their own training programs for new hires.

A strong ethics education can help counteract a narrowing worldview that often accompanies a student's progression through business school, supporters in academia say. Surveys conducted by the Aspen Institute, a think tank, show that about 60% of new M.B.A. students view maximizing shareholder value as the primary responsibility of a company; that number rises to 69% by the time they reach the program's midpoint.

Though maximizing shareholder returns isn't a bad goal in itself, focusing on that at the expense of customer satisfaction, employee well-being or environmental considerations can be dangerous.

Without tying ethics to a business curriculum, "we are graduating students who are very myopic in their decision-making," says Diane Swanson, founding chair of the Business Ethics Education Initiative at Kansas State University.

Stand-alone ethics courses are a start, but they "compartmentalize" the issue for students, as if ethical questions aren't applicable to all business disciplines, says David Ikenberry, dean of University of Colorado's Leeds School.

Some schools are experimenting with a more integrated approach. This fall, Boston University's School of Management is introducing a required ethics course for freshman business students, and is also tasking instructors in other business classes to incorporate ethics into their lessons. It may also overhaul a senior seminar to reinforce ethics topics.

"We need to hit the students hard when they first get here, remind them of these principles throughout their core classes, and hit them once again before they leave," says Kabrina Chang, an assistant professor at Boston University's business school, who is coordinating the new freshman class.

Students likely know right from wrong, so rather than, say, discussing whether a student would turn in a roommate caught stealing, Ms. Chang says she'll lead a debate on how or if a student might maintain a relationship with the thief.

Students may find the roommate-thief scenario more relevant than a re-examination of recent Ponzi schemes, but many remain skeptical of how such discussions apply to real life.

As one M.B.A. wrote last year on College Confidential, an online message board, "It's not like Johnny is going to be at the cusp of committing fraud and then think back to his b-school days and think, "gee, Professor Goody Two Shoes wouldn't approve."

What's more, schools can't calculate the moral well-being of their graduates the same way they can quantify financial success or technical acumen. One of the few rankings available—the Aspen Institute's "Beyond Grey Pinstripes" report—was suspended last year, in part because researchers could not determine the net benefit of ethics courses. Without demonstrable returns, there's little incentive for deans to add classes and instructors.

Employers, who have in the past pushed schools to add more hands-on training and global coursework, could successfully agitate for more ethics instruction. But many companies say completing an ethics course won't make or break a hiring decision—especially since firms tend to offer their own training for new hires.

Continued in article

This article also has a video.

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


When Grade Inflation = Lawsuit Inflation
"Prof's Daughter, Attending University for Free, Sues for $1.3 Million Over C+ Grade," by Riley Yates, The Morning Call, February 12, 2013 ---
http://www.mcall.com/news/local/mc-lehigh-university-student-sues-over-grade-20130211,0,937005.story

Megan Thode isn't the first Lehigh University student who was unhappy with the grade she received in a course. But she may be the first to sue to get it changed.

The C+ that Thode was given scuttled her dream of becoming a licensed professional counselor and was part of an effort to force her out of the graduate degree program she was pursuing, said her lawyer, Richard J. Orloski, whose lawsuit seeks $1.3 million in damages.

Orloski said his client is the victim of breach of contract and sexual discrimination, and a civil trial began Monday before Northampton County Judge Emil Giordano over the claims. They're nonsense, said Neil Hamburg, an attorney for Lehigh University.

"I think if your honor changed the grade, you'd be the first court in the history of jurisprudence to change an academic grade," Hamburg told Giordano.

"I've practiced law for longer than I'd like to [admit]," Giordano said, "and I've never seen something like this."

But after a day of testimony, a settlement could be in the works, after Giordano called the lawyers into his chambers late Monday and they emerged to hold private discussions with their clients. They are slated to return to court Tuesday with the trial, if it continues, expected to stretch through the week.

Thode, the daughter of Lehigh finance professor Stephen Thode, was attending the Bethlehem school tuition-free in 2009 when she received the poor mark in her fieldwork class. But instead of working to address her failings, she "lawyered up" and demanded a better grade, Hamburg said.

"She has to get through the program. She has to meet the academic standards," Hamburg said.

Thode, 27, of Nazareth, was enrolled in the College of Education in her second and final year of a master's in counseling and human services. She needed a B to take the next course of her field work requirement.

Orloski said she would have received that grade but for the zero in classroom participation that she was awarded by her teacher, Amanda Carr. Orloski charged that Carr and Nicholas Ladany — the then-director of the degree program — conspired to hold Thode back because they were unhappy that she'd complained after she and three other students were forced to find a supplemental internship partway through the semester.

Continued in article

Jensen Comment
How can you have a contract for a course grade before you take the course?
When I was nearly sued over an F grade in a student cheating incident, I learned from the Trinity University attorneys that it is very, very rare for a student to actually have a grade changed by a court. The lawsuit never was filed after the attorneys on both sides had a closed-door meeting among themselves.

The reason is obvious. If the courts set precedents for grade changes virtually all students who could afford to do so would sue to change any grade lower than an A grade. This would boggle the court dockets.

This Certainly Didn't Take Long --- Wonder if it will go all the way to the U.S. Supreme Court?

"Ex-Student Loses $1.3M Suit Over a C+," Inside Higher Ed, February 15, 2013 ---
http://www.insidehighered.com/quicktakes/2013/02/15/ex-student-loses-13m-suit-over-c

A Pennsylvania judge ruled Thursday that a former student had failed to demonstrate that a professor at Lehigh University was arbitrary in an illegal way in awarding her a C+, Lehigh Valley Live reported. The judge said that he did have some questions about the grade, but that the former student had failed to show that the grade was for "anything other than purely academic reasons." The former student had sought $1.3 million, saying that the low grade blocked her from proceeding in the graduate program of her choice.

Jensen Comment
The $1.3 million sought was supposedly computed on the basis of what the difference between average earnings of a lawyer versus that of a social worker.

 


"Three Accounting Frauds Most Chinese Companies Use To Cheat Foreign Investors," by Paul Gillis, China Money Podcast, February 5, 2013 ---
http://www.chinamoneypodcast.com/2013/02/05/paul-gillis-three-accounting-frauds-most-chinese-companies-use-to-cheat-foreign-investors

In this episode of China Money Podcast, guest Paul Gillis, professor of accounting at the Guanghua School of Management at Peking University in Beijing, discusses Caterpillar's $580 million write-down in its acquisition of Zhengzhou Siwei. Prof. Gillis explains the three most common accounting tactics Chinese companies use to cheat and defraud foreign investors, and what can foreign investors do to prevent themselves from being duped.

Listen to the full interview in the audio podcast, or read an excerpt.

Q: Caterpillar is taking a $580 million write-down on its acquisition of Chinese mining company, Zhengzhou Siwei, after discovering a "deliberate, multi-year, coordinated accounting misconduct."

Key background: 1, What Caterpillar bought for roughly $700 million was Hong Kong-listed ERA Mining Machinery, which is a shell company that owns Zhengzhou Siwei, a Henan province-based mining equipment maker. 2, Zhengzhou Siwei was absorbed by ERA through a reverse merger in 2010 and never went through a formal IPO process.

So Paul, can you use your imagination and picture what you think happened when Caterpillar's CFO told the CEO about this massive loss in their C-suit?

A: I imagine that was a pretty awkward situation. It's very embarrassing for anyone at Caterpillar to be involved in a deal like this. I'm sure there is a search for the guilty parties on the way.

Q: Here is what Caterpillar disclosed about how they found out about the accounting misconduct:

"Caterpillar first became concerned about…discrepancies…in November 2012 between the inventory recorded in Siwei’s accounting records and the company's actual physical inventory…Caterpillar promptly launched a comprehensive review and investigation (that) identified inappropriate accounting practices involving improper cost allocation that resulted in overstated profit. The review further identified improper revenue recognition practices involving early and, at times unsupported, revenue recognition."

From the above statement, what accounting fraud can you infer that Siwei has done?

A: The first thing they pointed to are problems with inventory. After counting the inventory in Siwei's factories, Caterpillar discovered Siwei didn't have as much inventory as recorded on their books. That means Siwei was capitalizing these costs and carrying it as inventory costs, as supposed to expensing it in the current period, which could lead to their profits significantly lower.

The more serious allegations in my mind are revenues being recognized too early or inappropriately. So some sales were recorded before they were actually completed. But this is a very common practice in China.

Western accounting standards are very detailed about when you can recognize revenue. For example, you must have signed contracts; you can't have rights of return; or obligations to do more things in the future. But in China, businesses are done more on relationships. The contracts are less important than the handshake. So I would not be surprised if management at Siwei didn't think they were involved in any kind of fraud relating to revenue recognition.

Q: But it does sound like that Caterpillar didn't check out Siwei's books and didn't examine physical inventories. Do you think it's likely?

A: It's hard to know. Caterpillar did say that they hired two Big Four accounting firms: Ernest & Young and Deloitte Touche Tohmatsu. It is unusual to hire two Big Four firms. But the due diligence is a customized process. Did the accounting firms miss what were right there in their face? Or did Caterpillar tell them not to look at certain things? We don't know.

The other thing is that you need to have access to get to the records and the people to conduct due diligence. But in some situations, you might not get as much as you'd like.

Q: One obvious red flag here seemed to be the fact that Siwei become part of ERA through a reverse merger. Wouldn't that already alarm auditors and buyers?

A: Everyone should have learned lessons on reverse mergers. The lack of scrutiny of reverse mergers deals is very dangerous. The number of accounting fraud associated with reverse mergers is huge. Most are U.S.-listed Chinese companies. Caterpillar is the first case involving a multinational strategic buyer and a Hong Kong-listed Chinese company through reverse merger.

The U.S. stock exchanges have effectively stopped reverse mergers by new rules that require reverse merger targets to be "seasoned" before listing. Hong Kong and other markets should probably look at potentially implementing the same rule.

Q: Who are legally liable relating to Caterpillar's massive losses?

A: Let me first give some clarifications about this goodwill write-down. Caterpillar paid significantly more than Siwei's book value. That excess was put into goodwill. Every year, a company has to determine whether it can continue to justify carrying that goodwill balance on the balance sheet. In this case, after learning all the accounting practices at Siwei, Caterpillar decided that Siwei will not be as profitable in the future as originally anticipated. What this means is essentially Caterpillar paid too much for Siwei.

When you pay too much for a company, who's at fault? Clearly, there will be a lot of focus on the management of Siwei. I understand that some of the purchase price is to be paid in notes. Surely Caterpillar's lawyers are looking at whether or not to pay those additional balances. The auditors of Caterpillar and the accounting firms that did the due diligence will also be looked at. Lastly, shareholders will also look at the management and board of Caterpillar. I think a lot of questions will be answered in the next couple of years.

Q: Do you expect anyone will be arrested and face criminal charges?

A: Not in China. I'm not aware of any criminal charges on an accounting fraud in China. Chinese government does not seem to consider accounting frauds as crimes in China.

Q: Looking at the broader Chinese accounting landscape, what are some of the most commonly used tactics by Chinese companies to cheat investors?

A: The most common is probably inappropriate revenue recognition or fake revenue. That's the simplest way to increase profits.

Relating to that are ways to fake cash balances. Once you record a sale, you need to find some place for it on the asset of the balance sheet. If you put it on receivables, the auditors will ask troublesome questions. So many companies record fake cash and convince banks to lie to auditors.

For example, a Chinese company created a fake online banking website to cheat auditors last year. The auditors found that an interest rate on the bank statement did not match Chinese Central Bank's official rates. The company promptly replied that it was a bank error and it was fixed in half an hour. The auditors became suspicious and clicked on some other buttons of the website, and found out the whole website is a fake.

Another example is putting deposits with contract manufacturers. If you use contract manufacturers, you usually have to give them some funds up front. That's a very hard number to audit. In some cases last year, auditors have decided to resign after determining that they can't verify those numbers.

A third tactic is the use of Variable Interest Entity (VIE) structure. It's been prone to accounting fraud (in a similar way like reverse merger).

Q: Lastly, what should overseas investors do to prevent a repeat of Caterpillar's sad fate?

A: If a foreign company is buying a Chinese company, it needs to go through a due diligence process

Continued in article

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


NASBA --- http://en.wikipedia.org/wiki/Nasba

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

"NASBA Opposes AICPA's Proposed FRF for SMEs," by Frank Byrt, AccountingWeb, February 1, 2013 ---
http://www.accountingweb.com/article/nasba-opposes-aicpas-proposed-frf-smes/220961?source=aa

The long-running debate over who's responsible for developing a framework for standards for financial reporting by privately held, small and midsized US businesses is far from over.

The American Institute of CPAs (AICPA) is getting push back for its Proposed Financial Reporting Framework for Small- and Medium-Sized Entities, which would create a non-GAAP (generally accepted accounting principles) financial reporting framework for small and medium-sized entities (FRF for SMEs).

The AICPA says its proposal will result in a less complicated and therefore less costly accounting system for smaller, privately held firms than one that would come from having to adhere to the requirements of GAAP, while still presenting an accurate financial picture of the business.

But the National Association of State Boards of Accountancy (NASBA) thinks its approach is better. Its board of directors voted to adopt a resolution urging the AICPA "to either table or withdraw the proposal in order to allow the Financial Accounting Foundation (FAF) Private Company Council (PCC) adequate opportunity to develop standards uniquely applicable to private companies that can be authoritative and part of GAAP," according to a January 30 NASBA press release.

The PCC was created in 2012 by the FAF to work with the Financial Accounting Standards Board (FASB) to recommend exceptions or modifications to US GAAP for private entities.

NASBA says its standing in the matter comes "under the Tenth Amendment of the US Constitution and the Sarbanes-Oxley Act, Section 209 [which says that] State Boards of Accountancy are vested with significant authority in the development, adoption, and enforcement of standards. This authority is particularly relevant as it relates to the private sector and the topic of the AICPA's FRF-SMEs proposal."

"There are increasing demands for significant improvements in the current financial reporting system serving the unique needs of private companies and their many stakeholders," said NASBA Chairman of the Board Gaylen Hansen in the NASBA press release. "We share those concerns with the AICPA, but we also recognize that well thought out and authoritative solutions stand a better chance of long-term success."

Robert Durak, AICPA's director of Private Company Financial Reporting, said in an e-mail statement, "We have received many comments on the FRF for SMEs and will be considering all of the input, as we decide upon appropriate revisions to the Framework and its development process in light of those comments. As is our normal policy, we will not be commenting on individual letters that have been received."

There also appears to be no unanimity in the accounting community about which approach is superior.

Big Four accounting firm PricewaterhouseCoopers (PwC) also asked the AICPA to reconsider its proposal, in a January 29 letter, a copy of which was shared with AccountingWEB by the AICPA. PwC prefers strict adherence to GAAP, saying, "We believe efforts focused on enhancing GAAP will be more beneficial for a broader population of private company stakeholders than creating another non-GAAP framework."

Scott Appel, CPA and partner-in-charge of the Orange County, California, office of Hein & Associates LLP, a public accounting and advisory firm, agreed: "I really think the best answer is for the Private Company Council to issue standards through FASB."

"I think the frustration out there is that they debated this for at least a year, and people are looking for progress to be made," but he added that it's questionable whether NASBA can override the AICPA's proposal. "I don't' disagree with what they want for the ultimate outcome, but I don't know that they have the authority to prevent the AICPA from doing what it's doing."

But on the other side of the debate is David Glusman, CPA and partner-in-charge of Marcum LLP's Philadelphia office. He says that he and his firm "believe that the AICPA proposal is a good proposal for our clients and for small and midsized businesses."

Continued in article

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


"New Black Box Metrics Challenge Accountants' Creativity and Investor Intelligence," by Anthony H. Catanach Jr., Grumpy Old Accountants Blog, February 15, 2013 ---
http://grumpyoldaccountants.com/blog/2013/2/15/new-black-box-metrics-challenge-accountants-creativity-and-investor-intelligence

According to Merriam Webster, a black box is broadly defined as “anything that has mysterious or unknown internal functions or mechanisms.”  How appropriate that Jonathan Weil called our attention to an “unconventional profitability metric” used by Black Box (the Company) to report third quarter performance in its January 29th press release (Form 8-K, Exhibit 99.1).   As usual, Jon got right to the point, and suggested that using the term “adjusted Ebitda (as adjusted)” was just another ploy to make “earnings look better.”  While I generally agree with Jon’s conclusion, I am particularly stunned by the lack of creativity exhibited by the Company’s accountants in naming their performance metrics.  After all, even a bean counter should be able to come up with something better.  As a grumpy old accountant, I'd recommend using Lynn Turner’s “everything but bad stuffEBS title (coined over a decade ago)…now that might have been more appropriate!  But why did Black Box’s accountants just give up?  Well, after a bit of digging, I think I know why.  I also discovered that this was just one of five non-GAAP measures used by the Company in its press release, but not in its current 10-Q or 10-K.  And finally, Black Box omitted a very important income statement disclosure in its press release that was included in its 10-Q and prior year 10-K.  All of this raises questions about the transparency of the Company’s most recent financial disclosures, and what is prompting the recent move to non-GAAP metrics.

But first, even though I have little or no respect for most performance based non-GAAP metrics, I must confess that Black Box’s “unconventional profitability metric” appears to comply with the policies of the U.S. Securities and Exchange Commission (SEC). The SEC outlines its rules for such measures in its Final Rule on Non-GAAP Financial Measures, as well as its Compliance and Disclosure Interpretations on Non-GAAP Financial Measures.  In fact, the Company’s cumbersome EBITDA moniker is likely due to SEC guidance to use the word “adjusted” when reconciling net income to a non-standard definition of EBITDA.  However, Black Box adopted two separate non-GAAP EBITDA metrics: EBITDA as adjusted and the hilarious “adjusted EBITDA (as adjusted)” term, the two of which differed only by stock compensation expense.  The table below shows how these two non-GAAP measures relate to each other, as well as to the more traditional notion of EBITDA.  The first column reflects income statement data for the Company’s nine months of operations for the current fiscal year (3QYTD13) as reported in the January 29th press release (8-K, Exhibit 99.1, page 10), while the other three columns reflect related P&L data from prior Company 10-K’s.

. . .

In summary, the Company’s “adjusted Ebitda (as adjusted)” metric appears to be the tip of a financial reporting iceberg. Instead of improving financial reporting transparency, Black Box may really be a Pandora’s Box of non-GAAP metrics that obfuscate “true” performance.

Continued in article

This is remotely related to OCI reporting where earnings are adjusted for non-recurrent and unrealized value changes.

From PwC on February 5, 2013
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
On February 5, 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This guidance is the culmination of the board's redeliberation on reporting reclassification adjustments from accumulated other comprehensive income. The new requirements will take effect for public companies in interim and annual reporting periods beginning after December 15, 2012 (the first quarter of 2013 for public, calendar-year companies).
http://www.pwc.com/en_US/us/cfodirect/assets/pdf/in-brief/in-brief-2013-05-fasb-other-comprehensive-income.pdf

 

Question
If the media insists on reporting one earnings number, which of the alternative earnings numbers should be reported?
In particular, should net earnings be reported before or after remeasuring financial instruments for unrealized changes in fair value?

Hint
The following paper has a great summary of the history of OCI and problems facing the FASB and IASB as we look to the future of financial reporting of business firms.

"Academic Research and Standard-Setting: The Case of Other Comprehensive Income," by Lynn L. Rees and Philip B. Shane, Accounting Horizons, December 2012, Vol. 26, No. 4, pp. 789-815. ---
http://aaajournals.org/doi/full/10.2308/acch-50237 

This paper links academic accounting research on comprehensive income reporting with the accounting standard-setting efforts of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). We begin by discussing the development of reporting other comprehensive income, and we identify a significant weakness in the FASB's Conceptual Framework, in the lack of a cohesive definition of any subcategory of comprehensive income, including earnings. We identify several attributes that could help allocate comprehensive income between net income, other comprehensive income, and other subcategories. We then review academic research related to remaining standard-setting issues, and identify gaps in academic research where hypotheses could be developed and tested. Our objectives are to (1) stimulate standard-setters to better conceptualize what is meant by other comprehensive income and to distinguish it from earnings, and (2) stimulate researchers to develop and test hypotheses that might help in that process.

. . .

Potential Alternative Definitions of Earnings

Table 1 summarizes and categorizes various standard-setting issues related to reporting comprehensive income, and provides the organizing structure for our literature review later in the paper. The most important of these issues is the definition of earnings, or what makes up earnings and how it is distinguished from OCI. This is a “cross-cutting” issue because it arises when the Boards deliberate on various topics. The Boards cooperatively initiated the financial statement presentation project intending, in part, to solve the comprehensive income composition problem, but the project was subsequently delayed.

Table 2 presents a list of the specific comprehensive income components under current U.S. GAAP that require recognition as OCI. The second column presents the statement that provided financial reporting guidance for the OCI component, along with its effective date. The effective dates provide an indication as to how the OCI components have expanded over time. Since the issuance of Statement No. 130, which established formal reporting of OCI, new OCI-expanding requirements were promulgated in Statement No. 133. Financial instruments, insurance, and leases are three examples of topics currently on the FASB's agenda where OCI has been discussed as an option to report various gains and losses. In all these discussions, a framework is lacking that can guide standard-setter decisions. The increased use of accumulated OCI to capture various changes in net assets and the likely expansion of OCI items reinforce the notion that standard-setters must eventually come to grips with the distinction between OCI and earnings, or even whether the practice of reporting OCI with recycling should be retained.7

Presumably, elements with similar informational attributes should be classified together in financial statements. It is unclear what attributes the items listed in Table 2 possess that result in their being characterized differently from other components of income. Notably, the basis for conclusions of the FASB standards gives little to no economic reasoning for the decision to place these items in OCI. While not exhaustive, Table 2 presents four attributes that standard-setters could potentially use to distinguish between earnings and OCI: (1) the degree of persistence of the item, (2) whether the item results from a firm's core operations, (3) whether the item represents a change in net assets that is reasonably within management's control, and (4) whether the item results from remeasurement of an asset/liability. We discuss in turn the merits and potential problems of using these attributes to form a reporting framework for comprehensive income.

Degree of Persistence.

The degree of persistence of various comprehensive income components has significant implications for firm value (e.g., Friedman 1957; Kormendi and Lipe 1987; Collins and Kothari 1989). Ohlson's (1995, 1999) valuation model places a heavy emphasis on earnings persistence, which suggests that a reporting format that facilitates identifying the level of persistence across income components could be useful to investors. Examples abound as to how the concept of income persistence has been used in standard-setting, including separate presentation in the income statement for one-time items, extraordinary items, and discontinued operations. Standard-setters have justified several footnote disclosures (segmental disclosures) and disaggregation requirements (e.g., components of pension expense) on the basis of providing information to financial statement users about the persistence of various income statement components.

Thus, the persistence of revenue and expense items potentially could serve as a distinguishing characteristic of earnings and OCI. Table 2 shows that we regard all the items currently recognized in OCI as having relatively low persistence. However, several other low-persistence items are not recognized in OCI; for example, gains/losses on sale of assets, impairments of assets, restructuring charges, and gains/losses from litigation. To be consistent with this definition of OCI, the current paradigm must change significantly, and the resulting total for OCI would look substantially different from what it is now.

Using persistence of an item to distinguish earnings from OCI would create significant problems for standard-setters. Persistence can range from completely transitory (zero persistence) to permanent (100 percent persistence). At what point along this range is an item persistent enough to be recorded in earnings? While restructuring charges are typically considered as having low persistence, if they occur every two to three years, is this frequent enough to be classified with other earnings components or infrequent enough to be classified with OCI? Furthermore, the relative persistence of an item likely varies across industries, and even across firms.

In spite of these inherent difficulties, standard-setters could establish criteria related to persistence that they might use to ultimately determine the classification of particular items. In addition, standard-setters would not be restricted to classifying income components in one of two categories. As an example, highly persistent components could be classified as part of “recurring earnings,” medium-persistence items could go to “other earnings,” and low-persistence items to OCI (or some other nomenclature). Standard-setters could create additional partitions as needed.

Core Operations.

Classifying income components as earnings or OCI based on whether they are part of a firm's core operations is intuitively appealing. This criterion is related to income persistence, as we would expect core earnings to be more persistent than noncore income items. Furthermore, classifying income based on whether it is part of core operations has a long history in accounting.

In current practice, companies and investors place primary importance on some variant of earnings. However, it is not clear which variant of earnings is superior. Many companies report pro forma net income, which presumably provides investors with a more representative measure of the company's core income, but definitions of pro forma earnings vary across firms. Similarly, analysts tend to forecast a company's core earnings (Gu and Chen 2004). Evidence in prior research indicates that pro forma earnings and actual earnings forecasted by analysts are more closely associated with share prices than income from continuing operations based on current U.S. GAAP (e.g., Bradshaw and Sloan 2002; Bhattacharya et al. 2003).

The problems inherent with this attribute are similar to those of the earnings-persistence criterion. No generally accepted definition of core operations exists. At what point along a continuum does an activity become part of the core operations of a business? As Table 2 indicates, classifying gains/losses from holding available-for-sale securities as part of core earnings depends on whether the firm operates in the financial sector. Different operating environments across firms and industries could make it difficult for standard-setters to determine whether an item belongs in core earnings or OCI.8 In addition, differences in application across firms may give rise to concerns about comparability and potential for abuse on the part of managers in exercising their discretion (e.g., Barth et al. 2011).

The FASB's (2010) Staff Draft on Financial Statement Presentation tries to address the definitional issue by using interrelationships and synergies between assets and liabilities as a criterion to distinguish operating (or core) activities from investing (or noncore) activities. Specifically, the Staff Draft states:

An entity shall classify in the operating category:

Assets that are used as part of the entity's day-to-day business and all changes in those assets Liabilities that arise from the entity's day-to-day business and all changes in those liabilities.

Operating activities generate revenue through a process that requires the interrelated use of the entity's resources. An asset or a liability that an entity uses to generate a return and any change in that asset or liability shall be classified in the investing category. No significant synergies are created for the entity by combining an asset or a liability classified in the investing category with other resources of the entity. An asset or a liability classified in the investing category may yield a return for the entity in the form of, for example, interest, dividends, royalties, equity income, gains, or losses. (FASB 2010, paras. 72, 73, 81)

The above distinction between operating activities and investing activities could similarly be used to distinguish between core activities and noncore activities. Alternatively, standard-setters might develop other definitions. Similar to the degree of persistence attribute, standard-setters would not be restricted to a simple core versus noncore dichotomy when using this definition.

Another possible solution is to allow management to determine which items belong in core earnings. Companies exercise this discretion today when they choose to disclose pro forma earnings. Furthermore, the FASB established the precedent of the “management approach” when it allowed management to determine how to report segment disclosures. In several other areas of U.S. GAAP, management is responsible for establishing boundaries that define its operating environment. FASB Accounting Standards Codification Topic 320 (formerly Statement 115) permits different measurements for identical investments based on management's intent to sell or hold the instrument. Other examples where U.S. GAAP allows for management discretion include determining the rate to discount pension liabilities, d