New Bookmarks
Year 2013 Quarter 2:  April 1 - June 30 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

For earlier editions of New Bookmarks go to 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

2013
June 1-30

May 31, 2013

April 30, 2013 

 

 

June 30, 2013

Bob Jensen's New Bookmarks June 30, 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

List of FASB Pronouncements ---
http://en.wikipedia.org/wiki/List_of_FASB_pronouncements

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

Technical Tax Course Materials from Lexis-Nexus
Graduate Tax Series --- http://taxprof.typepad.com/files/graduate-tax-series-description-082911.pdf

CGMA Portfolio of Tools for Accountants and Analysts ---
http://www.cgma.org/Resources/Tools/Pages/tools-list.aspx
Includes ethics tools and learning cases.

From the IRS
IRS Criminal Investigation Issues Fiscal 2012 Report, IR-2013-50, May 10, 2013 ---
http://www.irs.gov/uac/Newsroom/IRS-Criminal-Investigation-Issues-Fiscal-2012-Report




Humor Between June 1-30, 2013 --- http://www.trinity.edu/rjensen/book13q2.htm#Humor063013

Humor Between May 1-31, 2013 --- http://www.trinity.edu/rjensen/book13q2.htm#Humor053113

Humor Between April 1-30, 2013 --- http://www.trinity.edu/rjensen/book13q2.htm#Humor043013

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




In the June 2013 edition of Accounting Horizons, Bill Beaver and Mark Wolfson authored a long tribute to their colleague Chuck Horngren. I became somewhat closer to Chuck and Joan when we rented a house for one year about a block from the Horngren house in the Stanford faculty ghetto. My daughter Lisl and Kathy Horngren became close when attending the third grade in the same nearby elementary school. My relationship with Chuck was more on a social level. I never did work with him on projects since in those days my think tank interests were more in multivariate statistics before quantitative methods got a grip on the AAA. Bill Beaver and Joel Demski had only recently joined their University mentor (Chuck Horngren) on the Stanford GSB faculty.

I pretty much wasted the first of two years in a think tank near the Stanford campus. I did write my first AAA research monograph entitled Phantamagoric Accounting, but that was mostly a sideline the first year.
SAR 14 at http://aaahq.org/market/display.cfm?catID=5
In the second year I wrote SAR 19.

My real interest in those think tank years was in adaptive regression and non-parametrics. Twenty years later Jerome Friedman made original contributions that eluded me in the 1970s. I was no Jerome Friedman.

Jensen Comment on Robustness

Back in the 1970s, on leave of absence for two years from the University of Maine, I spent much of my first year in a think tank trying to "invent" adaptive linear regression models that were robust when predictor variables were interactive. This was in the days before personal computers and networked computers. The think tank was, and still is, just outside the main Stanford University campus on a cow-pasture hill overlooking Lake Laganita. The think tank provided me with a courier service that would take my IBM punch card decks (that i punched out) down to Stanford's main frame computer for agonizingly slow batch processing. After months of trial and error my "inventions" were failures largely because they were just not robust in the sense that the importance of predictor variables varied with such things as the order in which they were fed adaptively into my multivariate predictor models. I other words Models A and B might end up with the same predictive powers and the same predictor variables that were fed in adaptively. But the relative importance of the predictor variables often varied with the order in which they were fed into the model. My "inventions" were just not robust enough to excite any statistician or economist.

This was nearly twenty years before Jerome Friedman in 1991introduced a non-parametric multivariate regression splines ---
http://en.wikipedia.org/wiki/Multivariate_adaptive_regression_splines
These MARS models are designed to handle data with interactive predictor variables.

 


Ruth Bender, Ph.D. is an accounting professor in the United Kingdom

June 17, 2013 message from Ruth Bender

I did the MOOC ‘A Beginner’s Guide to Irrational Behavior’ from Dan Ariely at Duke (it uses Coursera).  I registered just to see what it was like, with no expectation of doing the work.  I ended up doing all of the video lectures, all of the required readings, many of the optional readings, some of the optional videos, all of the tests, the written assignment, peer-reviews of others’ assignments… I even spent time swotting for the final exam!  And when I got my certificate, even though it is covered in disclaimers (they can’t know that I really am the one who did the work) I felt a real sense of achievement.

On the other hand, I also started a Strategy course, and lasted only one lecture. 

And I have just started a Finance course, but am struggling with it as it’s a bit tedious.  (Not sure how much of that relates to the fact that I understand the time value of money, and how much of it is due to style, with a presenter speaking to camera for long periods.)

I wrote down, for Cranfield colleagues, some features of the Ariely course.  Here  they are.

1.    A lot of time had been spent getting this right.  They reckoned, about 3000 hours.  The videos are very professional.  The cartoon drawings that accompany them every so often are quite nice as a (relevant) distraction.

2.    As well as Dan Ariely, they had two teaching assistants on the course to answer queries.

3.    I didn’t use the discussion for a or the live hangouts.  I don’t know about the hangouts, but I did occasionally browse the discussion for a to see how they were being used.  They seemed quite active.  Likewise, I didn’t participate in the course Wiki but it did seem active.

4.    There was a survey done before at the start of the course and at the start of every single week.  The surveys covered attitudes, to the course and the subjects covered.  (This is a psychology course, after all.)

5.    A final exercise, voluntary that I am not joining, is to write a group essay on the course.

6.    The videos ranged from 5 minutes to over 20.  The readings ranged from 1-2 pages through to academic working papers of about 40 pages.

7.    There are two tests each week – on the videos, and on the readings.  You can re-sit the tests up to 15 times

8.    The closing exam was closed-book.  People were selling revision notes, and also providing them for free.  Some very complex mind maps here – this was unexpected and very interesting. 

9.    A lot of interaction with Dan, including the weekly Q&A video.

Overall, I think it was a success because the material was interesting, and because it was presented really well.  They kept my interest with short-ish videos, and with quizzes.  Ariely is an entertaining presenter.  In order to get a grade you had to peer-review at least 3 other people’s written assignments.  I ended up reading 11, just because I wanted to see the standard.  A couple were dire, but most were high.

Hope this helps.  Happy to give more information if you like.

Ruth

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

Dr Ruth Bender
Cranfield School of Management

UK

"Why We Fear MOOCs," by Mary Manjikian, Chronicle of Higher Education, June 14, 2013 ---
http://chronicle.com/blogs/conversation/2013/06/14/why-we-fear-moocs/?cid=wc&utm_source=wc&utm_medium=en

How to Sign Up for a MOOC

Hi Paul,

Various options are linked at
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI

Although not MOOC complete courses, there are over 2,000  free learning modules at Kahn Academy, including some advanced-learning accounting modules:
Khan Academy Home Page --- http://www.khanacademy.org/
This site lists the course categories but there are more courses than fit under these categories.  It's best to search for a topic of interest.

 

Bob Jensen's threads on MOOCs and other shared tutorials, courses, videos, and course materials from prestigious universities ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI


I hope Jim K will comment on how "research in business schools is becoming increasingly distanced from the reality of business"
"In 2008 Hopwood commented on a number of issues," by Jim Martin, MAAW Blog, June 26, 2013 ---
http://maaw.blogspot.com/2013/06/in-2008-hopwood-commented-on-number-of.html

The first issue below is related to the one addressed by Bennis and O'Toole. According to Hopwood, research in business schools is becoming increasingly distanced from the reality of business. The worlds of practice and research have become ever more separated. More and more accounting and finance researchers know less and less about accounting and finance practice. Other professions such as medicine have avoided this problem so it is not an inevitable development.

Another issue has to do with the status of management accounting. Hopwood tells us that the term management accountant is no longer popular and virtually no one in the U.S. refers to themselves as a management accountant. The body of knowledge formally associated with the term is now linked to a variety of other concepts and job titles. In addition, management accounting is no longer an attractive subject to students in business schools. This is in spite of the fact that many students will be working in positions where a knowledge of management control and systems design issues will be needed. Unfortunately, the present positioning and image of management accounting does not make this known.

Continued in article

June 29, 2013 reply from Zane Swanson

Hi Bob,

A key word of incentive comes up as it relates to the practitioner motivator of the nature of accounting and financing research. The AICPA does give an educator award at the AAA convention and so it isn't as though the practitioners don't care about accounting professorship activity.

Maybe, the "right"' type of incentive needs to be designed. For example, it was not so many years ago that firms developed stock options to align interests of management and investors. Perhaps, a similar option oriented award could be designed to align the interests of research professors and practitioners. Theoretically, practitioners could vest a set of professors for research publications in a pool for a particular year and then grant the exercise of the option several years later with the attainment of a practitioner selected goal level (like HR performance share awards). This approach could meet your calls to get researchers to write "real world" papers and to have follow up replications to prove the point.

However, there are 2 road blocks to this approach. 1 is money for the awards. 2 is determining what the practitioner performance features would be.

You probably would have to determine what practitioners want in terms of research or this whole line of discussion is moot.

The point of this post is: Determining research demand solely by professors choices does not look like it is addressing your "real world" complaints.

Respectfully,
Zane

June 29, 2013 reply from Bob Jensen

Hi Zane,

I had a very close friend (now dead) in the Engineering Sciences Department at Trinity University. I asked him why engineering professors seemed to be much closer to their profession than many other departments in the University. He said he thought it was primarily that doctoral students chose engineering because they perhaps were more interested in being problem solvers --- and their profession provided them with an unlimited number of professional problems to be solved. Indeed the majority of Ph.D. graduates in engineering do not even join our Academy. The ones that do are not a whole lot different from the Ph.D. engineers who chose to go into industry except that engineering professors do more teaching.

When they take up research projects, engineering professors tend to be working with government (e.g., the EPA) and and industry (e.g., Boeing) to help solve problems. In many instances they work on grants, but many engineering professors are working on industry problems without grants.

In contrast, accounting faculty don't like to work with practitioners to solve problems. In fact accounting faculty don't like to leave the campus to explore new problems and collect data. The capital markets accounting researchers purchase their databases and them mine the data. The behavioral accounting researchers study their students as surrogates for real world decision makers knowing full well that students are almost always poor surrogates. The analytical accounting researchers simply assume the world away. They don't set foot off campus except to go home at night. I know because I was one of them for nearly all of my career.

Academic accounting researchers submit very little original research work to journals that practitioners read. Even worse a hit in an accounting practitioner journal counts very little for promotion and tenure especially when the submission itself may be too technical to interest any of our AAA journal editors, e.g., an editor told me that the AAA membership was just not interested in technical articles on valuing interest rate swaps, I had to get two very technical papers on accounting for derivative financial instruments published in a practitioner journal (Derivatives Reports) because I was told that these papers were just too technical for AAA journal readers.

Our leading accountics science researchers have one goal in mind --- getting a hit in TAR, JAR, or JAE or one of the secondary academic accounting research journals that will publish accountics research. They give little or no priority to finding and helping to solve problems that practitioners want solved. They have little interest in leaving the ivory tower to collect their own messy real-world data.

Awards and even research grants aren't the answer to making accounting professors more like engineering, medical, and law professors. We need to change the priorities of TAR, JAR, JAE, and other top academic accounting research journals where referees ask hard questions about how the practice of the profession is really helped by the research findings of virtually all submitted articles.

In short, we need to become better problem solvers in a way like engineering, medical, and law professors are problem solvers on the major problems of their professions. A great start would be to change the admissions criteria of our top accounting research journals.

Respectfully,
Bob Jensen

 

Essays on the (mostly sad) State of Accounting Scholarship ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm#Essays

Sue Haka, former AAA President, commenced a thread on the AAA Commons entitled
"Saving Management Accounting in the Academy,"
--- http://commons.aaahq.org/posts/98949b972d
A succession of comments followed.

The latest comment (from James Gong) may be of special interest to some of you.
Ken Merchant is a former faculty member from Harvard University who form many years now has been on the faculty at the University of Southern California.

Here are my two cents. First, on the teaching side, the management accounting textbooks fail to cover new topics or issues. For instance, few textbooks cover real options based capital budgeting, product life cycle management, risk management, and revenue driver analysis. While other disciplines invade management accounting, we need to invade their domains too. About five or six years ago, Ken Merchant had written a few critical comments on Garrison/Noreen textbook for its lack of breadth. Ken's comments are still valid. Second, on the research and publication side, management accounting researchers have disadvantage in getting data and publishing papers compared with financial peers. Again, Ken Merchant has an excellent discussion on this topic at an AAA annual conference.

June 30, 2013 reply from Zane Swanson

Hi Bob,
  You have expressed your concerns articulately and passionately.  However, in terms of creating value to society in general, your "action plan" of getting the "top" of the profession (editors) to take steps appears unlikely.  As you pointed out, the professors who create articles do it with resources immediately under their control in the most expeditious fashion in order to get tenure, promotion and annual raises.  The editors take what submissions are given.  Thus, it is an endless cycle (a closed loop, a complete circle).  As you noted the engineering profession has different culture with a "make it happen" objective real world.  In comparison with accounting, the prospect of "only" accounting editors from the top dictating research seems questionable.  Your critique suggests that the "entire" accounting research culture needs a paradigm shift of real world action consequences  in order to do what you want.  The required big data shift is probably huge and is a reason that I suggested starting an options alignment mechanism of interests of practitioners and researchers.
 

Respectfully,
Zane

 

June 30, 2013 reply from Bob Jensen

Hi Zane,

 

You may be correct that a paradigm shift in accountics research is just not feasible given the generations of econometrics, psychometrics. and mathematical accountics researchers that virtually all of the North American doctoral programs have produced.
 
I think Anthony Hopwood, Paul Williams, and others agree with you that it will take a paradigm shift that just is not going to happen in our leading journals like TAR, JAR, JAE, CAR, etc. Paul, however, thinks we are making some traction, especially since virtually all AAA presidents since Judy Rayburn have made appeals fro a paradigm shift plus the strong conclusions of the Pathways Commission Report. However, that report seems to have fallen on deaf ears as far as accountics scientists are concerned.
 
Other historical scholars like Steve Zeff, Mike Granfof, Bob Kaplan, Judy Rayburn, Sudipta Basu, and think that we can wedge these top journals to just be a bit more open to alternative research methods like were used in the past when practitioners took a keen interest in TAR and even submitted papers to be published in TAR --- alternative methods like case studies, field studies, and normative studies without equations.
 

"We fervently hope that the research pendulum will soon swing back from the narrow lines of inquiry that dominate today's leading journals to a rediscovery of the richness of what accounting research can be. For that to occur, deans and the current generation of academic accountants must give it a push."
Granof and Zeff --- http://www.trinity.edu/rjensen/TheoryTAR.htm#Appendix01

Michael H. Granof
is a professor of accounting at the McCombs School of Business at the University of Texas at Austin. Stephen A. Zeff is a professor of accounting at the Jesse H. Jones Graduate School of Management at Rice University.

Accounting Scholarship that Advances Professional Knowledge and Practice
Robert S. Kaplan
The Accounting Review, March 2011, Volume 86, Issue 2, 

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

The videos of the three plenary speakers at the 2010 Annual Meetings in San Francisco are now linked at
http://commons.aaahq.org/hives/531d5280c3/posts?postTypeName=session+video
I think the video is only available to AAA members.

 


From the CFO Journal's Morning Ledger on June 26, 2013

Non-GAAP metrics are playing a bigger role in financial reporting. Since regulators relaxed their stance on the use of nontraditional financial reporting measures in 2010, companies have been embracing metrics like customer churn rates and average revenue per user, CFOJ’s Emily Chasan writes.

Driving the trend is a desire on the parts of both investors and corporate managers to focus on measures that have less noise and are clear indicators of the direction of the business. “There’s a disconnect between what finance departments want to report and financial-statement users want to receive,” Prof. Paul Bahnson of Boise State University said an Institute of Management Accountants conference in New Orleans this week. Corporate managers may prefer to report smoother results with less volatility based on historical information, but investors want to make sure they’re seeing more current information and capturing natural volatility.

Meanwhile, Prof. Paul Miller of the University of Colorado at Colorado Springs argues that historical cost information is losing its relevance. He says accountants should think about historical costs as “unverifiable” and “unreliable” since they are statistically based on a sample size of a single transaction and can’t capture the full market value of an asset.

Jensen Comment
Paul Miller is extremely misleading about historical cost bookings in the ledgers. To my knowledge no historical cost advocate from AC Littleton to Yuji Ijiri has ever claimed that historical cost financial statements even pretend to "capture the full market value of an asset" or any part  or combination thereof except in the case of conservatism overrides when historical cost book values significantly overstate current values. For example, if inventory carrying values (at historical cost) are seriously in excess of disposal value due to damage or obsolescence the Conservatism Principle dictates a departure from historical cost.

To my knowledge AC Littleton historically is the strongest advocate of historical cost accounting as modified by the Conservatism Principle. He repeatedly asserted that historical cost measurements make no pretenses of being surrogates for entry values or exit values or values-in-use under fair value accounting. Whereas the focus of fair value accounting is on balance sheet items, the main focus of historical cost accounting is on the income statement under the Matching Principle ---
http://www.trinity.edu/rjensen/Theory02.htm#FairValue
Fair value advocates inappropriately wrote off the Matching Principle years ago. To their embarrassment the Matching Principle is still with us in FASB and IASB standards in spirit if not in name.

Paul Miller's statement that "historical costs as 'unverifiable' and iunreliable' since they are statistically based on a sample size of a single (original) transaction" implicitly assumes that the only purpose of historical cost book value is to be a surrogate for some type of current market value. Since entry value accounting  requires arbitrary depreciation formulas and exit value accounting reports assets in their worst possible uses (yard sale junk items) what Paul Miller must mean is "value-in-use."

But to my knowledge no economist or accountant has ever figured out how to value any nonfinancial booked asset in Exxon at its "value-in-use."

The most important statistic, in my opinion, that is tracked by investors and financial analyst is current earnings in some form whether as Earnings-Per-Share  or Price/Earnings ratios. Like it or not historical cost is still a primary driver of current earnings under FASB or IASB accounting standards. Paul Miller's assertion that "historical cost information is losing its relevance" is totally incorrect as long as earnings measure are driven primarily by historical cost rules still drive earnings measurement under FASB and IASB rules. This will be true until the FASB and IASB eliminate historical cost depreciation and amortization and all the other historical cost accruals completely from the accounting standards. I may be ice skating and skiing in Hell before that happens.

Having said this, I've no objection to entry value or exit value columns alongside GAAP columns prepared under FASB or IASB standards. I just do not want all unrealized temporal changes in market values to impact on current earnings. I vote for OCI in that department for items like marketable securities now carried at exit values under FASB and IASB standards.


"Lie Detection 101 for Financial Analysts: How to Spot Manipulators and Actors," by Jason Voss, CFA, Enterprise Investor, July 19, 2012 ---
http://blogs.cfainstitute.org/investor/2012/07/19/lie-detection-basics/

"How to spot a liar," by Leon Gettler, Sydney Morning Herald, July 10, 2010 ---
http://www.smh.com.au/executive-style/management/blogs/management-line/how-to-spot-a-liar-20100905-14vot.html

Watch the Video
"The Science of Reading Faces" by Paul Eckman
http://www.youtube.com/watch?v=IA8nYZg4VnI

Watch the Video
"10 Verbal and Non-Verbal Signs to Spot a Liar at Work," Stanford Graduate School of Business, June 2013 ---
http://stanfordbusiness.tumblr.com/post/54109702521/10-verbal-and-non-verbal-signs-to-spot-a-liar-at-work

VERBAL SIGNS:
1. Selective wording
Someone might be lying if he or she doesn’t actually answer your question. For example, you might ask an interviewee, “Did you leave your last workplace under good conditions?” If the person responds, “I left to pursue things that were more in line with my skills and talents,” you should take note that he or she skirted around your true question.

2. Quasi-denials
Listen for instances when people back out of statements before actually saying them, like “I could be wrong but…”.

3. Qualifiers
Another possible sign of deception could be using qualifying phrases like “To the best of my knowledge…”.

4. Softeners
When innocent people are questioned about a possible theft or crime, they tend to use “hard” words like “steal” or “forge.” But if they are guilty, people soften their diction using words like “borrow” or “mistake.”

5. Overly formal wording
Liars might use phrases that add distance, like formal titles Mr. or Mrs. You might also hear them speak in full phrases like “did not” versus informal contraction “didn’t.”  

NONVERBAL SIGNS:
1. Stress signals
When people lie, their heart rate goes up, blood pressure goes up and breathing gets shallow. Much of detecting lies is actually detecting stress. You won’t know if people are lying just by the fact that they are playing with their jewelry or bouncing their feet, but you’ll know that something is up.

2. Deviation from the “truth baseline”
Before an official job interview, you might invite candidates for coffee so you can observe their gestures and the pitch of their voices as they answer easy questions like, “How did you hear about this job?” Look for a baseline of truthful answer behaviors and then take note of any changes during further questioning. 

3. “Telltale Four”
Look for clusters of verbal and nonverbal signs. If you’re interviewing someone and notice stress signs, put an asterisk by that question and return to the subject later. If you get the stressed reactions a second time, the person may be holding something back. 

4. Eye signals
The biggest myth around deception is that liars don’t look you in the eye. Because liars have heard this, they may overcompensate and look at you too directly. There is, however, a correlation between lying and blink rate. As a lie is constructed and told, the liar’s blink rate goes down. After the lie is told, the blink rate will increase up to eight times. 

5. Emotional incongruence
Sometimes you just have a gut feeling that something is off, like catching someone with a phony smile. A liar can look incredibly fearful that he or she will be caught, but be careful because truthful people can also look fearful that you won’t believe them. 

Jensen Comment
I don't have much faith in these cues. All too often fraudsters like Bernie Madoff, Jeff Skilling, and Rita Grundwell lie with great skill even amidst their own families. Chances are they repeatedly got away with telling lies and cheating from early childhood.


"Three Lies You Learned in School," Everyday Einstein, June 27, 2013 ---
http://everydayeinstein.quickanddirtytips.com/three-lies-you-learned-in-school.aspx

Another Lie College Students May Now Be Learning in School
"Quantitative Easing Is Not 'Printing Money'," by Martin Feldstein, Business Insider, June 27, 2013 ---
http://www.businessinsider.com/feldstein-why-inflation-is-low-2013-6 

Jensen Comment
There's a bit of slight of hand in the above article. There's a difference when the U.S. sells a treasury bond to China relative to selling a treasury bond to itself (errrr read that the Fed). The main difference is that the USA has to pay off the debt to China when it comes due. If QE comes to an end Uncle Sam has to either raise the payoff from taxpayers or borrow from somewhere (e.g., Saudi Arabia) to pay off what it owes to China. 

Uncle Sam does not have to borrow from Saudi Arabia (at possibly higher treasury rates) or raise taxes to pay off the bonds that it sold to itself. Instead this debt is paid off with inflation which is (gasp) tantamount to printing green backs. The QE works as long as circumstances are holding down inflation, especially circumstances where the other national economies on earth are in such worse shape.

If QE was the answer to deficit spending economies like Switzerland and Sweden would see the light and use QE to fund massive deficits like the USA funds massive deficits. But they know better!

Thus Feldstein's article is a smoke and mirrors piece that is technically correct but couched in wording that disguises the fact that QE is really a form of printing money.

The biggest drawback of QE in the USA political attitude that deficits don't matter as long as you're borrowing from yourself. Economists are not so easily misled, but the big spenders in Washington who want more of both guns and butter will keep borrowing from themselves if for no other reason than to keep getting re-elected year after year after year ad infinitum until they're finally pushing up daisies.

Someday the USA will pay the piper who is not invited to make music in Switzerland and Sweden. Quantitative Easing is not free money when you tear down the smoke and mirrors justification. Shame on you Martin Feldstein!

The Economist Dean of the Columbia University Business School  is Not a Fan of Ben Bernanke or Paul Krugman

"Glenn Hubbard Explains The Doomsday Scenario That America Will See In 20 Years If There's No Change In Spending," by Joe Weisenthal, Business Insider, June 24, 2013 ---
http://www.businessinsider.com/glenn-hubbards-doomsday-scenario-2013-6

We recently had Glenn Hubbard, dean of the Columbia Graduate School of Business, into discuss his book Balance: The Economics of Great Powers from Ancient Rome to Modern America.

Hubbard's main argument is that the US must reduce its long-term deficit, and that if it's not addressed, then within 20 years the US will see a "doomsday scenario" of virtually no social spending and monstrous taxes.

Watch the video

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

 


Questions
Is this math error by some of the best statisticians in the world or is it simply the planets aligning in a way that was not given much probability of happening?

How should this risk be accounted for in financial statements of life insurance companies?

"Misjudged Annuity Guarantees May Cost Life Insurers Billions,"  by Lesie E. Scism, The Wall Street Journal, June 24, 2013 ---
http://online.wsj.com/article/SB10001424127887323998604578565711321338272.html?mod=WSJ_hp_LEFTWhatsNewsCollection

Life insurers in the U.S. face charges against earnings potentially totaling billions of dollars from miscalculations about the number of customers who would exercise lifetime-income guarantees sold with the retirement products known as variable annuities, according to a new report from Moody's Investors Service MCO +1.70% .

Variable annuities are a tax-advantaged way to invest in stock and bond funds, and these particular guarantees promise steady payouts if owners' fund accounts become depleted.

The grim outlook from the New York ratings firm comes as some insurers are continuing to explore ways to reduce the liability they face from the big blocks of guarantees on their books. Over the past couple of years, many insurers have clamped down on fund choices, raised fees, forbid additional account contributions and sought to buy back the contracts.

In one of the latest efforts, Hartford Financial Services Group Inc. HIG +2.32% is requiring owners of certain of its guarantees to move at least 40% of their money into bond funds—and lose their guarantee if they fail to transfer the money out of stock funds.

Some financial advisers say they worry that clients they aren't able to reach will inadvertently lose the valuable guarantees, possibly exposing the advisers to litigation.

"If you do not allocate your contract value in accordance with the Investment Restrictions" by Oct. 4, the guarantee "WILL BE REVOKED," according to a letter Hartford is dispatching to its customers this month, with the words in boldface type.

Hartford says it needs customers to act because the company's contracts don't allow the insurer to move customers' money from one fund to another without authorization, as some other firms have done. A Hartford spokeswoman said that the insurer plans "a series of reminder letters to customers," as well as extensive communication to brokers and advisers. Customers who miss the Oct. 4 deadline will be notified of an opportunity to reinstate the guarantee, she said.

Scott Stolz, who heads an insurance unit at brokerage firm Raymond James, is among the critics of the move. "Is it the right thing to do to put the policyholder in a situation where, if they don't do something, they will lose a feature they have paid for for years?" he said. Mr. Stolz says he worries that no matter how good the outreach, "there will be a number [of clients] we can't get hold of, and now we carry the potential liability that a feature they bought from Hartford, through us, no longer exists."

Historically, the biggest risk the guarantees posed to insurers has been a steep equity-market decline, but most insurers have learned to effectively hedge the risk of stock-market declines using financial derivatives, according to the Moody's report.

Insurers now are plagued by "less-easily hedged and more unpredictable policyholder behavior," with retention of the products "much greater than expected," the report said.

Insurers including ING U.S VOYA +1.16% .'s life-insurance units and MetLife Inc. MET +2.05% together have taken more than $2.75 billion in charges, in part reflecting lower-than-expected cancellation of the products.

"Lower lapse rates means that higher reserves are required due to higher potential future guaranteed payments to a larger remaining customer group," Moody's report says.

The report said "the industry impact could be in the billions of dollars."

In the early to mid-2000s, insurers competed to sell ever-more-generous guarantees to older people worried about investment losses and outliving their savings. The market declines of the financial crisis showed the value of the products to consumers—and the cost to insurers, as they were required by regulators to boost reserves and capital to back the guarantees.

Immediately after the financial crisis, insurers yanked generous versions of the guarantees from the marketplace and launched new ones with scaled-back benefits, higher prices and fewer choices. Some insurers, including once-dominant-player Hartford, have stopped selling variable annuities.

Continued in article


Bob Jensen's threads on accounting for intangibles and contingencies ---
ttp://www.trinity.edu/rjensen/theory01.htm#TheoryDisputes


How to Lie With Statistics
Simpson's Paradox and Cross-Validation

Simpson's Paradox --- http://en.wikipedia.org/wiki/Simpson%27s_paradox

"Simpson’s Paradox: A Cautionary Tale in Advanced Analytics," by Steve Berman, Leandro DalleMule, Michael Greene, and John Lucker, Significance:  Statistics Making Sense, October 2012 ---
http://www.significancemagazine.org/details/webexclusive/2671151/Simpsons-Paradox-A-Cautionary-Tale-in-Advanced-Analytics.html

Analytics projects often present us with situations in which common sense tells us one thing, while the numbers seem to tell us something much different. Such situations are often opportunities to learn something new by taking a deeper look at the data. Failure to perform a sufficiently nuanced analysis, however, can lead to misunderstandings and decision traps. To illustrate this danger, we present several instances of Simpson’s Paradox in business and non-business environments. As we demonstrate below, statistical tests and analysis can be confounded by a simple misunderstanding of the data. Often taught in elementary probability classes, Simpson’s Paradox refers to situations in which a trend or relationship that is observed within multiple groups reverses when the groups are combined. Our first example describes how Simpson’s Paradox accounts for a highly surprising observation in a healthcare study. Our second example involves an apparent violation of the law of supply and demand: we describe a situation in which price changes seem to bear no relationship with quantity purchased. This counterintuitive relationship, however, disappears once we break the data into finer time periods. Our final example illustrates how a naive analysis of marginal profit improvements resulting from a price optimization project can potentially mislead senior business management, leading to incorrect conclusions and inappropriate decisions. Mathematically, Simpson’s Paradox is a fairly simple—if counterintuitive—arithmetic phenomenon. Yet its significance for business analytics is quite far-reaching. Simpson’s Paradox vividly illustrates why business analytics must not be viewed as a purely technical subject appropriate for mechanization or automation. Tacit knowledge, domain expertise, common sense, and above all critical thinking, are necessary if analytics projects are to reliably lead to appropriate evidence-based decision making.

The past several years have seen decision making in many areas of business steadily evolve from judgment-driven domains into scientific domains in which the analysis of data and careful consideration of evidence are more prominent than ever before. Additionally, mainstream books, movies, alternative media and newspapers have covered many topics describing how fact and metric driven analysis and subsequent action can exceed results previously achieved through less rigorous methods. This trend has been driven in part by the explosive growth of data availability resulting from Enterprise Resource Planning (ERP) and Customer Relationship Management (CRM) applications and the Internet and eCommerce more generally. There are estimates that predict that more data will be created in the next four years than in the history of the planet. For example, Wal-Mart handles over one million customer transactions every hour, feeding databases estimated at more than 2.5 petabytes in size - the equivalent of 167 times the books in the United States Library of Congress.

Additionally, computing power has increased exponentially over the past 30 years and this trend is expected to continue. In 1969, astronauts landed on the moon with a 32-kilobyte memory computer. Today, the average personal computer has more computing power than the entire U.S. space program at that time. Decoding the human genome took 10 years when it was first done in 2003; now the same task can be performed in a week or less. Finally, a large consumer credit card issuer crunched two years of data (73 billion transactions) in 13 minutes, which not long ago took over one month.

This explosion of data availability and the advances in computing power and processing tools and software have paved the way for statistical modeling to be at the front and center of decision making not just in business, but everywhere. Statistics is the means to interpret data and transform vast amounts of raw data into meaningful information.

However, paradoxes and fallacies lurk behind even elementary statistical exercises, with the important implication that exercises in business analytics can produce deceptive results if not performed properly. This point can be neatly illustrated by pointing to instances of Simpson’s Paradox. The phenomenon is named after Edward Simpson, who described it in a technical paper in the 1950s, though the prominent statisticians Karl Pearson and Udney Yule noticed the phenomenon over a century ago. Simpson’s Paradox, which regularly crops up in statistical research, business analytics, and public policy, is a prime example of why statistical analysis is useful as a corrective for the many ways in which humans intuit false patterns in complex datasets.

Simpson’s Paradox is in a sense an arithmetic trick: weighted averages can lead to reversals of meaningful relationships—i.e., a trend or relationship that is observed within each of several groups reverses when the groups are combined. Simpson’s Paradox can arise in any number of marketing and pricing scenarios; we present here case studies describing three such examples. These case studies serve as cautionary tales: there is no comprehensive mechanical way to detect or guard against instances of Simpson’s Paradox leading us astray. To be effective, analytics projects should be informed by both a nuanced understanding of statistical methodology as well as a pragmatic understanding of the business being analyzed.

The first case study, from the medical field, presents a surface indication on the effects of smoking that is at odds with common sense. Only when the data are viewed at a more refined level of analysis does one see the true effects of smoking on mortality. In the second case study, decreasing prices appear to be associated with decreasing sales and increasing prices appear to be associated with increasing sales. On the surface, this makes no sense. A fundamental tenet of economics is that of the demand curve: as the price of a good or service increases, consumers demand less of it. Simpson’s Paradox is responsible for an apparent—though illusory—violation of this fundamental law of economics. Our final case study shows how marginal improvements in profitability in each of the sales channels of a given manufacturer may result in an apparent marginal reduction in the overall profitability the business. This seemingly contradictory conclusion can also lead to serious decision traps if not properly understood.

Case Study 1: Are those warning labels really necessary?

We start with a simple example from the healthcare world. This example both illustrates the phenomenon and serves as a reminder that it can appear in any domain.

The data are taken from a 1996 follow-up study from Appleton, French, and Vanderpump on the effects of smoking. The follow-up catalogued women from the original study, categorizing based on the age groups in the original study, as well as whether the women were smokers or not. The study measured the deaths of smokers and non-smokers during the 20 year period.

Continued in article

What happened to cross-validation in accountics science research?

Over time I've become increasingly critical of the lack of validation in accountics science, and I've focused mainly upon lack of replication by independent researchers and lack of commentaries published in accountics science journals ---
http://www.trinity.edu/rjensen/TheoryTAR.htm

Another type of validation that seems to be on the decline in accountics science are the so-called cross-validations. Accountics scientists seem to be content with their statistical inference tests on Z-Scores, F-Tests, and correlation significance testing. Cross-validation seems to be less common, at least I'm having troubles finding examples of cross-validation. Cross-validation entails comparing sample findings with findings in holdout samples.

Cross Validation --- http://en.wikipedia.org/wiki/Cross-validation_%28statistics%29

When reading the following paper using logit regression to to predict audit firm changes, it struck me that this would've been an ideal candidate for the authors to have performed cross-validation using holdout samples.
"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.

We study events surrounding ChuoAoyama's failed audit of Kanebo, a large Japanese cosmetics company whose management engaged in a massive accounting fraud. ChuoAoyama was PwC's Japanese affiliate and one of Japan's largest audit firms. In May 2006, the Japanese Financial Services Agency (FSA) suspended ChuoAoyama for two months for its role in the Kanebo fraud. This unprecedented action followed a series of events that seriously damaged ChuoAoyama's reputation. We use these events to provide evidence on the importance of auditors' reputation for quality in a setting where litigation plays essentially no role. Around one quarter of ChuoAoyama's clients defected from the firm after its suspension, consistent with the importance of reputation. Larger firms and those with greater growth options were more likely to leave, also consistent with the reputation argument.

Jensen Comment
Rather than just use statistical inference tests on logit model Z-statistics, it struck me that in statistics journals the referees might've requested cross-validation tests on holdout samples of firms that changed auditors and firms that did not change auditors.

I do find somewhat more frequent cross-validation studies in finance, particularly in the areas of discriminant analysis in bankruptcy prediction modes.

Instances of cross-validation in accounting research journals seem to have died out in the past 20 years. There are earlier examples of cross-validation in accounting research journals. Several examples are cited below:

"A field study examination of budgetary participation and locus of control," by  Peter Brownell, The Accounting Review, October 1982 ---
http://www.jstor.org/discover/10.2307/247411?uid=3739712&uid=2&uid=4&uid=3739256&sid=21101146090203

"Information choice and utilization in an experiment on default prediction," Abdel-Khalik and KM El-Sheshai - Journal of Accounting Research, 1980 ---
http://www.jstor.org/discover/10.2307/2490581?uid=3739712&uid=2&uid=4&uid=3739256&sid=21101146090203

"Accounting ratios and the prediction of failure: Some behavioral evidence," by Robert Libby, Journal of Accounting Research, Spring 1975 ---
http://www.jstor.org/discover/10.2307/2490653?uid=3739712&uid=2&uid=4&uid=3739256&sid=21101146090203

There are other examples of cross-validation in the 1970s and 1980s, particularly in bankruptcy prediction.

I have trouble finding illustrations of cross-validation in the accounting research literature in more recent years. Has the interest in cross-validating waned along with interest in validating accountics research? Or am I just being careless in my search for illustrations?

 


Why India Trails China (NYT) ---
http://www.nytimes.com/2013/06/20/opinion/why-india-trails-china.html?_r=0

Jensen Comment
India performs worse on both inequality and birth control. Both nations restrain economic growth with high levels of government corruption.


 

From the Stanford University Encyclopedia of Philosophy
Science and Pseudo-Science --- http://plato.stanford.edu/entries/pseudo-science/

The demarcation between science and pseudoscience is part of the larger task to determine which beliefs are epistemically warranted. The entry clarifies the specific nature of pseudoscience in relation to other forms of non-scientific doctrines and practices. The major proposed demarcation criteria are discussed and some of their weaknesses are pointed out. In conclusion, it is emphasized that there is much more agreement in particular issues of demarcation than on the general criteria that such judgments should be based upon. This is an indication that there is still much important philosophical work to be done on the demarcation between science and pseudoscience.

1. The purpose of demarcations
2. The “science” of pseudoscience
3. The “pseudo” of pseudoscience

3.1 Non-, un-, and pseudoscience
3.2 Non-science posing as science
3.3 The doctrinal component
3.4 A wider sense of pseudoscience
3.5 The objects of demarcation 3.6 A time-bound demarcation

4. Alternative demarcation criteria

4.1 The logical positivists
4.2 Falsificationism
4.3 The criterion of puzzle-solving
4.4 Criteria based on scientific progress
4.5 Epistemic norms 4.6 Multi-criterial approaches

5. Unity in diversity Bibliography

Bibliography of philosophically informed literature on pseudosciences and contested doctrines

Other Internet resources Related Entries

Bibliography

Cited Works

Paul Feyerabend --- http://plato.stanford.edu/entries/feyerabend/

William Thomas Ziemba --- http://www.williamtziemba.com/WilliamZiemba-ShortCV.pdf

Thomas M. Cover --- http://en.wikipedia.org/wiki/Thomas_M._Cover

On June 15, 2013 David Johnstone wrote the following:

Dear all,
I worked on the logic and philosophy of hypothesis tests in the early 1980s and discovered a very large literature critical of standard forms of testing, a little of which was written by philosophers of science (see the more recent book by Howson and Urbach) and much of which was written by statisticians. At this point philosophy of science was warming up on significance tests and much has been written since. Something I have mentioned to a few philosophers however is how far behind the pace philosophy of science is in regard to all the new finance and decision theory developed in finance (e.g. options logic, mean-variance as an expression of expected utility). I think that philosophers would get a rude shock on just how clever and rigorous all this thinking work in “business” fields is. There is also wonderfully insightful work on betting-like decisions done by mathematicians, such as Ziemba and Cover, that has I think rarely if ever surfaced in the philosophy of science (“Kelly betting” is a good example). So although I believe modern accounting researchers should have far more time and respect for ideas from the philosophy of science, the argument runs both ways.

Jensen Comment
Note that in the above "cited works" there are no cited references in statistics such as Ziemba and Cover or the better known statistical theory and statistical science references.

This suggests somewhat the divergence of statistical theory from philosophy theory with respect to probability and hypothesis testing. Of course probability and hypothesis testing are part and parcel to both science and pseudo-science. Statistical theory may accordingly be a subject that divides pseudo-science and real science.

Etymology provides us with an obvious starting-point for clarifying what characteristics pseudoscience has in addition to being merely non- or un-scientific. “Pseudo-” (ψευδο-) means false. In accordance with this, the Oxford English Dictionary (OED) defines pseudoscience as follows:

“A pretended or spurious science; a collection of related beliefs about the world mistakenly regarded as being based on scientific method or as having the status that scientific truths now have.”

 


June 5, 2013 reply to a long thread by Bob Jensen

Hi Steve,

As usual, these AECM threads between you, me, and Paul Williams resolve nothing to date. TAR still has zero articles without equations unless such articles are forced upon editors like the Kaplan article was forced upon you as Senior Editor. TAR still has no commentaries about the papers it publishes and the authors make no attempt to communicate and have dialog about their research on the AECM or the AAA Commons.

I do hope that our AECM threads will continue and lead one day to when the top academic research journals do more to both encourage (1) validation (usually by speedy replication), (2) alternate methodologies, (3) more innovative research, and (4) more interactive commentaries.

I remind you that Professor Basu's essay is only one of four essays bundled together in Accounting Horizons on the topic of how to make accounting research, especially the so-called Accounting Sciience or Accountics Science or Cargo Cult science, more innovative.

The four essays in this bundle are summarized and extensively quoted at http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm#Essays 

I will try to keep drawing attention to these important essays and spend the rest of my professional life trying to bring accounting research closer to the accounting profession.

I also want to dispel the myth that accountics research is harder than making research discoveries without equations. The hardest research I can imagine (and where I failed) is to make a discovery that has a noteworthy impact on the accounting profession. I always look but never find such discoveries reported in TAR.

The easiest research is to purchase a database and beat it with an econometric stick until something falls out of the clouds. I've searched for years and find very little that has a noteworthy impact on the accounting profession. Quite often there is a noteworthy impact on other members of the Cargo Cult and doctoral students seeking to beat the same data with their sticks. But try to find a practitioner with an interest in these academic accounting discoveries?

Our latest thread leads me to such questions as:

  1. Is accounting research of inferior quality relative to other disciplines like engineering and finance?

     
  2. Are there serious innovation gaps in academic accounting research?

     
  3. Is accounting research stagnant?

     
  4. How can accounting researchers be more innovative?

     
  5. Is there an "absence of dissent" in academic accounting research?

     
  6. Is there an absence of diversity in our top academic accounting research journals and doctoral programs?

     
  7. Is there a serious disinterest (except among the Cargo Cult) and lack of validation in findings reported in our academic accounting research journals, especially TAR?

     
  8. Is there a huge communications gap between academic accounting researchers and those who toil teaching accounting and practicing accounting?

     
  9. Why do our accountics scientists virtually ignore the AECM and the AAA Commons and the Pathways Commission Report?
    http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm

One fall out of this thread is that I've been privately asked to write a paper about such matters. I hope that others will compete with me in thinking and writing about these serious challenges to academic accounting research that never seem to get resolved.

Thank you Steve for sometimes responding in my threads on such issues in the AECM.

Respectfully,
Bob Jensen

 


June 18, 2013 reply to David Johnstone by Jagdish Gangolly

David,

Your call for a dialogue between statistics and philosophy of science is very timely, and extremely important considering the importance that statistics, both in its probabilistic and non-probabilistic incarnations, has gained ever since the computational advances of the past three decades or so. Let me share a few of my conjectures regarding the cause of this schism between statistics and philosophy, and consider a few areas where they can share in mutual reflection. However, reflection in statistics, like in accounting of late and unlike in philosophy, has been on short order for quite a while. And it is always easier to pick the low hanging fruit. Albert Einstein once remarked, ""I have little patience with scientists who take a board of wood, look for the thinnest part and drill a great number of holes where drilling is easy".

1.

Early statisticians were practitioners of the art, most serving as consultants of sorts. Gosset worked for Guiness, GEP Box did most of his early work for Imperial Chemical Industries (ICI), Fisher worked at Rothamsted Experimental Station, Loeve was an actuary at University of Lyon... As practitioners, statisticians almost always had their feet in one of the domains in science: Fisher was a biologist, Gossett was a chemist, Box was a chemist, ... Their research was down to earth, and while statistics was always regarded the turf of mathematicians, their status within mathematics was the same as that of accountants in liberal arts colleges today, slightly above that of athletics. Of course, the individuals with stature were expected to be mathematicians in their own right.

All that changed with the work of Kolmogorov (1933, Moscow State, http://www.socsci.uci.edu/~bskyrms/bio/readings/kolmogorov_theory_of_probability_small.pdf), Loeve (1960, Berkeley), Doob(1953, Illinois), and Dynkin(1963, Moscow State and Cornell). They provided mathematical foundations for earlier work of practitioners, and especially Kolmogorov provided axiomatic foundations for probability theory. In the process, their work unified statistics into a coherent mass of knowledge. (Perhaps there is a lesson here for us accountants). A collateral effect was the schism in the field between the theoreticians and the practitioners (of which we accountants must be wary) that has continued to this date. We can see a parallel between accounting and statistics here too.

2.

Early controversies in statistics had to do with embedding statistical methods in decision theory (Fisher was against, Neyman and Pearson were for it), and whether the foundations for statistics had to be deductive or inductive (frequentists were for the former, Bayesians were for the latter). These debates were not just technical, and had underpinnings in philosophy, especially philosophy of mathematics (after all, the early contributors to the field were mathematicians: Gauss, Fermat, Pascal, Laplace, deMoivre, ...). For example, when the Fisher-Neyman/Pearson debates had ranged, Neyman was invited by the philosopher Jakko Hintikka to write a paper for the journal Synthese ( "Frequentist probability and Frequentist statistics", 1977).

3.

Since the early statisticians were practitioners, their orientation was usually normative: in sample theory, regression, design of experiments,.... The mathematisation of statistics and later work of people like Tukey, raised the prominence of descriptive (especially axiomatic) in the field. However, the recent developments in datamining have swung the balance again in favour of the normative.

4. Foundational issues in statistics have always been philosophical. And treatment of probability has been profoundly philosophical (see for example http://en.wikipedia.org/wiki/Probability_interpretations).

Regards,

Jagdish

June 18, 2018 reply from David Johnstone

Dear Jagdish, as usual your knowledge and perspectives are great to read.

In reply to your points: (1) the early development of statistics by Gossett and Fisher was as a means to an end, i.e. to design and interpret experiments that helped to resolve practical issues, like whether fertilizers were effective and different genetic strains of crops were superior. This left results testable in the real world laboratory, by the farmers, so the pressure to get it right rather than just publish was on. Gossett by the way was an old fashioned English scholar who spent as much time fishing and working in his workshop as doing mathematics. This practical bent comes out in his work.

(2) Neman’s effort to make statistics “deductive” was always his weak point, and he went to great lengths to evade this issue. I wrote a paper on Neyman’s interpretations of tests, as in trying to understand him I got frustrated by his inconsistency and evasiveness over his many papers. In more than one place, he wrote that to “accept” the null is to “act as if it is true”, and to reject it is to “act as if it is false”. This is ridiculous in scientific contexts, since to act as if something is decided 100% you would never draw another sample - your work would be done on that hypothesis.

(3) On the issue of normative versus descriptive, as in accounting research, Harold Jeffreys had a great line in his book, “he said that if we observe a child add 2 and 2 to get 5, we don’t change the laws of arithmetic”. He was very anti learning about the world by watching people rather than doing abstract theory. BTW I own his personal copy of his 3rd edition. A few years ago I went to buy this book on Bookfinder, and found it available in a secondhand bookshop in Cambridge. I rand them instantly when I saw that they said whose book it was, and they told me that Mrs Jeffreys had just died and Harold’s books had come in, and that the 1st edition was sold the day before.

(4) I adore your line that “Foundational issues in statistics have always been philosophical”. .... So must they be in accounting, in relation to how to construct income and net assets measures that are sound and meaningful. Note however that just because we accept something needs philosophical footing doesn’t mean that we will find or agree on that footing. I recently received a comment on a paper of mine from an accounting referee. The comment was basically that the effect of information on the cost of capital “could not be revealed by philosophy” (i.e. by probability theory etc.). Rather, this is an empirical issue. Apart from ignoring all the existing theory on this matter in accounting and finance, the comment is symptomatic of the way that “empirical findings” have been elevated to the top shelf, and theory, or worse, “thought pieces”, are not really science. There is so much wrong with this extreme but common view, including of course that every empirical finding stands on a model or a priori view. Indeed, remember that every null hypothesis that was ever rejected might have been rejected because the model (not the hypothesis) was wrong. People naively believe that a bad model or bad experimental design just reduces power (makes it harder to reject the null) but the mathematical fact is that it can go either way, and error in the model or sample design can make rejection of the null almost certain.

Thank you for your interesting thoughts Jagdish,

David

From Bob Jensen's threads on the Cult of Statistical Significance ---
http://www.cs.trinity.edu/~rjensen/temp/DeirdreMcCloskey/StatisticalSignificance01.htm
 

The Cult of Statistical Significance: How Standard Error Costs Us Jobs, Justice, and Lives ---
http://www.cs.trinity.edu/~rjensen/temp/DeirdreMcCloskey/StatisticalSignificance01.htm

Page 15
The doctor who cannot distinguish statistical significance from substantive significance, an F-statistic from a heart attach, is like an economist who ignores opportunity cost---what statistical theorists call the loss function. The doctors of "significance" in medicine and economy are merely "deciding what to say rather than what to do" (Savage 1954, 159). In the 1950s Ronald Fisher published an article and a book that intended to rid decision from the vocabulary of working statisticians (1955, 1956). He was annoyed by the rising authority in highbrow circles of those he called "the Neymanites."

Continued on Page 15


pp. 28-31
An example is provided regarding how Merck manipulated statistical inference to keep its killing pain killer Vioxx from being pulled from the market.

Page 31
Another story. The Japanese government in June 2005 increased the limit on the number of whales that may be annually killed in the Antarctica---from around 440 annually to over 1,000 annually. Deputy Commissioner Akira Nakamae explained why:  "We will implement JARPS-2 [the plan for the higher killing] according to the schedule, because the sample size is determined in order to get statistically significant results" (Black 2005). The Japanese hunt for the whales, they claim, in order to collect scientific data on them. That and whale steaks. The commissioner is right:  increasing sample size, other things equal, does increase the statistical significance of the result. It is, fter all, a mathematical fact that statistical significance increases, other things equal, as sample size increases. Thus the theoretical standard error of JAEPA-2, s/SQROOT(440+560) [given for example the simple mean formula], yields more sampling precision than the standard error JARPA-1, s/SQROOT(440). In fact it raises the significance level to Fisher's percent cutoff. So the Japanese government has found a formula for killing more whales, annually some 560 additional victims, under the cover of getting the conventional level of Fisherian statistical significance for their "scientific" studies.


pp. 250-251
The textbooks are wrong. The teaching is wrong. The seminar you just attended is wrong. The most prestigious journal in your scientific field is wrong.

You are searching, we know, for ways to avoid being wrong. Science, as Jeffreys said, is mainly a series of approximations to discovering the sources of error. Science is a systematic way of reducing wrongs or can be. Perhaps you feel frustrated by the random epistemology of the mainstream and don't know what to do. Perhaps you've been sedated by significance and lulled into silence. Perhaps you sense that the power of a Roghamsted test against a plausible Dublin alternative is statistically speaking low but you feel oppressed by the instrumental variable one should dare not to wield. Perhaps you feel frazzled by what Morris Altman (2004) called the "social psychology rhetoric of fear," the deeply embedded path dependency that keeps the abuse of significance in circulation. You want to come out of it. But perhaps you are cowed by the prestige of Fisherian dogma. Or, worse thought, perhaps you are cynically willing to be corrupted if it will keep a nice job

 


Some Comments About Accountics Science Versus Real Science

This is the lead article in the May 2013 edition of The Accounting Review
"On Estimating Conditional Conservatism
Authors

Ray Ball (The University of Chicago)
S. P. Kothari )Massachusetts Institute of Technology)
Valeri V. Nikolaev (The University of Chicago)

The Accounting Review, Volume 88, No. 3, May 2013, pp. 755-788

The concept of conditional conservatism (asymmetric earnings timeliness) has provided new insight into financial reporting and stimulated considerable research since Basu (1997). Patatoukas and Thomas (2011) report bias in firm-level cross-sectional asymmetry estimates that they attribute to scale effects. We do not agree with their advice that researchers should avoid conditional conservatism estimates and inferences from research based on such estimates. Our theoretical and empirical analyses suggest the explanation is a correlated omitted variables problem that can be addressed in a straightforward fashion, including fixed-effects regression. Correlation between the expected components of earnings and returns biases estimates of how earnings incorporate the information contained in returns. Further, the correlation varies with returns, biasing asymmetric timeliness estimates. When firm-specific effects are taken into account, estimates do not exhibit the bias, are statistically and economically significant, are consistent with priors, and behave as a predictable function of book-to-market, size, and leverage.

. . .

We build on and provide a different interpretation of the anomalous evidence reported by PT. We begin by replicating their [Basu (1997). Patatoukas and Thomas (2011)] results. We then provide evidence that scale-related effects are not the explanation. We control for scale by sorting observations into relatively narrow portfolios based on price, such that within each portfolio approximately 99 percent of the cross-sectional variation in scale is eliminated. If scale effects explain the anomalous evidence, then it would disappear within these portfolios, but the estimated asymmetric timeliness remains considerable. We conclude that the data do not support the scale-related explanation.4 It thus becomes necessary to look for a better explanation.

Continued in article

Jensen Comment
The good news is that the earlier findings were replicated. This is not common in accountics science research. The bad news is that such replications took 16 years and two years respectively. And the probability that TAR will publish a one or more commentaries on these findings is virtually zero.

How does this differ from real science?
In real science most findings are replicated before or very quickly after publication of scientific findings. And interest is in the reproducible results without also requiring an extension of the research for publication of the replication outcomes.

In accountics science there is little incentive to perform exact replications since top accountics science journals neither demand such replications nor will they publish (even in commentaries) replication outcomes. A necessary condition to publish replication outcomes in accountics science is the extend the research into new frontiers.

How long will it take for somebody to replicate these May 2013 findings of Ball, Kothari, and Nikolaev? If the past is any indicator of the future the BKN findings will never be replicated. If they are replicated it will most likely take years before we receive notice of such replication in an extension of the BKN research published in 2013.

Bob Jensen's threads on replication and commentaries in accountics science ---
http://www.trinity.edu/rjensen/TheoryTAR.htm


Question
In statistics what is a "winsorized mean?"

Answer in Wikipedia ---
http://en.wikipedia.org/wiki/Winsorized_mean

An analogy that takes me back to my early years of factor analysis is Procreates Analysis ---
http://en.wikipedia.org/wiki/Procrustes_analysis

"The Role of Financial Reporting Quality in Mitigating the Constraining Effect of Dividend Policy on Investment Decisions"
Authors

Santhosh Ramalingegowda (The University of Georgia
Chuan-San Wang (National Taiwan University)
Yong Yu (The University of Texas at Austin)

The Accounting Review, Vol. 88, No. 3, May 2013, pp. 1007-1040

Miller and Modigliani's (1961) dividend irrelevance theorem predicts that in perfect capital markets dividend policy should not affect investment decisions. Yet in imperfect markets, external funding constraints that stem from information asymmetry can force firms to forgo valuable investment projects in order to pay dividends. We find that high-quality financial reporting significantly mitigates the negative effect of dividends on investments, especially on R&D investments. Further, this mitigating role of financial reporting quality is particularly important among firms with a larger portion of firm value attributable to growth options. In addition, we show that the mitigating role of high-quality financial reporting is more pronounced among firms that have decreased dividends than among firms that have increased dividends. These results highlight the important role of financial reporting quality in mitigating the conflict between firms' investment and dividend decisions and thereby reducing the likelihood that firms forgo valuable investment projects in order to pay dividends.

. . .

Panel A of Table 1 reports the descriptive statistics of our main and control variables in Equation (1). To mitigate the influence of potential outliers, we winsorize all continuous variables at the 1 percent and 99 percent levels. The mean and median values of Total Investment are 0.14 and 0.09 respectively. The mean and median values of R&D Investment (Capital Investment) are 0.05 (0.06) and 0.00 (0.04), respectively. Because we multiply RQ−1 by −1 so that higher RQ−1 indicates higher reporting quality, RQ−1 has negative values with the mean and median of −0.05 and −0.04, respectively. The above distributions are similar to prior research (e.g., Biddle et al. 2009). The mean and median values of Dividend are 0.01 and 0.00, respectively, consistent with many sample firms not paying any dividends. The descriptive statistics of control variables are similar to prior research (e.g., Biddle et al. 2009). Panels B and C of Table 1 report the Pearson and Spearman correlations among our variables. Consistent with dividends having a constraining effect on investments (Brav et al. 2005; Daniel et al. 2010), we find that Total Investment and R&D Investment are significantly negatively correlated with Dividend.

Continued in article

Jensen Comment
With statistical inference testing on such an enormous sample size this may be yet another accountics science illustration of misleading statistical inferences that Deirdre McCloskey warned about (The Cult of Statistical Significance) in a plenary session at the 2011 AAA annual meetings in 2012 ---
http://www.cs.trinity.edu/~rjensen/temp/DeirdreMcCloskey/StatisticalSignificance01.htm
I had the privilege to be one of the discussants of her amazing presentation.

The basic problem of statistical inference testing on enormous samples is that the null hypothesis is almost always rejected even when departures from the null are infinitesimal.

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

My threads on Deidre McCloskey and my own talk are at
http://www.cs.trinity.edu/~rjensen/temp/DeirdreMcCloskey/StatisticalSignificance01.htm


How Statistics Can Mislead

"Young Households Falling Behind in Net Worth," by Barry Ritholtz, June 15, 2013 ---
http://www.ritholtz.com/blog/2013/06/young-households-falling-behind-in-net-worth/

Those averages are deceptive, in that they are raised by the high wealth of a relatively small number of households. A very different picture emerges from looking at the median — the level at which half the households are richer and half poorer. That statistic can be calculated from the Fed’s triennial survey of consumer finances. In the studies conducted in the 1990s, the median net wealth was about one-quarter of the average. In the 2000s, the median fell to about one-fifth of the average, and in 2010, it was down to about one-sixth of the average.”
Floyd Norris at the NYT

How Statistics Can Mislead
"MOOC Students Who Got Offline Help Scored Higher, Study Finds," by Steve Kolowich, Chronicle of Higher Education, June 7, 2013 ---
http://chronicle.com/blogs/wiredcampus/mooc-students-who-got-offline-help-scored-higher-study-finds/44111

Jensen Comment
Although I like this article, it is yet another example of the many times statistics are used to mislead readers. At the roots this is really a rehash of the issue of causation versus correlation.

This extrapolates to the granulation problem that I've previously mentioned with respect to how often (most always) accountics science researchers really cannot say anything about causality.

"How Non-Scientific Granulation Can Improve Scientific Accountics" ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsGranulationCurrentDraft.pdf


"Google HR Boss Explains Why GPA And Most Interviews Are Useless," by Max Nisen, Business Insider, June 19, 2013 --- 
http://www.businessinsider.com/how-google-hires-people-2013-6

Jensen Comment
Adam Bryant is not speaking for all industries and companies. I'm not certain interviews are all that useless for CPA firms seeking interns and new employees. Grades are less useful due to grade inflation where the median grades in college courses are A- grades.

Also Adam Bryant is not speaking for other recruiters, most of whom put lots of faith in grades and interviews.

Success in a CPA firm might be defined as success in obtaining sufficient technical experience to get employed by clients when leaving the CPA firms before attaining partnership. Attaining partnership is complicated in CPA firms. It usually is more of a function of talent for obtaining and maintaining clients. Partners in CPA firms generally have a greater willingness for working nights and weekends at civic functions and conferences and charity events like golf outings. It's nearly impossible to predict whether a student still in school is truly partner material. Grades, interviews, and most any factors are not very predictive at that stage in time. There's also a lot of serendipity regarding being in the right places at the right times.

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


From the CFO Journal's Morning Ledger on June 20, 2013

Bill to ban PCAOB from forcing auditor rotation advances
A bill to ban the PCAOB from ever requiring mandatory periodic rotation of corporate auditors advanced out of the House Financial Services Committee and will move toward a vote in the full House of Representatives,
Emily Chasan reports. The bill would prevent the PCAOB from “imposing rules that would cause significant disruption and financial cost to our companies,” Rep. Gregory Meeks (D., N.Y.) who co-sponsored the bill with Rep. Robert Hurt (D., Va.), said at the hearing. A mandatory auditor rotation requirement is “unworkable,” Mr. Meeks said, noting that most large companies already are limited to considering one or two of the “Big 4” auditors with expertise in their industry.

Teaching Case from The Wall Street Journal Weekly Accounting Review on June 27, 2013

Bill to Ban PCAOB From Forcing Auditor Rotation Advances
by: Emily Chasen
Jun 20, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Accounting, Auditing, Auditor Independence, Auditor Rotation, Big Four Firms, PCAOB, Sarbanes-Oxley

SUMMARY: A bill to ban the U.S. auditor watchdog agency from ever requiring mandatory periodic rotation of corporate auditors will move to the House of Representative. It would amend the Sarbanes-Oxley Act of 2002 to prohibit the Public Company Accounting Oversight Board from requiring public companies to use specific auditors, or from requiring them to use different auditors on a rotating basis.

CLASSROOM APPLICATION: This article is appropriate for an auditing class for the topic of auditor rotation and Sarbanes-Oxley. We can show students that while auditor rotation could have some benefits, there are issues and costs involved.

QUESTIONS: 
1. (Introductory) What is the PCAOB? What is its area of authority? How was it created?

2. (Advanced) What is auditor rotation? What is its stated purpose? Why is it a good idea? What is the potential value for business, consumers, and other parties?

3. (Advanced) What are the problems involved with mandatory auditor rotation? Who eventually pays the additional costs?

4. (Advanced) The issue of mandatory auditor rotation has been studies and debated for several years. Why might members of Congress become involved at this point?
 

Reviewed By: Linda Christiansen, Indiana University Southeast
 

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"Bill to Ban PCAOB From Forcing Auditor Rotation Advances," by Emily Chasen, The Wall Street Journal, June 20, 2013 ---
http://blogs.wsj.com/cfo/2013/06/19/bill-to-ban-pcaob-from-forcing-auditor-rotation-advances/?mod=djem_jiewr_AC_domainid

A bill to ban the U.S. auditor watchdog agency from ever requiring mandatory periodic rotation of corporate auditors advanced out of the House Financial Services Committee on Wednesday and will move toward the House of Representatives.

At a markup hearing on Wednesday, the committee voted 52 to zero to report favorably to the House an amended version of the bill, H.R. 1564, which would amend the Sarbanes-Oxley Act of 2002 to prohibit the Public Company Accounting Oversight Board from requiring public companies to use specific auditors, or from requiring them to use different auditors on a rotating basis. The vote marks the first step in advancing a bill toward a vote on the floor of the House.

The bill would prevent the PCAOB from “imposing rules that would cause significant disruption and financial cost to our companies,” Rep. Gregory Meeks (D., N.Y.) who co-sponsored the bill with Rep. Robert Hurt (R., Va.), said at the hearing. A mandatory auditor rotation requirement is “unworkable,” Mr. Meeks said, noting that most large companies already are limited to considering one or two of the “Big 4”  auditors with expertise in their industry.

The PCAOB issued a concept release in 2011seeking comments from the public on whether mandatory auditor term limits and requiring companies to periodically rotate auditors would improve auditor independence.

The PCAOB declined to comment on Wednesday’s committee vote.

Rep. Maxine Waters (D., Calif.) offered an amendment to the bill saying she didn’t want to “tie the hands” of the PCAOB, since they have only brought up the idea so far, and not offered a formal proposal. But the idea was slammed by hundreds of companies, business groups, corporate directors and auditors who said mandatory rotation would increase costs and harm audit quality as new auditors would struggle to gain expertise with their new clients. At a hearing last year, House Financial Services Committee members said they were worried a mandatory auditor rotation proposal from the PCAOB was an overreach of  its authority.

Rep. Hurt  said continued uncertainty over the status of the auditor rotation proposal at the PCAOB was having a “detrimental” effect on business. The board has not decided yet whether to abandon or move forward with the concept release.

Continued in article

Professors For and Against Audit Firm Rotation
A few surprises of professors coming out in favor of audit firm rotation
"PCAOB Hears Evidence Favoring Auditor Rotation," by Tammy Whitehouse, Compliance Week, October 18, 2012 ---
http://www.complianceweek.com/pcaob-hears-evidence-favoring-auditor-rotation/article/264288/

Audit research experts have presented the Public Company Accounting Oversight Board with evidence they say demonstrates auditor rotation leads to better audit quality.

During its Houston roundtable to discuss whether mandatory rotation would improve audit quality, Scott Whisenant, an associate professor of accounting at the University of Kansas, reviewed a variety of academic studies for the board that suggest rotation would produce benefits the board is seeking. He noted much of the protest around mandatory rotation has focused on costs, but few studies have focused on possible benefits because rotation is practiced in only a handful of countries.

The results of a 2000 study suggest, he said, that long-term auditor client relationships significantly increase the likelihood of an unqualified opinion, which raises questions about audit quality. The exception, however, is the last year of the relationship, when the likelihood of an unqualified opinion drops. “In this final year, the auditors finally drop the hammer down on clients,” Whisenant said, knowing they are about to surrender the job to a successor firm that will no doubt review their work.

Whisenant said his own more recent research with another coauthor suggests that in countries where rotation is practiced there's evidence of less earnings management, less managing to meet earnings targets, and more timely recognition of losses. The study concludes the quality of audit markets improves after the enactment of rotation, he says, and evidence suggests that concerns about any disruption or difficulty of transition to a new audit firm are more than offset by benefits. “Depending on the statistics we investigated, the benefit to audit quality of adopting rotation rules appears to be larger by a factor of at least two, and in some cases more, than the cost of audit quality erosion at the forced rotation of audit engagements,” he said.

Stephen Zeff, accounting professor at Rice University, told the PCAOB auditors have become more commercial and less professional over the past several decades, driven there by an education process that preaches memorization of standards more than critical thinking and an allowance for auditors to develop business relationships with their clients. Karen Nelson, another accounting professor from Rice, said her review of academic research suggests auditors working under the present model are more likely to issue a report biased toward management than under practically any other arrangement  that would involve mandates on rotation or retention.

PCAOB Chairman James Doty praised the “extraordinary array of views” presented by the academics. “This is where we we wanted to get to with the concept release,” he said, where the board could begin to digest empirical evidence that would suggest what regulatory regime is most likely to produce objective, professional, skeptical audits. The webcast archive of the Houston roundtable will be available on the PCAOB website.

 

Jensen Comment
A few of my AECM friends have repeatedly argued for audit firm rotation, including Tom Selling and David Albrecht. Now it turns out that some other professors mentioned above are coming out of the woodwork in favor of such rotation as well.

It would seem that the PCAOB wants audit firm rotation so badly that, in spite of the overwhelmingly negative comments received in various invitations to comment, the Board just keeps coming back for more support in favor of rotation..

I'm on record as being against it for various important reasons. One is cost since there are so many costs of gearing up for a first-time audit, especially a large multinational client with offices and factories spread about the world. I can't imagine the cost of gearing up for a first time audit of GM, GE, Exxon-Mobil, etc. Second, the new costs will be added to pressures on audit firms by the PCAOB to conduct more costly audits, including much more detailed testing ---
http://pcaobus.org/Inspections/Reports/Pages/default.aspx

It's naive to assume that clients will remain passive and simply cough up the millions or tens of millions of dollars added in rotation-based fees billed by their auditors. Instead, get ready for intense lobbying in Washington DC to overturn any PCOAB audit firm rotation mandate and more intense lobbying to overturn SarBox legislation that created the PCAOB in the first place. I think that attention given to the audit firm rotation issue may merely be a pretense by the PCAOB in an effort to scare audit firms and raise added concerns about audit independence. Does the PCAOB really want to go toe-to-toe with Corporate America as well as companies headquartered around the world who listed on the NYSE?

Equally important in my mind is what rotation will do to the quality and skills of auditors on the job. First there is the inevitable relocation that will come from shifting from a huge client headquartered in one city to another big client headquartered thousands of miles away. Even with medium-sized clients in smaller cities there will be inevitable stresses of having to uproot families and move. For example, after giving up an audit of USAA in San Antonio hundreds of auditors may have to move to Dallas, Houston, NYC, Washington DC or who knows where.

I'm not alone. A raft of other highly respected professors claim the following ---
http://pcaobus.org/Rules/Rulemaking/Docket037/041_Karim_Jamal.pdf

We understand and affirm the importance of auditor independence, objectivity and scepticism for the proper functioning of the U.S. capital market and are supportive of the PCAOB’s desire to enhance the actual and perceived independence of auditors. However, academic research on the topic suggests that adopting a system of audit firm rotation will not help the U.S. economy achieve these worthy goals. Instead, such a change may impair auditor independence, weaken audit expertise and undermine corporate governance.

We organize our response below in terms of impact on objectivity (especially opinion shopping), and development of expertise. We note that many of the views expressed in our letter are influenced by a detailed research study conducted by Fiolleau et al. (2010) on how companies currently choose auditors. A copy of this study is publicly available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1535074. Of course, any such study is limited in its generalizability. In particular, Fiolleau et al. (2010) examines cases where audit committee’s have voluntarily chosen to seek competing bids from auditors. However, we think the studies’ observations are suggestive of what is likely to happen on an economy-wide basis if PCAOB were to mandate periodic rotation of audit firms. Some of our other comments are based on other research evidence, which we cite.

Selection and appointment of auditors by their clients is a major source of concerns about real and perceived independence and objectivity of the auditors. Since the PCAOB seems to be unwilling to deal with this root cause of the independence problem at this time, other reforms are being sought. No audit can be perfect, and the quality of audit is determined not only by independence but also by many other factors—such as the quality of accounting standards, accounting education, auditor expertise, audit committees, corporate governance, auditor discipline, liability, and a host of other institutional features of the audit environment. The focus of PCAOB should be to provide the best audit quality, and not to fixate on any subset of such determinants of audit quality. Our reading of existing research leads us to conclude that, in spite of its superficial appeal, audit firm rotation is a bad policy choice on all relevant dimensions. We explain our reasons below.

Rotation and Auditor Objectivity
|
The most appealing and common sense intuition underlying auditor rotation is that it promotes objectivity by refreshing the personnel (or firm) who are not tied down by judgments, compromises, and personal relationships of the past. A new auditor brings a fresh set of eyes, and has the opportunity to raise issues that have been overlooked or settled in the past. Research experiments show that new auditors are better able to identify issues, alter their judgments, and bring issues up for discussion when they are not personally committed to prior decisions (see article by Tan on p. 113-35 in Spring 1995 issue of Journal of Accounting Research).

Our first observation on this rationale for firm rotation is that familiarity arises between individuals (e.g., the audit partner and the CFO) not firms, so most of the benefit from taking a “fresh look” can be obtained more simply by rotating the partner and or other senior personnel on the audit team (e.g., audit manager). Since the policy of partner rotation is already in place, audit firm rotation is unlikely to add any significant marginal benefit, especially when the considerable costs of firm rotation are taken into account. The GAO’s (2003) study on mandatory audit firm rotation estimated increased initial audit costs of more than 20% (some studies in Europe suggest 40%) and this did not include costs incurred by the audit committee and management to conduct the tendering process.

Our second observation from the research study by Fiolleau et al. (2010) is that although the auditors are supposedly appointed by the audit committee of the client company, management plays a significant role in the process, and may even dominate it for all practical purposes. This means that a mandate for audit firm rotation will force the incumbent and potential auditors into a “beauty contest” every few years. The market power of the audit firms is so much weaker than the power of their clients that, at the time of bidding for engagement, the former compete among themselves to convince the management / audit committee of their potential clients of their commitment, service, and responsiveness. Each hiring exercise becomes an opportunity for opinion shopping by clients, lowballing of audit fees and demonstrations of loyalty and relationship-building by the auditors. Many of the auditor behaviours that the rotation proposal is intended to discourage get exacerbated when the audit firm enters into a beauty contest (bidding war) to get an audit engagement.

A third observation from the Fiolleau et al., (2010) study is that, with only four large international firms, the audit market is highly concentrated. Most large clients already receive one service or another from every one of the four firms. If one of these accounting firms audits the client, the other three often provide it a host of advisory services in tax, valuations etc. This perpetual engagement and pre-existing relationships of most large companies with all four audit firms implies that there is only limited opportunity for mandatory rotation to bring about a “fresh look.”A large corporation would have to deliberately avoid business engagement with one Big 4 firm, to have at least one firm who would meet current independence rules and have the expertise needed to conduct the audit. The PCAOB proposal is likely to yield little by way of benefits and incur the additional harm associated with increased frequency of “beauty contests.”

Rotation and Auditor Expertise
There is compelling evidence that audit firm rotation will impair auditor expertise. PCAOB’s concept paper indicates awareness that the auditor is most vulnerable to missing fraud in a new engagement (see also St Pierre and Anderson on p 242-63 in Vol 59(2), 1984 issue of The Accounting Review). A variety of studies (e.g., Myers et al., on p 779-799 in Vol 78, July 2003 issue of The Accounting Review) show that the quality of accounting numbers improves with increases in auditor tenure. The most compelling force disciplining accounting accruals is auditor industry expertise (see Craswell et al., on p 297-322 in December 1995 issue of Journal of Accounting and Economics). While academic evidence is seldom conclusive, the weight of evidence suggests that a policy of mandatory auditor rotation undermines expertise formation and will impair audit quality. The thrust of Generally Accepted Accounting Principles (GAAP) is increasingly oriented to having management communicate to investors how they operate the business. Auditors’ understanding of the substance of client business would be undermined if they are rotated out every few years. The Fiolleau et al (2010) study reveals that even the four largest audit firm’s lack depth of expertise in serving large corporate clients across all industries outside the main business centres such as New York, Toronto, London, and Tokyo. For clients with headquarters located in smaller cities, finding industry specialists in the local offices can be a significant challenge.

Improving Audit Quality
Audit quality is not just an attribute of the auditor alone. The nature of Generally Accepted Accounting Principles (GAAP) is also a major determinant of audit quality. Over the recent decades, the Financial Accounting Standards Board (FASB) has set standards that de-emphasize verifiability in favour of the mark-to-market valuation, no matter how illiquid the market may be. It has also adopted a practice of writing detailed standards in its attempt to close loopholes but ends up creating new ones. Exploitation of the Repo 105 rules by financial service firms during the recent crisis is a good example. This type of standards place auditors in a very difficult position vis-à-vis corporate management. The shift in GAAP towards the so-called “fair value accounting” is a major factor undermining audit quality.

Importance of Audit Resignation as a Signal
When financial press reports that company X audited by firm Y for the past twenty years has changed its auditor, investors get a valuable and informative warning signal that draws close scrutiny by the investment and regulatory communities. PCAOB’s mandatory rotation proposal will eliminate this signal by making auditor changes a matter of routine, deserving little attention or scrutiny, and thus undermine the quality of audit.

Transfer of Audit Resources from Verification to Marketing
The PCAOB proposal, by eliminating all long-term client-auditor relationships, will induce audit firms to devote even greater resources to marketing themselves to potential clients. These resources can only come from cutting back on the substantive work of verification during the course of their audits or by raising audit fees. Individuals in the audit firm will find their presentation and marketing skills becoming more valuable relative to their technical accounting and auditing skills.

Confusion and Unintended Consequences from Too Many Initiatives
Auditors now face a very complex economic and social environment. There are economic incentives to be responsive to management but these have to be balanced with incentives emanating from audit committees, concurring review partners, national office reviews, litigation, GAAP and industry practice, and PCAOB reviews. In some countries two audit firms jointly conduct an audit making it difficult for any single audit firm to have consistency in its audits across countries as complex co-ordination is required across audit firms. Fraud cases like Parmalat are thought to have avoided detection due to lack of continuity of the auditor and presence of multiple audit firms. Adding more agents and incentives into this mix serves to create a very complex incentive structure, interpersonal friction and potential for unintended consequences as accountability and authority get distributed across a variety of agents. This increases moral hazard and the potential for confusion. Adding one more firm rotation requirement on top is not just a free good that improves the system. Too much complexity makes the audit process more vulnerable to systemic failure.

Conclusion
Audit firm rotation is a bad policy prescription especially in an environment where auditors are appointed by board audit committees who often are significantly influenced by management. The potential benefits of rotation will be exceeded by the harm associated with the “beauty contest” that takes place to appoint a new auditor. Rotation actually impairs audit quality by promoting more frequent opinion shopping and lowballing. Rotation also impairs audit expertise, eliminates a valuable signal of auditor change, and shifts even more resources from substantive audit work to marketing of audit services.

Most of the benefits of rotation can be realized by rotating the engagement partners. Because of limited depth of expertise, we suggest rotating engagement partners every ten years. Given the limited independence of most audit committees from the management, PCAOB’s goal of improving audit quality through firm rotation is beyond its reach. Pressing the FASB/IASB to pay greater attention to verifiability of financial reports would be a more effective avenue to improve audit quality.

Signed,

Tracey C. Ball, FCA ICD.D
Executive Vice President & CFO Canadian Western Bank Group (TSX:CWB)

Rozina Kassam,CA
CFO, C
OMMERCIAL SOLUTIONS INC. (TSX:CSA)

Jonathan Glover, PhD
Professor of Accounting, Carnegie Mellon University

Karim Jamal, FCA, PhD
Chartered Accountants Distinguished Chair Professor, University of Alberta

Ken Kouri FCA
Retired Partner Kouri Berezan Heinrichs, CA

D. Brad Paterson, CMA
CFO, Wave Front Technology Solutions (TSX (V): WEE)

Suresh Radhakrishnan, PhD
Professor of Accounting, University of Texas at Dallas

Shyam Sunder, PhD
James L. Frank Professor of Accounting, Economics and Finance, Yale University

 

The very best prospects for becoming accounting majors may be turned off by the gypsy-living prospects of becoming career CPA auditors. The very best seniors and managers and even partners on a particular audit may take up other job offers rather than uproot spouses and children to relocate as Sundowners ---
http://en.wikipedia.org/wiki/The_Sundowners

There are many, many more very responsible concerns raised in the overwhelmingly negative responses received by the PCAOB --
http://pcaobus.org/Rules/Rulemaking/Pages/Docket037.aspx

In particular read Response 35 (James L. Fuehrmeyer, Jr.) and Response 29 (Dennis R. Beresford) at
http://pcaobus.org/Rules/Rulemaking/Pages/Docket037Comments.aspx

 

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


Teaching Case from The Wall Street Journal Accounting Weekly Review on June 27, 2013

DOMA's Demise: The Tax Fallout
by: Laura Saunders
Jun 26, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Accounting, DOMA, Estate Tax, Gift Tax, Marriage Penalty, Tax, Taxation

SUMMARY: The end of the Defense of Marriage Act brings good news and bad on taxes for same-sex married couples. The current income tax code was designed with one-earner families in mind, and has both marriage penalties and bonuses. Experts say that many two-earner same-sex married couples will likely see an annual federal income tax increase of hundreds or thousands of dollars. The penalties are more likely to occur as two partners' incomes converge, especially if they have children. A marriage bonus is more likely if one partner earns all or nearly all the income.

CLASSROOM APPLICATION: The Supreme Court's decision to overturn the Defense of Marriage Act once again highlights the issues surrounding the "marriage penalty". This topic can be used to illustrate the differences between filing statuses, as well as the differences between the taxation of a married vs. and unmarried couple.

QUESTIONS: 
1. (Introductory) What is the "marriage penalty"? Why is it in the spotlight again as a result of the Supreme Court's decision on the Defense of Marriage Act?

2. (Introductory) What are the tax filing statuses? Define each.

3. (Advanced) What is the reasoning behind the marriage penalty? What is its history?

4. (Advanced) What taxpayers are penalized by marriage? What taxpayers are benefited by marriage? Why is this tax preference given to some, and a penalty assessed on others?

5. (Advanced) How are estate and gift taxes affected by marriage? Is marriage a benefit or a disadvantage for estate and gift taxes? Why is the law structured in this way?
 

Reviewed By: Linda Christiansen, Indiana University Southeast
 

RELATED ARTICLES: 
When It Doesn't Pay to Be Married
by Laura Saunders
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Wedding-Bell Blues
by Laura Saunders
Jun 08, 2013
Page: B7

"DOMA's Demise: The Tax Fallout," by Laura Saunders, The Wall Street Journal, June 26, 2013 ---
http://blogs.wsj.com/washwire/2013/06/26/domas-demise-the-tax-fallout/?mod=djem_jiewr_AC_domainid

The end of the Defense of Marriage Act brings good news and bad on taxes for same-sex married couples.

The current income tax code was designed with one-earner families in mind, and has both marriage penalties and bonuses.

Experts say that many two-earner same-sex married couples will likely see an annual federal income tax increase of hundreds or thousands of dollars. The penalties are more likely to occur as two partners’ incomes converge, especially if they have children. A marriage bonus is more likely if one partner earns all or nearly all the income.

or example, a married couple with two teenagers in which each spouse earns $75,000 owes nearly $4,000 more in tax annually compared with what they would owe as two single filers, according to calculations made by Roberton Williams of the Tax Policy Center, a nonpartisan group in Washington. If this couple has the same $150,000 income but all of it is earned by one spouse, then they owe nearly $4,600 less than what they would owe as two single filers, according to Mr. Williams.

Marriage tax penalties and bonuses can occur at any income level, but the 2013 tax changes has increased marriage penalties for two-earner couples with more than $250,000 of adjusted gross income. The Tax Policy Center has a calculator for determining a couple’s bonus or penalty.

The end of DOMA is a boon to very wealthy same-sex couples who are planning estates. The current estate and gift tax exemption is $5.25 million per individual, so married couples qualify for more than $10 million of exemption. In addition, a surviving spouse can use the unused portion of the partner’s exemption to shelter assets in his or her own estate.

Social Security retirement benefits can contain bonuses for married couples. If there is just one earner, says Mr. Williams, the non-earner gets an benefit equal to half of the earner’s benefit on top of what the earner receives. Two-earner couples can also in many cases use strategies to maximize their retirement benefits. “Married couples can never get less Social Security retirement benefits than they would get if the partners weren’t married,” he says. “Social Security has no marriage penalty.”

Continued in article

 


He's didn't like it --- I guaranteed it!
"Fired Men's Wearhouse Founder George Zimmer Rips On Board In Open Letter," by Ashley Lutz, Business Insider, June 26, 2013 ---
http://www.businessinsider.com/mens-wearhouse-letter-from-zimmer-2013-6

From the CFO Journal's Morning Ledger on June 20, 2013

Men’s Wearhouse founder gets the boot
Men’s Wearhouse
terminated its founder and public face, George Zimmer, from his position as executive chairman. Mr. Zimmer said he was being silenced after expressing concerns about the company’s direction. He didn’t elaborate on the disagreements. But the split was a deep-seated one that “manifests itself in several conflicts with the board,”
a person familiar with the matter tells the WSJ. The company has warned in its securities filings that Mr. Zimmer is important to its success and that a loss of his services could hurt its business and stock price. The move sent the company’s shares down as much as 6.9% Wednesday before they recovered to close at $37.04, down 1.1%.

Jensen Comment
This is one of the most familiar voices in television commercials for men's clothing. His most famous lines:  "You're going to like it. I guarantee it." Wal-Mart and other big box stores also "guarantee it "with their no-questions-asked return policies. The only time I walked into a Men's Warehouse store it was to look for a summer suit. I was told that MW only sold wool suits. Wool, even summer wool, in the South Texas heat? I just did not want to be a professor in sheep's clothing in that humidity. For summer I preferred the cotton and poly blends. In retirement I don't have to wear suits except for funerals and weddings.


"Google HR Boss Explains Why GPA And Most Interviews Are Useless," by Max Nisen, Business Insider, June 19, 2013 --- 
http://www.businessinsider.com/how-google-hires-people-2013-6

Jensen Comment
Adam Bryant is not speaking for all industries and companies. I'm not certain interviews are all that useless for CPA firms seeking interns and new employees. Grades are less useful due to grade inflation where the median grades in college courses are A- grades.

Also Adam Bryant is not speaking for other recruiters, most of whom put lots of faith in grades and interviews.

Success in a CPA firm might be defined as success in obtaining sufficient technical experience to get employed by clients when leaving the CPA firms before attaining partnership. Attaining partnership is complicated in CPA firms. It usually is more of a function of talent for obtaining and maintaining clients. Partners in CPA firms generally have a greater willingness for working nights and weekends at civic functions and conferences and charity events like golf outings. It's nearly impossible to predict whether a student still in school is truly partner material. Grades, interviews, and most any factors are not very predictive at that stage in time. There's also a lot of serendipity regarding being in the right places at the right times.

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


"The 50 Rip-Off Charities: Give at Your Own Risk," by Morgan Brittany, Townhall, June 17, 2013 --- Click Here
http://finance.townhall.com/columnists/morganbrittany/2013/06/17/the-50-ripoff-charities-give-at-your-own-risk-n1621292?utm_source=thdaily&utm_medium=email&utm_campaign=nl

The List of 50 --- http://www.tampabay.com/americas-worst-charities/


"Canada Mayor Crisis Spreads: Montreal Mayor In Custody," by Josh Barro, Business Insider, June 17, 2013 ---
http://www.businessinsider.com/montreal-mayor-michael-applebaum-arrest-2013-6 

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


The law does not pretend to punish everything that is dishonest. That would seriously interfere with business.
Clarence Darrow --- Click Here

Teaching Case from The Wall Street Journal Accounting Weekly Review on June 27, 2013

Ex-KPMG Partner to Plead Guilty in Insider Case
by: Michael Rapoport
Jun 21, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Accounting

SUMMARY: Scott London, the former KPMG LLP partner who has admitted to an insider-trading scheme, will plead guilty to fraud. Mr. London, who had been a senior partner in charge of KPMG's Pacific Southwest audit practice, had previously agreed to plead guilty to one count of securities fraud. Mr. London has admitted passing confidential information about KPMG clients to a friend, Bryan Shaw, who prosecutors say made $1.27 million in illegal profits by trading on the information and paid Mr. London at least $60,000 in cash and gifts. Mr. Shaw has already pleaded guilty.

CLASSROOM APPLICATION: This article would be an excellent addition to an auditing class for part of a discussion regarding the importance of ethics and independence when dealing with client information. The stakes are high for those who violate rules, as illustrated in the downfall of this KPMG partner. You can combine this article with the attached Related Articles to serve as a case study of the case.

QUESTIONS: 
1. (Introductory) Who is Scott London? What was his professional position? What are the accusations against him?

2. (Advanced) For what reasons might Mr. London have decided to enter a guilty plea? What would be his other options?

3. (Advanced) What is insider trading? Why is it prohibited? How was Mr. London able to access information to use to commit this crime? What auditing rules has Mr. London violated?

4. (Introductory) What is KPMG? What was KPMG's response to the discovery of Mr. London's activities? How was the firm impacted?

5. (Advanced) What, if anything, could KPMG have done to prevent this situation from happening? How should KPMG proceed going into the future? What additional internal controls or procedures could the firm implement?

6. (Advanced) How likely is it that similar activities occur in the public accounting industry? How could these activities be prevented or detected earlier?
 

Reviewed By: Linda Christiansen, Indiana University Southeast
 

RELATED ARTICLES: 
Trading Case Embroils KPMG
by Jean Eaglesham, Juliet Chung, and Hannah Karp
Apr 10, 2013
Page: A1

KPMG Finds Its Safeguards 'Sound and Effective'
by Michael Rapoport
Jun 05, 2013
Page: C1

Question in KPMG Case: Why?
by Justine Baer, Hannah Karp and Ben Fritz
Apr 13, 2013
Page: B1

Jeweler Pleads Guilty in KPMG Insider-Trading Case
by Hannah Karp
May 20, 2013
Page: C3

KPMG Adds to the Big Four's Troubles
by Michael Rapoport
Apr 09, 2013
Online Exclusive

How to Solve a Problem Like Scott London
by Michael Rapoport
Apr 12, 2013
Online Exclusive

Secret Recordings, Cash in Insider Sting
by Jean Eaglesham, Reed Albergotti, and Hannah Karp
Apr 12, 2013
Page: A1

Meet KPMG's Scott London, the Alleged 'Rogue' Partner
by David Benoit
Apr 09, 2013
Online Exclusive

Herbalife Auditor Hunt Hampered by Small Pool, Big Needs
by Maxwell Murphy
Apr 30, 2013
Online Exclusive

 

"Ex-KPMG Partner to Plead Guilty in Insider Case," by Michael Rapoport, The Wall Street Journal, June 21, 2013 ---
http://online.wsj.com/article/SB10001424127887323393804578560160409788432.html?mod=djem_jiewr_AC_domainid

Scott London, the former KPMG LLP partner who has admitted to an insider-trading scheme, will plead guilty to fraud on July 1, according to a court docket and his attorney.

Mr. London, who had been a senior partner in charge of KPMG's Pacific Southwest audit practice, had previously agreed to plead guilty to one count of securities fraud. At his arraignment earlier this week, a not-guilty plea was automatically entered for him, but he had been expected to change that plea once some procedural matters were resolved.

According to an entry filed Friday on the court docket in his case, a "change of plea" hearing has been set for July 1 before U.S. District Judge George H. Wu in Los Angeles.

"We're going to go in and plead guilty on July 1," Harland Braun, Mr. London's attorney, said Friday.

Mr. London has admitted passing confidential information about KPMG clients to a friend, Bryan Shaw, who prosecutors say made $1.27 million in illegal profits by trading on the information and paid Mr. London at least $60,000 in cash and gifts. Mr. Shaw has already pleaded guilty.

Continued in article

Question
Will Scott London get off Scott free under the lenient Federal Sentencing Guidelines?
Sentencing is set for September 16, 2013

From CFO Journal's Morning Ledger on June 18, 2013

KPMG ex-partner Scott London is arraigned
Former KPMG senior partner Scott London was arraigned in federal court, where a not-guilty plea was entered on his behalf, although he is expected to plead guilty once certain procedural matters are resolved,
the WSJ reports. Mr. London is accused of securities fraud for providing confidential information about KPMG clients to a friend as part of an insider-trading scheme. Mr. London faces up to 20 years in prison, though he is likely to receive a lesser sentence under federal sentencing guidelines. Mr. London told reporters that he hopes to move past the scandal and get a new job. “I won’t be practicing before the SEC, but it’ll be something,” he said. “I’ll wait tables.”

Bob Jensen's threads on why white collar crime pays bigtime even if you know you will be caught ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays

Bob Jensen's threads on this insider trading crime committed by the KPMG audit engagement managing partner ---
http://www.trinity.edu/rjensen/Fraud001.htm
Search for "Scott London".


From the CFO Journal's Morning Ledger on June 19, 2013

SEC Chairman Mary Jo White: SEC seeks admissions of fault
SEC Chairman Mary Jo White said her agency intends to make companies and individuals admit wrongdoing as a condition of settling civil charges in certain cases, or be forced to fight the charges in court. That would mark a watershed change to the SEC’s decades-old policy of allowing companies and individuals to settle charges without admitting or denying liability,
the WSJ’s Jean Eaglesham and Andrew Ackerman note. The new policy, which came out of a review Ms. White began when she joined the agency, will be applied in “cases where…it’s very important to have that public acknowledgment [of wrongdoing] and accountability.” Decisions will be made “case by case,” Ms. White said. But she added the agency intends to target cases of egregious intentional conduct or widespread harm to investors. Watch a video of the interview here.


From the CFO Journal's Morning Ledger on June 21, 2013

Insurance-accounting overhaul moves toward final phase
The IASB just issued its latest draft of proposed new rules for accounting for insurance contracts,
Emily Chasan reports. The proposal this week revises a 2010 exposure draft to reduce the impact of artificial, noneconomic volatility in insurance accounting and would change the way companies present insurance-contract revenue in their financial statements. New rules on insurance accounting are expected to make fundamental changes to the way companies account for insurance contracts, and add more principle-based rules to one of the most industry-specific areas of accounting. Read the exposure draft here (PDF).

"Insurers Inflating Books, New York Regulator Says," by Mary Williams Walsh, The New York Times, June 11, 2013 ---

New York State regulators are calling for a nationwide moratorium on transactions that life insurers are using to alter their books by billions of dollars, saying that the deals put policyholders at risk and could lead to another taxpayer bailout.

Insurers’ use of the secretive transactions has become widespread, nearly doubling over the last five years. The deals now affect life insurance policies worth trillions of dollars, according to an analysis done for The New York Times by SNL Financial, a research and data firm.

These complex private deals allow the companies to describe themselves as richer and stronger than they otherwise could in their communications with regulators, stockholders, the ratings agencies and customers, who often rely on ratings to buy insurance.

Benjamin M. Lawsky, New York’s superintendent of financial services, said that life insurers based in New York had alone burnished their books by $48 billion, using what he called “shadow insurance,” according to an investigation conducted by his department. He issued a report about the investigation late Tuesday.

The transactions are so opaque that Mr. Lawsky said it took his team of investigators nearly a year to follow the paper trail, even though they had the power to subpoena documents.

Insurance is regulated by the states, and Mr. Lawsky said his investigators found that life insurers in New York were seeking out states with looser regulations and setting up shell companies there for the deals. They then used those states’ tight secrecy laws to avoid scrutiny by the New York State regulators.

Insurance regulation is based squarely on the concept of solvency — the idea that future claims can be predicted fairly accurately and that each insurer should track them and keep enough reserves on hand to pay all of them. The states have detailed rules for what types of assets reserves can be invested in. Companies are also expected to keep a little more than they really expect to need — called their surplus — as a buffer against unexpected events. State regulators monitor the reserves and surpluses of companies and make sure none fall short.

Mr. Lawsky said that because the transactions made companies look richer than they otherwise would, some were diverting reserves to other uses, like executive compensation or stockholder dividends.

The most frequent use, he said, was to artificially increase companies’ risk-based capital ratios, an important measurement of solvency that was instituted after a series of life-insurance failures and near misses in the 1980s.

Mr. Lawsky said he was struck by similarities between what the life insurers were doing now and the issuing of structured mortgage securities in the run-up to the financial crisis of 2008.

“Those practices were used to water down capital buffers, as well as temporarily boost quarterly profits and stock prices,” Mr. Lawsky said. “And ultimately, those practices left those very same companies on the hook for hundreds of billions of dollars in losses from risks hidden in the shadows, and led to a multitrillion-dollar taxpayer bailout.”

The transactions at issue are modeled after reinsurance, a business in which an insurance company pays another company, a reinsurer, to take over some of its obligations to pay claims. Reinsurance is widely used and is considered beneficial because it allows insurers to spread their risks and remain stable as they grow. Conventional reinsurance deals are negotiated at arm’s length by independent companies; both sides understand the risk and can agree on a fair price for covering it. The obligations drop off the original insurer’s books because the reinsurer has picked them up.

Mr. Lawsky’s investigators found, though, that life insurance groups, including some of the best known, were creating their own shell companies in other states or countries — outside the regulators’ view — and saying that these so-called captives were selling them reinsurance. The value of policies reinsured through all affiliates, including captives, rose to $5.46 trillion in 2012, from $2.82 trillion in 2007.

Continued in article

Also see
"World Needs More Hardheads Like Benjamin Lawsky," by Jonathan Weil, Bloomberg News, June 13, 2013 ---
http://www.bloomberg.com/news/2013-06-13/world-needs-more-hardheads-like-benjamin-lawsky.html

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


Heads Up from Deloitte
"FASB Proposes Going-Concern Guidance," by Mark Crowley and Lyndsey McAlister, Deloitte & Touche, June 27, 2013 ---
http://deloitte.wsj.com/cfo/files/2013/06/Heads-Up-%E2%80%94-FASB-Proposes-Going-Concern-Guidance.pdf

To the Point from Ernst & Young
"Management Would Have to Assess Going Concern Uncertainties," Ernst & Young, June 28, 2013 --- Click Here
http://www.ey.com/Publication/vwLUAssetsAL/TothePoint_BB2564_GoingConcern_28June2013/%24FILE/TothePoint_BB2564_GoingConcern_28June2013.pdf

Jensen Comment
The obvious moral hazard here is that the probability of becoming a non-going concern and management disclosures beforehand are miles away from being independent events.

Where were the auditors in 2013 when concern opinions were given to over 1,000 banks just before they failed?
http://www.trinity.edu/rjensen/2008Bailout.htm#AuditFirms


Novate --- replace with something new, especially an old obligation by a new one

When IASB Standards Diverge Rather Than Converge Toward FASB Standards
IASB Eases Hedge Accounting Requirements Yet Again --- Click Here
http://www.pwc.com/us/en/cfodirect/publications/in-brief/2013-34-iasb-provides-relief-for-novation-of-derivatives.jhtml?display=/us/en/cfodirect/issues/financial-instruments&j=172912&e=rjensen@trinity.edu&l=420963_HTML&u=8776759&mid=7002454&jb=0

The IASB has published narrow-scope amendments to IAS 39, Financial instruments: Recognition and measurement. Similar provisions will be incorporated into the forthcoming chapter on hedge accounting in IFRS 9, Financial instruments. The amendments provide relief from parts of the hedge accounting requirements when a derivative is novated to a central counterparty (CCP), such as a central clearing organization, provided certain conditions are met.


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

From the CFO Journal's Morning Ledger on June 21, 2013

Libor case ensnares more banks
Employees of some of the world’s largest financial institutions conspired with a former bank trader to rig benchmark interest rates, British prosecutors alleged, a sign authorities have their sights on an array of banks and brokerages. The U.K.’s Serious Fraud Office charged former UBS and Citigroup trader Tom Hayes with eight counts of “conspiring to defraud” in an attempt to manipulate Libor, the WSJ reports. The charges read in court Thursday accuse Mr. Hayes of conspiring with employees of eight banks and interdealer brokerage firms, as well as with former colleagues at UBS and Citigroup. Mr. Hayes, who was charged with similar offenses by the U.S. last December, hasn’t entered a plea in either country.

"Libor Case Ensnares More Banks U.K. Prosecutors Allege Staff From J.P. Morgan, Deutsche Bank and Others Tried to Fix Rates," by David Enrich, The Wall Street Journal, June 20, 2013 ---
http://online.wsj.com/article/SB10001424127887323893504578556941091595054.html?mod=djemCFO_h

Employees of some of the world's largest financial institutions conspired with a former bank trader to rig benchmark interest rates, British prosecutors alleged Thursday, a sign authorities have their sights on an array of banks and brokerages.

The U.K.'s Serious Fraud Office this week charged former UBS AG UBSN.VX +0.43% and Citigroup Inc. C -3.40% trader Tom Hayes with eight counts of "conspiring to defraud" in an alleged attempt to manipulate the London interbank offered rate, or Libor. Mr. Hayes appeared in a London court Thursday, where prosecutors for the first time detailed their allegations against him, including a list of institutions whose employees Mr. Hayes allegedly conspired with.

Mr. Hayes, who was charged with similar offenses by the U.S. last December, hasn't entered a plea to either country's charges. He wrote in a January text message to The Wall Street Journal that "this goes much much higher than me."

The charges read in court Thursday accuse Mr. Hayes of allegedly conspiring with employees of eight banks and interdealer brokerage firms, as well as with former colleagues at UBS and Citigroup. Each of the eight charges accused Mr. Hayes of "dishonestly seeking to manipulate [Libor]…with the intention that the economic interests of others would be prejudiced and/or to make personal gain for themselves or another."

The banks include New York-based J.P. Morgan Chase JPM -2.04% & Co.; Germany's Deutsche Bank DBK.XE +0.78% AG; British banks HSBC Holdings HSBA.LN +1.34% PLC and Royal Bank of Scotland Group RBS.LN -3.06% PLC; and Dutch lender Rabobank Groep NV. Prosecutors alleged Mr. Hayes also worked with employees of ICAP IAP.LN +4.74% PLC, Tullett Prebon TLPR.LN -0.07% PLC and R.P. Martin Holdings Ltd., which are London-based interdealer brokers that serve as middlemen between bank traders.

An ICAP spokeswoman said the firm has provided information to British prosecutors and continues to cooperate. A Rabobank spokesman said the bank continues to cooperate with investigators and is likely to eventually reach a settlement. In a statement, Tullett said it is "cooperating fully" with prosecutors' requests for information. Representatives for the rest of the named institutions declined to comment.

The list of banks and brokerages named at Thursday's court hearing underscores the breadth of institutions that remain under government scrutiny. So far, only three banks—UBS, RBS and Barclays BARC.LN +0.30% PLC—have reached settlements with U.S. and British authorities. Authorities hope to hammer out settlements with additional institutions, including Rabobank, in coming months, according to a person familiar with the investigation.

The list that prosecutors read Thursday included at least one institution that has said it wasn't involved in the Libor scandal. After UBS settled rate-rigging allegations last December, Tullett Prebon spokeswoman Charlotte Kirkham said the firm didn't help UBS manipulate rates and that no Tullett employees had been disciplined in connection with Libor. In April, Tullett said it stood by that statement.

In a statement Thursday, Tullett disclosed for the first time that it has been asked to provide information to various regulators and government agencies in connection with Libor investigations. In addition to saying it is cooperating with the requests, the firm reiterated it hasn't been informed that it or its brokers are under investigation in relation to Libor. A spokesman declined to comment further.

The interdealer brokers' alleged involvement in attempts to rig Libor has rocked the industry in recent months. Two R.P. Martin employees were arrested along with Mr. Hayes in December but not charged. The U.S. Justice Department and the Commodity Futures Trading Commission also are investigating brokers as part of their Libor probes, according to people familiar with those investigations.

Mr. Hayes, a 33-year-old British citizen, was a derivatives trader in Tokyo from 2006 through 2010, the period during which prosecutors allege he attempted to manipulate Libor. He is the only person the Serious Fraud Office has charged in their nearly yearlong Libor investigation, although an agency spokesman said this week that more arrests and charges are possible.

Mr. Hayes, wearing beige trousers and an untucked, navy dress shirt, didn't respond to the charges at court Thursday. Standing behind a glass partition in the courtroom, he was mostly silent aside from telling the judge his name, address and date of birth. At one point, the judge asked him to take his hands out of his pockets.

Continued in article

"Who's Manipulating Derivative Indexes and Why:  How to think about the Libor scandal and its astonishingly proliferating offspring," by Holman W. Jenkins Jr., The Wall Street Journal, June 21, 2013 ---
http://online.wsj.com/article/SB10001424127887323893504578559282047415410.html?mod=djemEditorialPage_h

Is Ewan McGregor, who played Nick Leeson in the movie about the Barings bank bust, available for a sequel? He would find an oddly similar character in Tom Hayes, the former UBS UBSN.VX -1.93% and Citibank employee charged in this week's latest financial scandal of the century.

Let's try to sort it out. As with Libor, or the London interbank offered rate, a benchmark for loans world-wide, allegations are floating that traders manipulated other widely used benchmarks. Three big banks—Barclays, BARC.LN -2.26% UBS and Royal Bank of Scotland RBS.LN -7.24% —have already paid $2.5 billion in fines and penalties in the Libor caper. Now the focus has turned to suspected manipulation of fuel-market indexes, loan-market indexes in Japan and Singapore, and indexes used in pricing interest-rate swaps.

Said Europe's Competition Commissioner Joaquin Almunia last month: "Huge damages for consumers and users would have been originated by this."

Well, maybe. A basic schematic would go like this: Some enterprising soul decides it would be useful to publish a daily price benchmark by surveying market participants about certain transactions that don't take place on a central exchange. Somebody else decides it would be useful to create tradable derivatives whose price would vary based on changes in these benchmarks—that is, would let participants bet on how a survey of themselves in the future will come out.

Libor involved questioning bank traders about the pricing of loans—and Libor derivatives let these same traders bet on the answers they would give in the future. The invitation here now seems rather obvious. Mr. Hayes, a baby-faced yen-derivatives trader in Tokyo at the time, is charged with orchestrating attempts to rig a similar Tokyo-based benchmark called Tibor.

All this proves one thing: Financial professionals can't be counted on to do the right thing when self-interest beckons so we must turn power over to government officials who always do the right thing regardless of self-interest.

Or maybe not. The Libor scandal broke only because London banks, in cahoots with regulators, put out transparently fake reports about their borrowing costs during the 2008 panic. That led to the discovery of a long history of everyday manipulation of their Libor borrowing costs. Traders now fessing up say they learned the practice from their predecessors who learned it from their predecessors, and so on.

As they drain this swamp, investigators like to allege enormous damage to the public by multiplying small discrepancies by the number of transactions in the market. Treat these claims with skepticism. Whatever the extent of mispricing in downstream transactions, it is a smidgeon compared to the rake-off brokers used to earn in pre-electronic days. It is a smidgeon compared to the margins that middlemen could extract before published surveys were available to shed light on transactions previously invisible to most market participants.

It is also a smidgeon compared to the margins that would have to be built into prices if not for Libor hedges and other risk-sharing inventions.

A kick in the pants has been delivered to publishers of price indexes. They need to make their products more manipulation-proof. Where markets are thin and surveys are the only way to glean market intelligence, publishers already exercise a visible hand to expel questionable or anomalous data. A further solution might be to poll a larger number of traders and randomly exclude most of their answers so no trader would have any certainty of influencing the index.

To understand why such opportunities exist in the first place is to understand something about a generic condition of our world, in which technology has drastically reduced transaction costs and cheap money has vastly increased leverage available even to low-ranking bank employees, magnifying the return to small bits of illicit or licit information, including insider information.

Continued in article

Bigger than Enron and Rotten to the Core:  The LIBOR Scandal
Bob Jensen's threads on the LIBOR Scandal ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking


Teaching Case
From  The Wall Street Journal Accounting Weekly Review on June 14, 2013

CRU, After LIBOR Scandal, Audits Steel Prices Index
by: John W. Miller
Jun 05, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Assurance Services, Auditing, Auditing Services

SUMMARY: CRU Group compiles steel prices and issues a report every Wednesday. "The compiler...said an auditor will conduct on-site inspections of steel companies that provide pricing data and will gather more information about how the prices are collected for four major types of steel product, which go into four different indexes. The move is believed to be a first by a commodity-price-index firm to audit information provided to it."

CLASSROOM APPLICATION: The article may be used in an auditing or other assurance services class to discuss non-audit services, audit planning for a first-of-its-kind engagement, and determination of materiality in such a setting.

QUESTIONS: 
1. (Introductory) What does Commodity Research Unit Group (CRU) do? Who uses the information that the group prepares?

2. (Advanced) What service has CRU hired KPMG LLP to conduct? Be specific in stating a type of service to be provided and the type of report that you think may be issued under U.S. assurance service requirements.

3. (Advanced) What is the significance for assurance work planning of the fact that this engagement is apparently the first by a commodity-price-index firm to audit information provided to it?

4. (Advanced) Suppose you are an audit manager planning an engagement for KPMG to examine steel prices. What factors will you consider in deciding on materiality of amounts to examine?
 

Reviewed By: Judy Beckman, University of Rhode Island

"CRU, After LIBOR Scandal, Audits Steel Prices Index," by John W. Miller, The Wall Street Journal, June 5, 2013 ---
http://online.wsj.com/article/SB10001424127887324069104578527632400988350.html?mod=djem_jiewr_AC_domainid

A key price compiler in the global steel industry said it will begin auditing its data providers, part of an effort to address concerns about transparency in price indexes following the Libor rate-fixing scandal.

The compiler, Commodity Research Ltd., said an auditor will conduct on-site inspections of steel companies that provide pricing data and will gather more information about how the prices are collected for four major types of steel product, which go into four different indexes. Much of these steel types are destined for the U.S automotive market.

The move is believed to first by a commodity-price-index firm to audit information provided to it. CRU, based in London and Pittsburgh, has hired KPMG LLP to conduct the audits, according to a person familiar with the matter. KPMG didn't respond to a request for comment.

Glenn Cooney, London-based head of operations for CRU Indices, which publishes price data on 75 commodities in metals, mining and fertilizers, said it would look at auditing other data providers in other sectors to bolster industry transparency.

Currently, CRU collects price and volume data on spot transactions from steel producers and buyers, who submit their prices voluntarily to a CRU website. CRU publishes an index price based on the submissions every Wednesday.

CRU officials say they hope the move will lend it added credibility at a time of concern about indexes. Three banks in Europe have agreed to pay over $2 billion in settlement fees to U.S. and U.K. regulators after they were caught manipulating the London interbank offered rate, or Libor, the interest rate banks charge to borrow from each other. Josh Spoores, a Pittsburgh-based steel analyst for CRU, said the company started receiving more requests for improved transparency after the Libor scandal.

The company also hopes it will be able to reassure several major U.S. steel mills, which in April said they would no longer link some contracts to CRU's steel indexes because they felt prices quoted weren't an accurate reflection of the market. The steelmakers that stopped using the indexes include ArcelorMittal, MT +3.34% U.S. Steel Corp. X +5.23% and Nucor Corp. NUE +3.01%

Grant Davidson, general manager for sales at ArcelorMittal's Dofasco mill in Canada, said big steel companies would welcome more transparency. "We're for what's most accurately reflecting the price in the market," he said.

Michael Steubing, vice president of global procurement for Mauser USA LLC, which makes steel drums and barrels, said an audited index would help guarantee that he can sell his product at a competitive price. He sells barrels to big chemical companies that use CRU to help determine how much they will pay for the barrels. "So we'd like that (CRU) to be as accurate as possible," he said.

CRU, which is used by the Chicago Mercantile Exchange and says its prices are used to settle steel contracts with an annual global value of over $20 billion, faces more competition from Platts, a division of McGraw Hill Financial Inc., MHFI +0.97% which two years ago bought price compiler The Steel Index.

Joe Innace, Platts's editorial director for metals, said Platts would continue its phone survey for its Platts industry newsletter independently of The Steel Index and wouldn't use audits because he said it has enough verifications, such as checking that prices match the types and volumes of steel appropriate to the index, in place.

Steve Randall, who founded The Steel Index in 2006, said it had no plans to audit data providers. "We run all our data through a series of screenings," he said. He declined to provide details about the screening procedure.

Continued in article

"Everything Is Rigged: The Biggest Price-Fixing Scandal Ever:   The Illuminati were amateurs. The second huge financial scandal of the year reveals the real international conspiracy: There's no price the big banks can't fix," by Matt Taibbi, Rolling Stone, April 25, 2013 ---
http://www.rollingstone.com/politics/news/everything-is-rigged-the-biggest-financial-scandal-yet-20130425

Bob Jensen's LIBOR fraud threads ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

Bob Jensen's threads on LIBOR are under the C-terms at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm

Bob Jensen's threads on LIBOR and other derivative financial instruments frauds (timeline) ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
This is so huge it's better to do a word search for LIBOR


From the CPA Letter Daily on June 25, 2013

Tax:  Proposed repair regulations affect more than tangible property capitalization
The proposed regulations governing tangible property (the so-called repair regulations) will require accounting method changes by many taxpayers. As this article discusses, those changes, in turn, will affect not just the capitalization or expensing of tangible property costs, but the computation of several tax items, including the Sec. 199 domestic production activities deduction, the uniform capitalization rules, and LIFO and FIFO.
The Tax Adviser (6/2013)


"Good News For Future California CPAs Who Were Totally Going To Get Around to That 150 Hour Thing... Eventually," by Adrienne Gonzalez, Going Concern, June 24, 2013 ---
http://goingconcern.com/post/good-news-future-california-cpas-who-were-totally-going-get-around-150-hour-thing-eventually

Jensen Comment
This is great news for one of our sons in California.


"Gone in 90 Seconds: Tesla's Battery-Swapping Magic," by Ashley Vance, Bloomberg Businessweek, June 21, 2013 ---
http://www.businessweek.com/articles/2013-06-21/gone-in-90-seconds-teslas-battery-swapping-magic

Jensen Comment
This is a perfect opportunity for accounting students to do a feasibility-cost study based upon the cost parameters for purchasing a Tesla and paying $60-$80 per battery swap. One item to compare is the size of the nation. Canada, Russia, and the USA are particularly troublesome because both nations are huge with lots of open spaces and cold weather (batteries do not work as well in cold weather). Battery swapping that works well in Israel might be such a good idea for the USA, Canada, and Russia.

Also troublesome are large cities. Do you really want to have to drive for 50 traffic-jammed miles round trip to find a battery swap station in downtown Toronto or Los Angeles or NYC?

For accounting students this is a complicated fixed cost research question in CVP analysis where charging stations across a nation currently cost $500,000 each battery swap pit. How long will it take to recover the $500,000 fixed cost of a recharging station pit up in Yellow Feather village located in far north Alberta?

Unanswered questions include warranty issues.
Batteries currently have a 100,000 mile warranty. What if a battery having 97,483 miles is swapped for a new battery costing $60-$80 at a swapping station? Or what if you swap a battery with 1,037 miles for one having 97,483 miles? I'm not at all clear on how Tesla plans to deal with the battery warranty complications caused by battery swapping. Is Tesla essentially giving low cost battery replacements ($60-$80) for the life of a car that could be as long as forever?

I recall what a disaster it was for K-Mart to give me a lifetime free battery replacement warranty on my 1970 Plymouth station wagon. In 1998 the K-Mart service manager just rolled his eyes when I asked for my free battery Number 10.  Under the writing in my particular warranty contract there was no prorated depreciation for time of use. I felt like Jack Benny driving to K-Mart in a Maxwell ---
http://www.youtube.com/watch?v=0Js93UCdzH0
(Following a very long Lucky Strike commercial)

Similarly, when the Feds bailed out Chrysler in 2007 a $1 billion reserve had to be created for all those Chrysler vehicles that had lifetime warranties on the power train. A car's "lifetime" apart from the power train might well be forever.

The warranty issue is also a worry for investors in Tesla. There is zero experience on long-term battery life in varying climates. The warranty losses are great unknowns at this point in time --- a worry for accountants, investors, car buyers, and the Tesla company itself. Will banks loan $400,000 on each charging station pits having zero alternate uses.

 


"On “Geek” Versus “Nerd” ---
http://slackprop.wordpress.com/2013/06/03/on-geek-versus-nerd/


FINRA --- http://en.wikipedia.org/wiki/FINRA
Something tells me Barry does not have a whole lot of respect for FINRA.

"The Latest Fuckery from FINRA," by Barry Ritholtz , June 17, 2013 ---
http://www.ritholtz.com/blog/2013/06/the-latest-fuckery-from-finra/

What kind of fuckery is this?
You made me miss the Slick Rick gig (oh Slick Rick)
You thought I didn’t love you when I did (when I did)
Can’t believe you played me out like that (Ahhh)

-Amy Winehouse,  Me & Mr Jones
Pop star drug addict who committed suicide

I have throughout my career in finance, studiously avoided having much to do with FINRA, WallStreet’s woefully corrupt self-regulatory entity.

I never got into trouble when I was on the Sell Side (i.e., series 7 licensed individual), so I never experienced their crony-flavored version of justice. But I was very much aware of their role in screwing investors — out of their legal rights to a trial (via mandatory arbitration) and thus out of their monies. If you want a primer on this, check out William Cohan’s series on FINRA arbitrations. It is astounding.

The latest nonsense from this wholly self serving cesspool of corruption is detailed by Susan Antilla, in Dealbook’s A Rise in Requests From Brokers to Wipe the Slate Clean. It turns out that bad brokers can have their records of misdeeds, if not expunged, well then cleaned up quite a bit. Try doing that with a felony or even misdemeanor if you are not a juvenile.

I cannot begin to express my disdain for this organization, which serves the interests of wirehouses and not investors. Indeed, I believe they have done immeasurable damage to individual investors over the decades — through their kangeroo (non)courts, and by the way the “Self” regulate, an inherent contradiction in terms if ever there was one.

Don’t take my word for it. Read Cohan’s series, and do some digging into their formation and background. Just don’t have a large meal first . . .

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

"Why Are Some Sectors (Ahem, Finance) So Scandal-Plagued?" by Ben W. Heineman, Jr., Harvard Business Review Blog,  January 10, 2013 --- Click Here
http://blogs.hbr.org/cs/2013/01/scandals_plague_sectors_not_ju.html?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Greatest Swindle in the History of the World ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout

The trouble with crony capitalism isn't capitalism. It's the cronies ---
http://www.trinity.edu/rjensen/2008Bailout.htm#CronyCapitalism

Subprime: Borne of Greed, Sleaze, Bribery, and Lies (including the credit rating agencies) ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

History of Fraud in America --- 
http://www.trinity.edu/rjensen/415wp/AmericanHistoryOfFraud.htm

Rotten to the Core ---
http://www.trinity.edu/rjensen/FraudRotten.htm

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


From Vimeo on June 25, 2013--- http://vimeo.com/user4591615
Documentary Film: 
Crossing the Line: Ordinary People Committing Extraordinary Crime
Features that horse-faced horse addict from Dixon, IL who is now serving a 19-year sentence in Club Fed

Kelly Richmond Pope, Ph.D., CPA. Managing Principal, Loop Learning Solutions, Inc. Associate Professor, School of Accountancy and MIS, DePaul University in Chicago, IL. Creator and Executive Producer of the award-winning educaitonal documentary, Crossing the Line: Ordinary People Committing Extraordinary Crimes.


Question
What is a skeuomorphism?

Answer
Economist Magazine, June 25, 2013
http://www.economist.com/blogs/economist-explains/2013/06/economist-explains-15

In my auditing days I was pretty fast when using a 10-key adding machine that spewed out paper streams that I stapled to accounting forms in the audit work papers.

Today I'm wondering if the original keyboard designers put 10 number keys on the right side of the keyboard as an skeuomorphism of the old 10-key adding machine?


"Addressing the Opportunity Cost Reason for Not Pursuing a Ph.D. in Accounting," by Jim Martin, MAAW Blog, June 17, 2013 ---
http://maaw.blogspot.com/2013/06/addressing-opportunity-cost-reason-for.html

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

Jensen Comment
The daughter of one of my close friends is now trying to write up a dissertation proposal in a major USA university. For a time she was dubious about applying for an accounting doctoral program because of all the math, statistics, and econometrics. Now at the dissertation proposal she's decided to beat Compustat data with an econometrics stick because that's easier than trying to collect an original data set.

The irony is that the econometrics turns away many potential applicants to accounting doctoral programs becomes their salvation when they want the easiest kind of dissertations as they near graduation from accountancy doctoral programs. Go figure!


From TaxProf blog rankings on June 13, 2013 ---
http://taxprof.typepad.com/

Law Prof Blog Traffic Rankings

Below are the updated quarterly traffic rankings (page views and visitors) of the Top 35 blogs edited by law professors with publicly available SiteMeters for the most recent 12-month period (April 1, 2012 - March 31, 2013), as well as the percentage change in traffic from the prior 12-month period:

 

Blog

Page Views

Change

1

Althouse

19,876,719

+16.6%

2

Legal Insurrection

14,749,820

+64.7%

3

Hugh Hewitt

6,879,670

+25.1%

4

Leiter Reports: Philosophy

5,727,403

+0.1%

5

Patently-O

3,562,246

-3.9%

6

Jack Bog's Blog

3,308,120

+10.8%

7

TaxProf Blog

3,283,047

-4.3%

8

PrawfsBlawg

1,982,377

+14.0%

9

The Faculty Lounge

1,333,904

+6.8%

10

Sentencing Law & Policy

1,275,184

-15.0%

Jensen Comment
It makes no sense to me why Professor Althouse gets so many hits relative to the others. She's more conservative than most of the other top law bloggers ---  which should be a turn off for the liberal Academy. She has a lot of personal postings about her life and is not the best source for professional references. Just goes to show you that there's no accounting for taste in terms ob blog popularity. I like the TaxProf blog best.


From a Stanford University Faculty Member and the Center for Leadership
"CEOs are Terrible at Management, Study Finds," Forbes, May 23, 2013 ---
http://www.forbes.com/sites/susanadams/2013/05/23/ceos-are-terrible-at-management-study-finds/


"Record-Setting Demand Projected for Accounting Graduates: AICPA Report Accounting Graduates and Enrollments at Historic Levels, Continuing Upward Trend, AICPA, June 18, 2013 --- Click Here
http://www.aicpa.org/Press/PressReleases/2013/Pages/Record-Setting-Demand-for-Accounting-Graduates-AICPA.aspx

Jensen Comment
This increases demand for the relatively-miniscule number of accounting doctoral graduates in 2013 ---
http://www.jrhasselback.com/AtgDoctInfo.html

$53,300: The Average Starting Salary for New Accounting Grads (in 2013) ---
http://www.naceweb.com/salary-survey-data/?referal=research&menuID=71&nodetype=4

Jensen Comment
I think such starting salary surveys are highly misleading unless they also show cost of living adjustments. A starting salary of $53,300 will go a lot further in San Antonio than in San Francisco, NYC, Los Angeles, and Honolulu where people earning $53,300 should probably get food stamps and subsidized housing.

I would go to work for $20,000 if the starting job had world class training and exposures to clients thirsting to hire away CPAs from top accounting firms.

It's all about windows of opportunity that trump starting salaries in nearly every instance.

I would not opt for an MBA program were graduates have average starting salaries of $143,800 (and a high standard deviation and kurtosis) relative to a Masters of Accounting Program where average starting salaries are $53,300 with a small standard deviation and negligible kurtosis. By kurtosis I mean that a few superstar graduates (such as those with whiz-kid computer science undergraduate degrees from elite universities) with starting salaries over $250,000 are skewing the average.

There are also misleading "expected" compensations contingent upon such things as sales. For example, a marketing or finance job may look great when told that last year's hires earned an average of $143,800 with commissions and bonuses thrown in. But what about those that came in below average because they just had a harder time selling products and services?

Please warn students that the most important thing about a new job is not the anticipated salary. It's the anticipated opportunity with a few other factors thrown in such as tension, long hours, geographic location, and constant travel. For example, a CPA firm may pay double for going to Moscow, but do you really want to start your career in Moscow where it's really dangerous on the streets and housing is rather Spartan?

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


How to Electronically Sign Documents Without Printing and Scanning Them --- Click Here
http://www.howtogeek.com/164668/how-to-electronically-sign-documents-without-printing-and-scanning-them/?utm_source=newsletter&utm_medium=email&utm_campaign=030613


Special Robotics (Robot) Feature Article from MIT's Technology Review --- Click Here
"
How Technology Is Destroying Jobs," by David Rotman, MIT's Technology Review, June 12, 2013
Note the 60 comments to date
http://www.technologyreview.com/featuredstory/515926/how-technology-is-destroying-jobs/?utm_campaign=newsletters&utm_source=newsletter-daily-all&utm_medium=email&utm_content=20130613

Jensen Comment
This makes me recall a science fiction movie years ago. Handsome people feeding, frolicking, and "working" at whatever they wanted like painting landscape pictures above ground for no pay lived very well (sort of like what Carl Marx viewed as the ultimate communism state). The genetics of illness, including mental illness, was cured. Everything was wonderful except for the unlucky few now and then that were hauled off to slaughter houses to feed the ugly trolls living in dark caverns below ground, trolls that really controlled the world.


Nine Famous Whistle-Blowers: Where Are They Now?

This includes updates on Sherron Watkins (foul mouthed whistle blower who helped bring down Enron)
This includes updates on Cynthia Cooper (persistent internal auditor whistle blower that helped bring down Worldcom)

9 Famous Whistle-Blowers: Where Are They Now?
http://www.businessinsider.com/9-famous-whistle-blowers-2013-6?op=1

Bob Jensen's threads on Sherron (Smith) Watkins and Cynthia Cooper are at
http://www.trinity.edu/rjensen/FraudEnron.htm

Two types of speakers are popular on the convention circuit --- former whistle blowers and former fraudsters (after their prison years)
Both types usually write top selling books as well.
One problem with former fraudsters is that recidivism is somewhat high

"Recidivism and Risk Management: Barry Minkow Goes Back to the Slammer," by Jim Peterson, re:Balance, March 2011 --- Click Here
http://www.jamesrpeterson.com/home/2011/03/recidivism-and-risk-management-barry-minkow-goes-back-to-the-slammer.html

Bob Jensen's threads on whistle blowing ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#WhistleBlowing

Can Ethics Be Taught?
"Crazy Eddie Revisited: Old Lessons for Today's Accountants," by Anthony H. Catanach Jr., Grumpy Old Accountants, June 7, 2013 ---
http://grumpyoldaccountants.com/blog/2013/6/7/crazy-eddie-revisited-old-lessons-for-todays-accountants

"Does Social Media (such as corporate financial official revelations in Titter tweets) Promote "Selective Disclosure?" by Anthony H. Catanach Jr., Grumpy Old Accountants, June 19, 2013 ---
http://grumpyoldaccountants.com/blog/2013/6/19/does-social-media-promote-selective-disclosure
Jensen Question
Do the newer types of social media (e.g., Twitter, Facebook, LinkedIn, etc.) constitute "legal notice" sites in the eyes of the USA court system? I don't know the answer, but I seriously doubt it at this point in time ---
http://en.wikipedia.org/wiki/Legal_Notice 
Legal notice must be made in sources where people traditionally will look for such notices such in classified notices in local newspapers and and  court sites (bulletin boards) at the courthouses. I suspect that the Website of a court now is a medium for legal notice in matters regarding that particular court.


From the Stanford Graduate School of Business
5 Attitudes of Successful Entrepreneurs, from Professor Irv Grousbec
k ---
http://stanfordbusiness.tumblr.com/post/52905655004/5-attitudes-of-successful-entrepreneurs-from-professor

Jensen Comment
We must acknowledge that successful entrepreneurs, like successful CEOs of public companies, have flaws that are generally offset by tremendous offsetting traits. For example, I don't know of any analysts that credit Steve Jobs for skills in managing people. Steve was a genius at managing products.

Also too little credit is given to the serendipity of "success" that comes from being in the right place at the right time. A perfect combination of the five "attitudes" mentioned by Professor Grousbeck are only a small part of "success."


Accounting, Auditing, and Tax Humor Videos

Hi Linda,

Probably the best thing to do is to go to YouTube and search for "Auditing Humor" ---
http://www.youtube.com/

When I did that on YouTube a few possibilities emerged. For example, take a look at
The Fixed Assets Audit --- http://www.youtube.com/watch?v=PnWDEZdrmi4

You can also try other YouTube search words like "accounting humor," "bookkeeper humor," "SNL Accountant," "Tax Accounting Humor," "Tax Humor," "Accounting Nerds" and "Bob Newhart Accountant."

You might consider the movie "Hot Millions" with Peter Ustinov, Maggie Smith, and Karl Malden.
I never could find this on NetFlix so I bought it cheap from Amazon.

My sadly neglected threads on accounting novels, plays, and movies are at
http://www.trinity.edu/rjensen/AccountingNovels.htm
There's not much in the way of humor here.

Bob Jensen's threads on accounting and finance humor ---
http://www.trinity.edu/rjensen/FraudEnron.htm#Humor
There's not much in the way of video humor listed here.

Professor Roselyn Morris (University of South Texas) had a nice listing of ethics movies and some accounting movies on the Web. However, I don't think she included humor videos. The link to her Web page on this is now broken. You might contact her. If she has a newer URL to that page please send it to me.

Wikipedia has a page on
Hollywood Accounting --- http://en.wikipedia.org/wiki/Hollywood_accounting
But there's nothing funny here.


Not Wanting to Waltz With Matilda
Traders Are Massively Betting Against The Australian Dollar [CHART] ---
http://www.businessinsider.com/the-market-is-massively-short-the-australian-dollar-2013-6

Australia is Not the Only Loser During the Rise in the Value of the Dollar
"Citigroup Facing $7 Billion Hit on Dollar Gain," by Donal Griffin, June 11, 2013 ---
http://www.bloomberg.com/news/2013-06-11/citigroup-facing-7-billion-currency-hit-on-dollar-peabody-says.html

Darrell Duffie: Big Risks Remain In the Financial System
A Stanford theoretician of financial risk looks at how to fix the "pipes and valves" of modern finance
Stanford Graduate School of Business, May 2013
Click Here
http://www.gsb.stanford.edu/news/headlines/darrell-duffie-big-risks-remain-financial-system?utm_source=Stanford+Business+Re%3AThink&utm_campaign=edfd4f11fb-Stanford_Business_Re_Think_Issue_Thirteen5_17_2013&utm_medium=email&utm_term=0_0b5214e34b-edfd4f11fb-70265733&ct=t%28Stanford_Business_Re_Think_Issue_Thirteen5_17_2013%29

. . .

In March, Duffie and the Squam Lake Group proposed a dramatic new restriction on executive pay at “systemically important” financial institutions. Duffie argues that top bank executives still have lopsided incentives to take excessive risks. The proposal: Force them to defer 20 percent of their pay for five years, and to forfeit that money entirely if the bank’s capital sinks to unspecified but worrisome levels before the five years is up.

“On most issues,” Duffie said, “the banks would be glad to see me go away.”

Jensen Comment
Squam Lake and its 30 islands is in the Lakes Region of New Hampshire --- http://en.wikipedia.org/wiki/Squam_Lake
It is better known as "Golden Pond" after Jane Fonda, her father (Henry) and Katherine Hepburn appeared in the Academy Award winning movie called "On Golden Pond" that was filmed on Squam Lake. Professor Duffie now has some "golden ideas" for finance reforms.


EITF Update from Ernst & Young, June 2013 --- Click Here
http://www.ey.com/Publication/vwLUAssetsAL/EITFUpdate_BB2560_12June2013/%24FILE/EITFUpdate_BB2560_12June2013.pdf


Update on EU proposal for audit firm rotation
Just when audit firms in Europe were breathing a sigh of relief that the proposed mandatory audit firm rotation would be 14-25 years, the Irish presidency of the EU has presented revised a revised proposal to reduce this to six years which, as I recall, was a number favored by USA audit firm rotation advocate Tom Selling.

The PCAOB found that responses on audit firm rotation in the USA were predominantly negative toward any such mandated rotation.
Bob Jensen's threads on audit firm rotation proposals ---
http://www.trinity.edu/rjensen/Fraud001c.htm#Rotation


AACSB Ethics/Sustainability Resource Center ---
http://www.aacsb.edu/resources/ethics-sustainability/default.asp

Bob Jensen's threads on ethics in accounting education are at
http://www.trinity.edu/rjensen/FraudProposedReforms.htm#AccountingEducation


Possible Team Project in Cost Accounting Courses
Have students compare costs of building and owning swimming pools under various conditions like nearby tall trees and various types of pools

I had two swimming pools in my life (in Florida and in Texas), I will never ever buy a home in the future with a swimming pool. In Florida my main problem was towering nearby pine trees that shed needles so heavily I could almost walk on water at times. In Texas my main problem was towering live oak trees that shed surface-staining acorns and leaves into my pool. Live oaks dribble acorns and leaves all winter long.

The kids enjoyed the pools, especially son Marshall who became a championship swimmer in his school. But as an empty-nester I would bury a swimming pool if I had a swimming pool.

Apart from my tree debris removal troubles it seemed to cost a fortune to maintain these pools, and I don't much enjoy swimming.

When grading the student team projects on swimming pool costs, downgrade them for not mentioning electricity costs. I never took the trouble, but I shudder to think about what it cost to power up two big 300-watt lights under each end of our pools. Actually, the lights in the night were what I enjoyed most about our pools. But when I think about it, these lights burning for hours each night are an unnecessary use of electricity when nobody is using the pool.

When my new neighbor down the road in Florida decided to put in a new pool, the excavating machine encountered a buried swimming pool. After moving to a second spot in his back yard the excavating machine dug into a second swimming pool buried underground.

"Here's The Real Cost Of Owning A Home With A Swimming Pool," Brian O'Connell, Business Insider, June 9, 2013 ---
http://www.businessinsider.com/the-cost-of-swimming-pool-ownership-2013-6


"Another View of the Accounting Doctoral Shortage," by James Martin, MAAW Blog, June 10, 2013 ---
http://maaw.blogspot.com/2013/06/another-view-of-accounting-doctoral.html

Jensen Comment
Note that this posting focuses on a 2008 article where some of the recommendations have already been met.

Recommendations:
1.
2. Train Ph.D.s from other disciplines to teach accounting.
Jensen Comment
To date the AACSB Bridging Program has trained over a hundred PhDs in other disciplines for accountancy tenure track positions, although the R1 research universities are not inclined to give them tenure track positions. However, to teach accounting in tenure track positions at other colleges they must have had an accounting background that prepares them to teach the assigned accounting courses. For example, a CPA who also earned a history PhD can complete the AACSB briding program to qualify herself to obtin tenure in an accounting department. A computer science PhD who has qualified work experience in AIS may bridge to teach AIS courses.

 
3. Remove arbitrary AQ-PQ standards.
Jensen Comment
Just recently the AACSB expanded on other categories beyond the old AQ-PQ categories. The hope is that this will open tenure alternatives to those that previously have been denied tenure alternatives as PQ faculty.

 
4. Treat PQ faculty as collaborators in both research and teaching rather than as second-class citizens.
Jensen Comment
This varies among colleges and universities, but in top R1 accounting research universities the only PhDs in tenure tracks are  likely to hold doctorates in accounting, finance, mathematics, statistics, social scienc, or computer science. Humanities PhD holders need not apply for tenure-track positions in R1 universities except in very rare circumstances. Even then a mathematics PhD is not likely to teach intermediate and other undergraduate and masters accounting courses unless qualified in those subjects. For example, a mathematics PhD is more apt to only teach in the accounting doctoral program and supervise doctoral dissertations.
 
PQ faculty in R1 universities are not likely to be on tenure tracks and, when push comes to shove, they are second class citizens in most respects except teaching loads where they may see more students in a year than some of the research faculty see in a lifetime.
 
June 12, 2013 reply from John Brozovsky
 

Official numbers may be slightly low. I have put out two in a non-official ‘bridge’ program students in the last three years. Basically, they have their PhD in a different disciplines (ag econ and hotel and restaurant management) and then got a master’s degree in accounting and after went out to teach accounting in accounting departments. We currently have an outside PhD in our master’s program but she is not interested in teaching at all having already done it in her prior discipline. In essence we are getting PhDs into our master’s program because they think they can get a better job than their other discipline provided them. They did not come in thinking about being an accounting professor at all—they were thinking of going out and being an accountant.

John

 

 
Bob Jensen's threads on the shortage of accounting doctoral students ---
http://www.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms
 
An Accounting PhD Versus a History PhD ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#HistoryVsAccountancy

Employee Stock Options (ESOs) versus Restricted Stock Units (RSUs) ---
http://moneygirl.quickanddirtytips.com/what-are-employee-stock-options-rsu.aspx

Jensen Comment
Most employees still like stock options, but their employers mostly lost enthusiasm of this type of compensation when the FASB revised FAS 123 into FAS 123R that changed the rules regarding when employers must expense these options.

The Controversy Over Employee Stock Options as Compensation ---
http://www.trinity.edu/rjensen/theory/sfas123/jensen01.htm
 


This might make a good lease versus buy case for accounting students.

Chains such as Rent-a-Wheel and Rimco are seeing business boom. Many consumers pay double or triple the cost of buying and face aggressive repossession policies.
"High prices are driving more motorists to rent tires," by Ken Bensinger, Los Angeles Times, June 8, 2013 ---
http://www.latimes.com/business/autos/la-fi-rent-a-tire-20130609,0,2490443,full.story


Research by Professors from Dartmouth and Warwick
"How Home Ownership Causes (Periodic) Unemployment," by John Carney, CNBC, June 7, 2013 ---
http://www.cnbc.com/id/100798861

Jensen Comment
What I think is lacking in this study is an in-depth look at the alternatives. In the USA the alternative is the rental market. The rental market is complicated. In NYC there's a huge shortage of rental housing caused in large measure by rent controls that discourage bringing supply closer to demand. In free markets like those in Las Vegas there's often a glut of rental housing because of massive overbuilding in economic booms.

In China there are now many towers of condo and rental apartments where the towers and their connecting malls are all vacant due to overbuilding by developers. It is possible for investors who build enormous housing complexes to make forecasting mistakes that are really devastating on the construction economy and its employment.

 There are many good things attributable to home ownership.

There are also good things attributable to renting housing.


"Islamic Finance is Growing Fast but Faces the Form-Versus-Substance Debate (Video)," by Usman Hayat, CFA, Enterprising Investor, June 11, 2013 --- Click Here
http://blogs.cfainstitute.org/investor/2013/06/11/islamic-finance-is-growing-fast-but-faces-the-form-versus-substance-debate-video/ 

Bob Jensen's threads on Islamic Accounting ---
http://www.trinity.edu/rjensen/Theory01.htm#IslamicAccounting


Ernst & Young's Financial Reporting Briefs for the Second Quarter of 2013 ---
http://www.ey.com/UL/en/AccountingLink/Accounting-Link-Home


"Potential income tax benefits for families with special needs children," by Thomas M. Brinker Jr. and W. Richard Sherman, Journal of Accountancy, June 2013 ---
http://www.journalofaccountancy.com/Issues/2013/Jun/20137378.htm

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

Bob Jensen's threads on education technology for disabled students ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Handicapped


Selecting a Conferencing Solution --- Click Here
http://www.comparebusinessproducts.com/DownloadAsset?ac=9728671429064917ac1d9a2a6725f1d0&tk=a78613e1eab94d46ba96232a945911de


Law School Faculty Salary Links from Paul Carone on the TaxProf Blog on June 11, 2013

Following up on my recent post, Law Faculty Salaries, 2012-13:  Above the Law has blogged individual law faculty salaries at these Top 20 public schools:

Jensen Comment
This is a better way to compare faculty salaries in top schools. Large surveys like those of the AAUP, Chronicle of Higher Education, and the AACSB are too skewed by small and low paying colleges.

Keep in mind that salary comparison in general can be like comparisons of apples and kangaroos. Things to consider are the many aspects of "compensation" contracts such as summer income assurances (research or teaching), expense budgets (that in prestigious schools may be near $20,000 allowances for travel, etc.), and most importantly access to additional consulting revenues. For example, faculty at the Harvard Business School may make more consulting with and teaching CPE credits in HBS alumni companies than they make from their Harvard salaries.

Just being on the faculty of a prestigious university also opens doors to lucrative expert witness offers, consulting offers, and textbook publishing deals where prestigious faculty are offered deals to publish with lesser known writers who write most of the books.

Some schools like Stanford, NYU, and Columbia offer faculty great housing deals such as relatively low rents or 100-year lot leases for a dollar a year.


Nonprofit Groups Tackle Newfangled Metrics

From the CFO Journal's Morning Ledger on June 4, 2013

Standardizing the way newfangled metrics are calculated is a big job. As companies churn out their own performance benchmarks to satisfy investors’ demands, nonprofit groups are cropping up to help them develop and report new metrics in a uniform way and decide whether they should be included on balance sheets, writes Emily Chasan in Today’s Marketplace section. In some cases they’ve even leapfrogged the FASB.

The Sustainability Accounting Standards Board expects  next quarter to release its first draft of standards for the health-care industry, including guidelines for reporting product recalls and fatalities in drug clinical trials. Meanwhile, the nonprofit Marketing Accountability Standards Board is working with companies like GM and Kimberly-Clark to standardize valuation methods for corporate brands. Another group, the International Integrated Reporting Council, is working with about 90 mostly European companies on a project to link sustainability reports and corporate financial statements so that both kinds of metrics appear in one place.

The FASB is likely to get into the act soon. Its advisory council is scheduled to meet today to hash out the board’s priorities as it wraps up a decadelong effort to harmonize U.S. and international accounting standards. The council and accounting rule makers will hold preliminary talks on whether companies, investors and auditors “have the same views about areas where accounting can be improved,” says Russell Golden, who’s set to become FASB chairman in July.


Teaching Case
From The Wall Street Journal Weekly Accounting Review on June 6, 2013 ---

The Many Ways that Cities Cook Their Bond Books
by: Steve Malanga
Jun 01, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Debt, Governmental Accounting, Pension Accounting, SEC, Securities and Exchange Commission

SUMMARY: This opinion page piece describes governmental accounting for pensions and cities' financial report disclosures both as ways of "cooking the books." This follows on the SEC's charge against Harrisburg, PA which was covered in a WSJ Accounting Weekly Review on May 7, 2013. The related article refers to the one covered at that time. "The SEC says this is the first time the regulatory agency has 'charged a municipality for misleading statements made outside of its securities disclosure documents.'"

CLASSROOM APPLICATION: The article highlights the critical nature of government reports for investors in state and municipal bonds and may be used either in a governmental accounting or financial reporting class.

QUESTIONS: 
1. (Introductory) In what report has the SEC found failings by the city of Harrisburg, PA? What is new and unusual about the SEC charges?

2. (Advanced) How big is the municipal bond market? With what information do investors in this market make their investing decisions?

3. (Introductory) In what ways does the author accuse city governments of "cooking the books"?

4. (Advanced) Given the discussion in the article, what comprises a major portion of total state and municipal debt?

5. (Introductory) How much debt in total is outstanding from U.S. state and local governments? Of what importance is that total debt to state and municipalities' bondholders?

6. (Advanced) The author states that pension-fund accounting is of particular concern "because states have latitude in choosing how to value their retirement debts." How is this area of accounting subject to management discretion? How can this be described as a "sophisticated accounting wrinkle"?

7. (Introductory) Recently a judge has made a finding about these debts being paid by the city of Stockton, California. What was that finding? How does that finding bear on the notion of debt repayment to different class of creditors to state and local governmental entities?
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
City Hit by SEC Fraud Charges: Harrisburg's Public Statements Faulted
by Kris Maher and Michael Corkery
May 07, 2013
Page: A1

 

 

"The Many Ways That Cities Cook Their Bond Books:  The $3 trillion municipal debt market is rife with creative accounting," by Steve Malanga, The Wall Street Journal, May 31, 2013 ---
http://online.wsj.com/article/SB10001424127887324659404578501241181682894.html?mod=djemEditorialPage_h

It has been a busy few weeks for the Securities and Exchange Commission. In May, the SEC charged two cities—Harrisburg, Pa., and South Miami, Fla.—with securities fraud for allegedly deceiving investors in their municipal bonds.

This follows similar fraud charges against states, New Jersey in 2010 and Illinois in March, after SEC investigators uncovered what they called "material omissions" and "false statements" in bond documents related to those state's pension funds.

With Harrisburg, however, the SEC has gone further and charged the city government with "securities fraud for its misleading public statements when its financial condition was deteriorating and financial information available to municipal bond investors was either incomplete or outdated." The SEC says this is the first time the regulator has "charged a municipality for misleading statements made outside of its securities disclosure documents."

The Harrisburg charges are part of a broader SEC effort to scrutinize state and local government issuers in the nation's $3 trillion municipal-bond market. "Anyone who follows municipal finance knows that budgets can sometimes be a work of fiction," says Anthony Figliola, a vice president at Empire Government Strategies, a Long Island-based consulting firm to local governments. "Harrisburg is the tip of the iceberg."

And a mighty iceberg it is. The 2012 State of the States report, released in November by Harvard's Institute of Politics, the University of Pennsylvania's Fels Institute of Government and the American Education Foundation, found state and local governments are carrying more than $7 trillion in debt, an amount equal to nearly half the federal debt. Often, the report said, "States do not account to citizens in ways that are transparent, timely or accessible."

Consider the practices of Stockton, Calif., which last June became the nation's biggest city to file for bankruptcy. In 2011, Stockton's new financial managers issued a blistering critique of past accounting practices and acknowledged that the city's previous financials had hidden significant costs, including the real cost of employee compensation and retirement obligations. Bob Deis, the new city manager, declared that Stockton's financials bore "eerie similarities to a Ponzi scheme."

If so, the city's bondholders have been taken for a ride. In bankruptcy court earlier this year, a judge ruled that Stockton could suspend payments on its bonds even while continuing to fund its employee retirement system.

Similarly, when another California city, San Bernardino, went bust last year, some city officials alleged that it had been filing inaccurate financial records for nearly 16 years. At best, officials said, the city's bookkeeping had been "unprofessional." The SEC began an investigation last fall. Meanwhile, the city has defaulted on bond payments, leaving investors in the lurch.

One area that has come under special scrutiny is pension-fund accounting, because states have latitude in choosing how to value their retirement debts. The SEC noted that Illinois used accounting that funds a larger percentage of an employee's pension costs near the end of his career, a method that increases the risks that the system could go bust. The SEC said Illinois didn't properly reveal the risks posed by this sophisticated accounting wrinkle.

The SEC accused New Jersey of failing to disclose to investors that it wasn't sticking to a plan to adequately fund its pension system. In this, the Garden State isn't alone. Many states underfund their pension systems, even by their own accounting standards.

A June 2012 study by the Pew Center on the States found that 29 states didn't make their annual required contribution for pensions in 2010, the last year for which data were available. It isn't clear how many of the more than 3,000 local government pension systems follow the same practice, although a survey this January by Pew of 61 large cities found nearly half didn't make their full contributions.

In the South Miami case the SEC zeroed in on a complex bond deal that changed over time in a way that threatened the tax-free status of the securities. The SEC essentially warned South Miami that municipalities that employ such schemes need to fully understand the consequences for investors. In this particular case, South Miami paid $260,000 to the Internal Revenue Service to preserve the tax-free status of the bonds for investors.

Municipal investors have often ignored such questionable practices thanks to a generation of low default rates. Many also assume that even when a local government gets into financial trouble, bondholders are always first in line to be paid.

But officials in some troubled cities are pushing back against the notion that investors should get the best deal among creditors. Harrisburg City Council members have balked at a state-proposed bailout plan because they claim it places much of the burden on taxpayers without penalizing investors. Last year, City Councilman Brad Koplinski called the plan's 1% increase in the state-imposed income tax on Harrisburg residents "a bad decision for the people of Harrisburg, people who did nothing to get our city into our fiscal crisis.''

Investors will hear more of this talk as municipalities face growing budget pressures. Recently, former New York Lt. Gov. Richard Ravitch warned the municipal bond industry that the promises governments have made to repay investors may not take precedent over other obligations. States and cities face "a unique challenge," he said, "in trying to maintain services and meet their retirement commitments to workers," emphasizing that this was "not necessarily a good message" for investors.

Continued in article

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

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

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


Teaching Case
From The Wall Street Journal Weekly Accounting Review on June 21, 2013 ---

Behind the Big Profits: A Research Tax Break
by: Scott Thurm
Jun 14, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Income Taxes, Interim Financial Statements, R&D Credit

SUMMARY: "Strong first-quarter corporate profits may not be quite as good as they look, an analysis by The Wall Street Journal shows, because the extension of a big tax credit quietly boosted profits of dozens of companies." The WSJ has analyzed 456 of the S&P 500 companies' first quarter results and found taxes lower by an average of 5.6% "'The biggest reason [was]...the extension of the research credit and other tax breaks in January,' said Jeffrey Hoopes, a lecturer in accounting at Ohio State University whose recent doctoral dissertation examined the issue....For some companies the effect was dramatic. Internet giant Google Inc. reported spending $6.8 billion on research and development in 2012...The company [accrued] less than half as much...for first-quarter taxes as it did a year earlier even as its pretax income increased 2% to $3.6 billion."

CLASSROOM APPLICATION: The article may be used in a tax class to cover the 2013 renewal of the R&D credit or in a financial reporting class covering accounting for income taxes. Quarterly impact of the tax accrual is the issue. The related graphic "Taking Credit" provides an excellent table to show students the use of accounting information: R&D Spending 2012, 2013 pre-tax income for Q1, effective tax rates for Q1 2012 and Q2 2013, and estimated tax benefits of the R&D credit. Intel is the first company in the table and their note related to income taxes for the first quarterly filing is available on the SEC web site at http://www.sec.gov/cgi-bin/browse-edgar?action=getcompany&CIK=INTC, filing dated 29 April 2013. Note 16: Income Taxes Provision for Taxes Our effective income tax rate was 16.3% in the first three months of 2013 compared to 28.2% in the first three months of 2012. The effective rate was positively impacted by the U.S. R&D credit reenacted in January 2013 retroactive to the beginning of 2012. The enactment date occurred after our fiscal year end of December 29, 2012 so the impact of the R&D credit was not recognized in the 2012 financial statements. The estimated full year 2012 and first quarter 2013 impact of the U.S. research and development tax credit has been recognized in the first three months 2013 financial statements.

QUESTIONS: 
1. (Advanced) What is the Research & Development (R&D) tax credit?

2. (Advanced) What feature about this credit made it unavailable to companies in 2012?

3. (Introductory) Why do you think that U.S. tax law allows for this credit if it "costs the federal government more than $7 billion annually"?

4. (Introductory) In what industries are tax credits for R&D activities most commonly taken? By what types of entities? (Hint: Use the graphic labeled "Taking Credit" as well as the article.)

5. (Advanced) Why does the author write that "under accounting rules, the companies reported a year's worth of benefits from the research-and-development tax credit in their first quarter results"? In your answer, state how you think the change in tax law for R&D credits should be accounted for and cite authoritative standards in your answer.

6. (Advanced) What is an effective tax rate? How did this change in R&D tax law affect companies' effective tax rates reported in the first quarter?

7. (Advanced) Why does an analyst at Morningstar say that "the effective tax rate we saw in the first quarter is not representative of what we'll see in the rest of the year"?

8. (Advanced) Several times in the article the author describes the recording of a provision for income taxes as setting aside money for first-quarter taxes. Does recording a provision set aside cash to pay the tax liability? Explain your answer.
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Behind the Big Profits: A Research Tax Brea," by Scott Thurm, The Wall Street Journal, June 14, 2013 ---
http://online.wsj.com/article/SB10001424127887324049504578543324262064306.html?mod=djem_jiewr_AC_domainid

Strong first-quarter corporate profits may not be quite as good as they look.

An analysis by The Wall Street Journal shows that the extension of a big tax credit quietly boosted the profits of dozens of companies. Under accounting rules, the companies reported a year's worth of benefits from the research-and-development tax credit in their first-quarter results, lifting profits for many of them by more than 10%.

With first-quarter results nearly complete, 465 participants in the Standard & Poor's 500-stock index cumulatively reported that revenue increased 2.1% from the same period a year earlier. Expenses grew slightly faster, so pretax profit rose only 0.9%, according to the Journal's analysis.

But the S&P-500 companies also set aside 5.6% less money for taxes, and that helped their cumulative profits grow a robust 6.7%, the Journal found.

The biggest reason they took that action: the extension of the research credit and other tax breaks in January, said Jeffrey Hoopes, a lecturer in accounting at Ohio State University whose recent doctoral dissertation examined the issue.

For some companies, the effect was dramatic. Internet giant Google Inc. GOOG -1.77% reported spending $6.8 billion on research and development in 2012, making it one of the nation's biggest corporate research spenders.

The company set aside less than half as much money for first-quarter taxes as it did a year earlier even as its pretax income increased 2%, to $3.6 billion. Its effective tax rate fell to 7.9% from 18.5%. In a securities filing, Google said the drop was "primarily" due to the extension of the tax credit. If Google's profit had been taxed at the same rate as last year, the company would have had to set aside an additional $380 million for income taxes.

"This tax credit was introduced over 25 years ago to stimulate innovation—and that's exactly what we use it for," a Google spokeswoman said.

The first-quarter tax rate of semiconductor maker Intel Corp. INTC -3.37% also declined, to 16.3% from 28.2%, in the 2012 first quarter. Intel reported $10.1 billion in research spending last year, more than any other publicly traded U.S. company. It said the "substantial majority" of the decline stemmed from extension of the research credit. If Intel's profits had been taxed at last year's rate, it would have set aside an additional $290 million.

Big companies cited a variety of reasons for reporting smaller first-quarter tax bills. In addition to the tax-credit extension, pharmaceutical maker Merck MRK -2.74% & Co. reported a $160 million benefit from resolving an old tax dispute between the Internal Revenue Service and Schering-Plough Corp., which Merck acquired in 2009. Insurance company Cigna Corp. CI +0.45% said its tax rate declined because of changes to its reinsurance and disability businesses.

But extension of the research credit weighed heavily. The credit, which applies to increases in research spending, costs the federal government more than $7 billion annually, according to the Senate Finance Committee. First adopted in 1981, the credit has been extended 15 times, but it has never been made a permanent part of the tax code.

The previous extension expired at the end of 2011, meaning that companies couldn't claim the credit last year. That quietly increased tax rates—and hurt earnings—last year. Under the measure approved in January, the research credit will again expire at the end of this year, raising the prospect of future distortions in corporate earnings.

Research-heavy technology and pharmaceutical companies benefit most from the credit. In 2009, the latest year for which statistics are available, the Internal Revenue Service said that more than half the $7.7 billion in credit was claimed by companies in three industries: computer and electronics manufacturing, chemical and pharmaceutical manufacturing, and transportation manufacturing.

Within those industries, said Nirupama Rao, an economics professor at New York University, the bulk of the credits are claimed by the largest companies. "It's big corporate America," Ms. Rao said of the beneficiaries. "Small firms aren't profitable enough to get the credit."

For example, aircraft-maker Boeing Co. BA -2.55% said that extension of the credit reduced its first-quarter income-tax provision by $145 million. Boeing's tax rate fell to 23.1% from 36.8% in the first quarter a year earlier. Boeing reported spending $3.3 billion on research and development in 2012.

It's unclear how well investors anticipated the additional tax benefits. The accounting implications were known when Congress approved the extension as part of a deal to resolve the so-called fiscal cliff on Jan. 1. But a spot check by Thomson Reuters found that, of a dozen big beneficiaries of the credit, analysts excluded the impact from their earnings estimates at only one: Texas Instruments Inc. TXN -3.04%

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on June 21, 2013 ---

Tesla Clashes With Car Dealers
by: Mike Ramsey and Valerie Bauerlein
Jun 18, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Consolidated Financial Statements, Entrepreneurship, Revenue Recognition, Subsidiaries

SUMMARY: Tesla Motors, Inc. has never had franchised dealerships and so says that franchise laws do not apply to its operations. The company "wants to sell [its] $70,000 Tesla electric luxury vehicles directly to consumers, bypassing franchised automobile dealers...[Many] state franchise laws...go back to the auto industry's earliest days....Dealers say laws passed over the decades to prevent car makers from selling directly to consumers are justified because without them auto makers could use their economic clout to sell vehicles for less than their independent franchisees...Those franchise laws have insulated car dealers from much of the e-commerce revolution that has hammered other sectors from books to electronics." The article expresses dealers' concern that if entities other than auto manufacturers with already existing franchise networks are allowed not to be covered by franchise laws, auto manufacturers may simply set up new subsidiaries to make direct sales to customers.

CLASSROOM APPLICATION: The article may be used to introduce the current state of change in franchising--typically covered with revenue recognition practices-with an exciting new product and internet sales discussion. In a class on consolidations, the reference to new subsidiaries could be used to introduce the legal structural reasons for the existence of subsidiaries that are consolidated.

QUESTIONS: 
1. (Advanced) What is a franchise? How is a franchise established? What are the benefits of a franchise to the selling entity and to the purchasing entity?

2. (Introductory) Summarize the effect of state laws on franchising in the automobile industry as they are reported in the article.

3. (Advanced) What new product does Tesla Motors, Inc. manufacture?

4. (Introductory) Why does Tesla Motors' Elon Musk argue that these franchise laws do not apply to its car sales? How does this entrepreneur want to sell the company's vehicles?

5. (Advanced) If some entities are given an exemption from applicability of the franchise laws for automobile sales, how would setting up a new subsidiary allow automobile manufacturers to circumvent their own dealer network?
 

Reviewed By: Judy Beckman, University of Rhode Island

"Tesla Clashes With Car Dealers," Mike Ramsey and Valerie Bauerlein, The Wall Street Journal, June 18, 2013 ---
http://online.wsj.com/article/SB10001424127887324049504578541902814606098.html?mod=djem_jiewr_AC_domainid

Elon Musk made a fortune disrupting the status quo in online shopping and renewable energy. Now he's up against his toughest challenge yet: local car dealers.

Mr. Musk, the billionaire behind PayPal and now Tesla Motors Inc., TSLA -4.00% wants to sell his $70,000 Tesla electric luxury vehicles directly to consumers, bypassing franchised automobile dealers. Dealers are flexing their considerable muscle in states including Texas and Virginia to stop him.

The latest battleground is North Carolina, where the Republican-controlled state Senate last month unanimously approved a measure that would block Tesla from selling online, its only sales outlet here. Tesla has staged whiz-bang test drives for legislators in front of the State House and hired one of the state's most influential lobbyists to stave off a similar vote in the House before the legislative session ends in early July.

The focus of the power struggle between Mr. Musk and auto dealers is a thicket of state franchise laws, many of which go back to the auto industry's earliest days when industry pioneer Henry Ford began turning to eager entrepreneurs to help sell his Model T.

If Tesla is successful in establishing its own retail network, it could open the door for other new companies, such as Chinese auto makers, to set up direct sales networks, legal experts say. Dealers worry that existing car companies might try to create new subsidiaries to sell vehicles directly to consumers—a tactic General Motors Co. GM -3.38% and Ford Motor Co. F -3.26% flirted with during the late 1990s before retreating in the face of a dealer backlash.

Franchise laws differ by state. Most prohibit manufacturers from having both company and franchised stores. Some states, like North Carolina and Texas, require manufacturers use independent dealers. In some states, including North Carolina, dealers are pushing lawmakers to strengthen prohibitions against any form of direct-to-consumer selling by auto makers.

Dealers have "an essential monopoly on their business and they want to maintain it," said Diarmuid O'Connell, Tesla's chief of business development. Car dealers and alcohol distributors, he said, are the rare businesses still vigorously fighting disruption by the Internet.

Enlarge Image image image Stephen Voss for The Wall Street Journal

Shoppers can study Tesla's Model S cars at showrooms in several states but must use the Internet to buy.

Mr. O'Connell said the company has been looking at a federal legal challenge based on limits to interstate commerce and at pursuing new legislation in Congress. The company is committed to selling direct, he said. Tesla doesn't break out its spending on lobbying, but its first quarter overhead costs rose 53% to $47 million, in part because of hiring in sales and marketing.

Thomas Tallerico, a senior lawyer at Bodman PLC in Detroit who has represented auto makers and franchised dealers, said the chances of overturning franchise laws are dim.

"It is difficult to understand what the legal basis is by which Tesla could persuade a federal judge to strike down state laws designed to protect dealers, particularly when every state in the country has passed such laws and there is a federal law that protects dealers," he said.

Dealers' state house allies have given them tremendous sway. During their 2009 bankruptcies, GM and Chrysler terminated thousands of dealers using federal court's power to void contracts, but the pair were forced to go through binding arbitration and sometimes had to reinstate or buy out dealers because of state rules.

Mr. Musk, a founder of PayPal, co-founder of SolarCity Corp. and Space Exploration Technologies Corp., declined to comment for this article. At Tesla's annual meeting this month, Mr. Musk lashed out at dealers, calling their lobbying for laws to restrict Tesla sales a "perversion of democracy."

"I think customers are going to lead a revolt on this front," he said.

The clash in North Carolina illustrates the forces at play. Patrick Vaughn, a Charlotte investment banker, bought a pearl white Model S in January in a "simple and painless" online transaction. The car arrived with California temporary tags on a flatbed truck.

Mr. Vaughn said he doesn't buy that dealers, which are behind a proposal to block online car sales in the state, are trying to protect consumers. "They are trying to protect their turf—like any company would."

Thom Tillis, North Carolina's House speaker, said language that bars Internet car sales is unlikely to pass in the House.

David Westcott, chairman of the National Automobile Dealers Association who has a Buick-GMC dealership in Burlington, N.C., said Tesla's effort to sell direct to consumers was important to all dealers and something the national association was watching.

"The system has worked for a long time," he said. "We only want Tesla to play by the same rules," Mr. Westcott added.

Even if Tesla wins in North Carolina, it is still smarting from losing an effort last month to amend Texas law to allow the company to take orders at company-owned stores. Tesla has two retail showrooms, or "galleries," in the state, but buyers have to order the cars online from California. Mr. Musk made a push in Austin, trying to rally support, but the bill died without action and can't be reintroduced before 2015.

Bill Wolters, who leads the Texas Automobile Dealers Association and helped to defeat the Tesla-led proposal, said he is worried that GM or Ford might want to offer direct sales as well, cutting perhaps 15% out of the dealer business and putting thousands of business owners under.

Mr. Musk told shareholders he doesn't want to sell cars through established dealers because he doubts they'll advocate for electric vehicles as vigorously as Tesla would.

Many more battles remain. Tesla defeated a bill in Minnesota that would have blocked sales. But in Virginia, the state Department of Motor Vehicles has so far refused to issue Tesla a license to operate a company store.

Continued in article


Yawn! News that medical providers, medical insurance companies are defrauding Medicare is hardly newsworthy anymore
From the CFO Journal's Morning Ledger on June 12, 2013

Former Wellcare CFO found guilty of Medicaid fraud
The former CFO and former CEO of Wellcare Health Plans were found guilty by a federal jury in Tampa, Fla., of a scheme to defraud the state’s Medicaid program,
the WSJ reports. Ex-CEO Todd S. Farha and former CFO Paul L. Behrens were both convicted of two counts of health-care fraud. Mr. Behrens was also convicted of two counts of making false statements relating to health-care matters. According to the Justice Department, the defendants falsely submitted inflated information in order to reduce contractual payback obligations for behavioral health-care services.


"Walgreen in $80 Million Settlement (with Feds) Over Painkillers," by Timothy W. Martin, The Wall Street Journal, June 11, 2013 ---
http://online.wsj.com/article/SB10001424127887324904004578539743775320834.html?mod=djemCFO_h


"In Crackdown on Bank Consultants, Deloitte Is Fined ($10 million) and Banned," by Ben Protess and Jessica Silver-Greenberg, The New York Times, June 18, 2013 ---
http://dealbook.nytimes.com/2013/06/18/in-crackdown-on-bank-consultants-deloitte-is-fined-and-banned/?smid=li-share

Bob Jensen's threads on the history of Deloitte's legal and regulation troubles ---
http://www.trinity.edu/rjensen/Fraud001.htm


"Overview Of The New 3.8% Investment Income Tax, Part 3: Gains From The Sale Of Property," by Tony Nitti, Forbes, May 2013 --- Click Here
http://www.forbes.com/sites/anthonynitti/2013/05/01/overview-of-the-new-3-8-investment-income-tax-part-3-gains-from-the-sale-of-property/

. . .

We’ll be back with Part 4, in which we’ll discuss some additional considerations everyone should be aware of regarding the new net investment income tax.


From the CPA Daily Letter on June 10, 2013

AICPA launches new framework for small-business financial reporting
The AICPA unveiled Monday the Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs), which is designed to help small businesses prepare streamlined, relevant financial reports. The framework is intended for private companies that do not need GAAP financial statements. The AICPA said the framework is complementary to the Financial Accounting Foundation's Private Company Council, which is considering potential GAAP exceptions and modifications for private companies. The AICPA is hosting a live webcast today on the framework at 12:30 to 1:45 p.m. ET. JournalofAccountancy.com (6/10), The New York Times (tiered subscription model) (6/9), The Wall Street Journal


Teaching Case
From  The Wall Street Journal Accounting Weekly Review on June 14, 2013

New Accounting Rules Proposed for Small Businesses
by: Michael Rapoport
Jun 10, 2012
Click here to view the full article on WSJ.com
 

TOPICS: FASB, Financial Accounting, Financial Accounting Standards Board

SUMMARY: The American Institute of Certified Public Accountants (AICPA) has issued new guidelines for small and medium-sized entities (SMEs) in advance of the Private Company Council of the Financial Accounting Standards Board, in which the AICPA participates. Acknowledged in the article is the fact that "the new framework will be optional even for companies who might choose to adopt it. The AICPA doesn't have any authority to compel companies to do so." This issuance is contentious, with some "saying the AICPA should wait for the Private Company Council to develop its modifications to GAAP to benefit private companies instead of trying to develop a separate system."

CLASSROOM APPLICATION: The article may be used in any financial reporting class covering authoritative accounting guidance or issues facing SMEs.

QUESTIONS: 
1. (Introductory) Who has issued new guidelines for accounting and reporting by small to medium sized entities (SMEs)?

2. (Advanced) Is this new system authorized GAAP in the U.S.? Explain.

3. (Advanced) What is the Private Company Council? What is its responsibility for issuing authoritative pronouncements under U.S. GAAP?

4. (Introductory) What are some of the features of the proposed reporting by SMEs that differ from U.S. GAAP requirements for larger, publicly-traded companies? Why are these differences proposed?

5. (Introductory) What entities might influence whether a company could choose to report under the new SME guidelines? Explain their influence on the decision.
 

Reviewed By: Judy Beckman, University of Rhode Island

"New Accounting Rules Proposed for Small Businesses," by Michael Rapoport, The Wall Street Journal, June 10, 2013 ---
http://online.wsj.com/article/SB10001424127887324634304578536982485919890.html?mod=djem_jiewr_AC_domainid

Millions of U.S. small businesses will be able to use simplified, streamlined methods for measuring and presenting their financial results under a new accounting framework announced Monday.

The new guidelines for "small and medium-size entities" come from the American Institute of Certified Public Accountants, the nation's main accounting trade group.

The guidelines are designed as an alternative to generally accepted accounting principles, or GAAP, the system large companies use in the U.S.

"It is a framework that is tailored for small business—a very relevant, simplified framework," said Bob Durak, the AICPA's director of private company financial reporting.

Public companies in the U.S. must use GAAP, as must privately held companies if their lenders, bonding companies or regulators require it. But smaller, less-complex private companies long have complained that GAAP is overly burdensome and complicated.

The Private Company Council, a new panel created last year with the AICPA's participation, is focused on carving out potential modifications to GAAP to benefit privately held firms.

But even given those efforts, Mr. Durak said many private companies that don't have to use GAAP have been "looking for another option" that omits some of the complexities of GAAP that aren't relevant to them.

Among the ways in which the new framework would simplify GAAP: The new framework uses only historical cost as a basis for valuing assets and liabilities, not current market value. It doesn't include more-complex accounting for areas that smaller, simpler companies are unlikely to get into, such as off-balance-sheet entities, derivatives or hedging.

The new framework will be optional even for companies who might choose to adopt it. The AICPA doesn't have any authority to compel companies to do so.

Some have opposed the group's efforts, saying the AICPA should wait for the Private Company Council to develop its modifications to GAAP to benefit private companies instead of trying to develop a separate system.

On Monday, the FASB endorsed the council's first three proposals to modify GAAP for private companies, and agreed to issue them for public comment. If ultimately approved, they would loosen the rules on how private companies account for intangible assets like goodwill, which is created when one company buys another for more than the value of its hard assets. The new set of proposals would also let private companies use simpler accounting for certain types of interest rate swaps.

"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," PricewaterhouseCoopers LLP, an accountancy firm, said in a January letter sent to the AICPA.

Continued in article

 


Teaching Case
From  The Wall Street Journal Accounting Weekly Review on June 14, 2013

CRU, After LIBOR Scandal, Audits Steel Prices Index
by: John W. Miller
Jun 05, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Assurance Services, Auditing, Auditing Services

SUMMARY: CRU Group compiles steel prices and issues a report every Wednesday. "The compiler...said an auditor will conduct on-site inspections of steel companies that provide pricing data and will gather more information about how the prices are collected for four major types of steel product, which go into four different indexes. The move is believed to be a first by a commodity-price-index firm to audit information provided to it."

CLASSROOM APPLICATION: The article may be used in an auditing or other assurance services class to discuss non-audit services, audit planning for a first-of-its-kind engagement, and determination of materiality in such a setting.

QUESTIONS: 
1. (Introductory) What does Commodity Research Unit Group (CRU) do? Who uses the information that the group prepares?

2. (Advanced) What service has CRU hired KPMG LLP to conduct? Be specific in stating a type of service to be provided and the type of report that you think may be issued under U.S. assurance service requirements.

3. (Advanced) What is the significance for assurance work planning of the fact that this engagement is apparently the first by a commodity-price-index firm to audit information provided to it?

4. (Advanced) Suppose you are an audit manager planning an engagement for KPMG to examine steel prices. What factors will you consider in deciding on materiality of amounts to examine?
 

Reviewed By: Judy Beckman, University of Rhode Island

"CRU, After LIBOR Scandal, Audits Steel Prices Index," by John W. Miller, The Wall Street Journal, June 5, 2013 ---
http://online.wsj.com/article/SB10001424127887324069104578527632400988350.html?mod=djem_jiewr_AC_domainid

A key price compiler in the global steel industry said it will begin auditing its data providers, part of an effort to address concerns about transparency in price indexes following the Libor rate-fixing scandal.

The compiler, Commodity Research Ltd., said an auditor will conduct on-site inspections of steel companies that provide pricing data and will gather more information about how the prices are collected for four major types of steel product, which go into four different indexes. Much of these steel types are destined for the U.S automotive market.

The move is believed to first by a commodity-price-index firm to audit information provided to it. CRU, based in London and Pittsburgh, has hired KPMG LLP to conduct the audits, according to a person familiar with the matter. KPMG didn't respond to a request for comment.

Glenn Cooney, London-based head of operations for CRU Indices, which publishes price data on 75 commodities in metals, mining and fertilizers, said it would look at auditing other data providers in other sectors to bolster industry transparency.

Currently, CRU collects price and volume data on spot transactions from steel producers and buyers, who submit their prices voluntarily to a CRU website. CRU publishes an index price based on the submissions every Wednesday.

CRU officials say they hope the move will lend it added credibility at a time of concern about indexes. Three banks in Europe have agreed to pay over $2 billion in settlement fees to U.S. and U.K. regulators after they were caught manipulating the London interbank offered rate, or Libor, the interest rate banks charge to borrow from each other. Josh Spoores, a Pittsburgh-based steel analyst for CRU, said the company started receiving more requests for improved transparency after the Libor scandal.

The company also hopes it will be able to reassure several major U.S. steel mills, which in April said they would no longer link some contracts to CRU's steel indexes because they felt prices quoted weren't an accurate reflection of the market. The steelmakers that stopped using the indexes include ArcelorMittal, MT +3.34% U.S. Steel Corp. X +5.23% and Nucor Corp. NUE +3.01%

Grant Davidson, general manager for sales at ArcelorMittal's Dofasco mill in Canada, said big steel companies would welcome more transparency. "We're for what's most accurately reflecting the price in the market," he said.

Michael Steubing, vice president of global procurement for Mauser USA LLC, which makes steel drums and barrels, said an audited index would help guarantee that he can sell his product at a competitive price. He sells barrels to big chemical companies that use CRU to help determine how much they will pay for the barrels. "So we'd like that (CRU) to be as accurate as possible," he said.

CRU, which is used by the Chicago Mercantile Exchange and says its prices are used to settle steel contracts with an annual global value of over $20 billion, faces more competition from Platts, a division of McGraw Hill Financial Inc., MHFI +0.97% which two years ago bought price compiler The Steel Index.

Joe Innace, Platts's editorial director for metals, said Platts would continue its phone survey for its Platts industry newsletter independently of The Steel Index and wouldn't use audits because he said it has enough verifications, such as checking that prices match the types and volumes of steel appropriate to the index, in place.

Steve Randall, who founded The Steel Index in 2006, said it had no plans to audit data providers. "We run all our data through a series of screenings," he said. He declined to provide details about the screening procedure.

Continued in article

"Everything Is Rigged: The Biggest Price-Fixing Scandal Ever:   The Illuminati were amateurs. The second huge financial scandal of the year reveals the real international conspiracy: There's no price the big banks can't fix," by Matt Taibbi, Rolling Stone, April 25, 2013 ---
http://www.rollingstone.com/politics/news/everything-is-rigged-the-biggest-financial-scandal-yet-20130425

Bob Jensen's LIBOR fraud threads ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking

Bob Jensen's threads on LIBOR are under the C-terms at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm

Bob Jensen's threads on LIBOR and other derivative financial instruments frauds (timeline) ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds
This is so huge it's better to do a word search for LIBOR


"Do You Trust Banks? Country by County Comparison," by Mike Shedlock, Townhall, June 15, 2013 --- Click Here
http://finance.townhall.com/columnists/mikeshedlock/2013/06/15/do-you-trust-banks-country-by-county-comparison-n1620658?utm_source=thdaily&utm_medium=email&utm_campaign=nl

Jensen Comment
Corruption in banking is so common that the public hardly takes notice anymore. For example, the LIBOR fraud committed by large U.K. banks was a much bigger deal than Enron. However, the media coverage of the LIBOR fraud is miniscule compared the the massive media coverage of the Enron fraud.

Also in the case of Enron, criminal executives eventually served prison terms. To my knowledge, no banking executive in the LIBOR fraud even was charged with a felony.


The biggest scandal in the history of the SEC is probably how it botched the Bernie Madoff Ponzi scandal. But there are other areas in need of reform at the SEC and reforms instigated by the SEC.

Teaching Case
From The Wall Street Journal Accounting Weekly Review on June 14, 2013

A Reform Beginning at the SEC
by: WSJ Opinion Page Editors
Jun 05, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Accounting For Investments, Banking, Cost-Basis Reporting, Mark-to-Market, SEC, Securities and Exchange Commission

SUMMARY: Some money market mutual funds may be allowed to 'break the buck' in their financial reports. "A unanimous commission voted to propose floating share prices for...money-market funds catering to large institutional investors and holding corporate debt...The idea is to underline for investors that money-fund values can fluctuate, and a modest decline is no reason to panic...." During the financial crisis, "after bad bets on Lehman Brothers debt caused the underlying assets of one fund, Reserve Primary, to slip below $1, institutional investors began fleeing Reserve and other 'prime' funds that held corporate debt. The federal government responded by slapping a temporary guarantee around the whole industry. After the crisis, much of the fund industry still resisted floating asset values." The article reports that the SEC proposal closely tracks a plan proposed in 2012 by one who has taken a different stance from the industry on this issue, Charles Schwab CEO Walt Bettinger.

CLASSROOM APPLICATION: The article may be used in a course on banking or in any financial reporting class covering investments, particularly in comparing amortized cost for bond investments instead of fair market value. NOTE TO INSTRUCTOR: REMOVE THE FOLLOWING INFORMATION PRIOR TO DISTRIBUTING TO STUDENTS AS IT ANSWERS SEVERAL QUESTIONS AND THE PROPOSED GROUP ASSIGNMENT. Amortized cost is the accounting method allowed for money market mutual funds in order to present their net asset values as $1 per share. This presentation is labeled "accounting fiction" in the article. Resources for the instructor from the SEC's web site: "Money Market Mutual Fund Reform: Opening statement at the SEC Open Meeting" by Norm Champ, Director, Division of Investment Management, U.S. SEC, 06/05/13, available on the SEC web site at http://www.sec.gov/news/speech/2013/spch060513nc.htm " Rule 2a-7 under the Investment Company Act allows money market mutual funds to maintain this stable $1.00 share price by allowing them to use certain pricing and valuation conventions. In return, the funds must adhere to certain credit quality, maturity, liquidity, and diversification requirements designed to reduce the likelihood of fluctuations in their value." Rule 2a-7 excerpts, from the SEC web site at http://www.sec.gov/rules/final/21837.txt "To maintain a stable share price, most money funds use the amortized cost method of valuation ("amortized cost method") or the penny-rounding method of pricing ("penny-rounding method") permitted by rule 2a-7. The 1940 Act and applicable rules generally require investment companies to calculate current net asset value per share by valuing portfolio instruments at market value or, if market quotations are not readily available, at fair value as determined in good faith by, or under the direction of, the board of directors. Rule 2a-7 exempts money funds from these provisions, but contains conditions designed to minimize the deviation between a fund's stabilized share price and the market value of its portfolio." NOTES: -[5]-A money fund is required to disclose prominently on the cover page of its prospectus that: (1) the shares of the fund are neither insured nor guaranteed by the U.S. Government; and (2) there can be no assurance that the fund will be able to maintain a stable net asset value of $1.00 per share. ... -[6]-Under the amortized cost method, portfolio securities are valued by reference to their acquisition cost as adjusted for amortization of premium or accretion of discount. Paragraph(a)(1) of rule 2a-7, as amended. -[7]-Share price is determined under the penny-rounding method by valuing securities at market value, fair value or amortized cost and rounding the per share net asset value to the nearest cent on a share value of a dollar, as opposed to the nearest one tenth of one cent.

QUESTIONS: 
1. (Advanced) What is a money market mutual fund?

2. (Advanced) How is a money market fund's net asset value determined?

3. (Introductory) According to the article, what are investors' perceptions of money market funds when their net asset values are presented at a constant $1 per share?

4. (Introductory) What is the "accounting fiction" described in the article?

5. (Advanced) How could accounting rules support presentation of $1 net asset values "even if the underlying assets of a fund were worth slightly more or less"?
 

SMALL GROUP ASSIGNMENT: 
Assign question 6 as an in class group activity, having the students search the SEC web site to find the accounting requirements for money market mutual funds. The results can then be used to lean into a comparison of amortized cost and market value accounting methods for investments.

Reviewed By: Judy Beckman, University of Rhode Island

 

"A Reform Beginning at the SEC," by WSJ Opinion Page Editors, June 5, 2013 ---
http://online.wsj.com/article/SB10001424127887323844804578527462489392582.html?mod=djem_jiewr_AC_domainid

Is the taxpayer safety net under American finance finally, just possibly, starting to shrink? On Wednesday the Securities and Exchange Commission took a step toward reform, even as it reminded taxpayers how far it has to go to ensure that the 2008 rescue of money-market mutual funds is never repeated.

A unanimous commission voted to propose floating share prices for a large category of money-market funds. If commissioners enact a final rule later this year, funds catering to large institutional investors and holding corporate debt would be required to report accurate prices in real time, just as in other securities markets. The idea is to underline for investors that money-fund values can fluctuate, and a modest decline is no reason to panic or call the Treasury Secretary for help.

For decades, SEC rules have allowed fund companies to report fixed values of $1 per share, even if the underlying assets of a fund were worth slightly more or less. This accounting fiction encouraged investors to view their money funds as cash balances akin to guaranteed bank deposits.

To further encourage the illusion of risk-free investing, the SEC also required funds to invest only in assets rated highly by the government-approved credit ratings agencies, including Standard & Poor's, Moody's MCO +2.98% and Fitch. Come the financial crisis, investors learned that the idea that money funds never "break the buck" (never lose value) was a marketing slogan, not a federal law. After bad bets on Lehman Brothers debt caused the underlying assets of one fund, Reserve Primary, to slip below $1, institutional investors began fleeing Reserve and other "prime" funds that held corporate debt. The federal government responded by slapping a temporary guarantee around the whole industry.

After the crisis, much of the fund industry still resisted floating asset values. But last year Charles Schwab CEO Walt Bettinger broke with the industry by proposing in these pages to float the prices of institutional prime funds—ground zero in the 2008 panic. This week's SEC proposal closely tracks the Bettinger plan and is a significant reform.

Even better would be a requirement for floating asset values across the whole industry. It's true that funds holding government debt, as opposed to corporate debt, often perform better in times of market turbulence, but government debts can also cause such turbulence (see Europe). And there is the regulatory challenge of ensuring that institutions cannot simply split up their money-fund investments into various accounts if the retail end of the market still promises fixed asset values. But it's encouraging that at long last the SEC is moving toward clarifying that money funds are investments that can lose value, and not deposits backed by taxpayers.

More disappointing in the SEC's Wednesday proposal is that, almost two years after a legal deadline, the agency still hasn't removed from its money-fund rules its endorsements of credit-rating agencies. Forcing funds and by extension their investors to buy only assets deemed safe by the government's anointed credit judges was disastrous in 2008 and will be again if not reformed.

Continued in article

Bob Jensen's banking and related rotten to the core threads ---
http://www.trinity.edu/rjensen/FraudRotten.htm#InvestmentBanking


From the CFO Journal's Morning Ledger on June 14, 2013

American companies generally reaped robust profits in Q1. But many of them would have had a less upbeat quarter had it not been for the extension of the R&D tax credit, the WSJ’s Scott Thurm reports. Under accounting rules, the companies reported a year’s worth of benefits from the credit in their first-quarter results, lifting profits for many of them by more than 10%.

The bulk of the credits are claimed by big companies. Google reported spending $6.8 billion on R&D in 2012, making it one of the nation’s biggest corporate-research spenders. The company set aside less than half as much money for first-quarter taxes as it did a year earlier even as its pretax income increased 2%, to $3.6 billion. Its effective tax rate fell to 7.9% from 18.5%, which it said was “primarily” due to the extension of the tax credit. If Google’s profit had been taxed at the same rate as last year, the company would have had to set aside an additional $380 million for income taxes, Thurm writes. And Boeing said the extension cut its Q1 income-tax provision by $145 million. The company’s tax rate fell to 23.1% from 36.8%.

The extension won’t help corporate profits for the rest of this year. Analysts expect that S&P 500 earnings will rise 2.7% in Q2—about half the growth rate of the first quarter. “The effective tax rate we saw in the first quarter is not representative of what we’ll see in the rest of the year,” said Alex Morozov, head of the health-care analyst team at Morningstar.

 


Marriage Penalty --- http://en.wikipedia.org/wiki/Marriage_penalty
For more details see http://www.lao.ca.gov/1999/121699_marriage_penalty.html
Note that words are misleading in that the intent is truly not to penalize marriage. Rather the intent is not to subsidize marriage at a huge expense to tax revenue collection. It is progressive with income levels of both parties contemplating marriage.

An inconvenient truth of marriage is that it often brings a tax increase compared with what the couple would pay as two single people. And the problem is only getting worse: Provisions taking effect this year will increase the "marriage penalty" for many high earners. ...
"Wedding Bell Tax Blues," by Laura Saunders, The Wall Street Journal, June 7, 2013 ---
http://online.wsj.com/article/SB10001424127887324069104578529521517818776.html

The current provisions are deeply rooted in the tax code and lawmakers would find them expensive to alter, so marriage penalties for two-earner couples will probably last longer than many marriages. Here are strategies that can help lower the bill.

Note that the marriage penalty is not necessarily eliminated by getting married and filing separately.

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


"How Managers Do Love the Leasing ED: Let Me Count the Ways," by Tom Selling, The Accounting Onion, June 9, 2013 ---
http://accountingonion.com/2013/06/how-managers-do-love-the-leasing-ed-let-me-count-the-ways.html

An excerpt from a WSJ blog:

“Outgoing FASB Chairman Leslie Seidman has had plenty of time to tackle long-standing questions about whether accounting principles are more desirable than specific accounting rules, writes Emily Chasan. The debate over whether detailed rules and bright-line exceptions are more or less useful than broad principles that require management judgment has dominated her past 1o years on the board. “I think it’s undeniable that we Americans like our rules,” Ms. Seidman said …  in her final public speech as chairman of the U.S. accounting rule maker.” [emphasis added]

I guess that settles it.  Now we know for certain why FASB standards have gone from bad worse.

Even if Ms. Seidman is correct, the FASB has come up way short of the mark.  The three super major projects she leaves for others to complete when her second five-year term soon comes to an end are the most direct evidence of the dysfunction: loan impairment, revenue recognition and leases.

Focusing on lease accounting by lessees should be enough to make the point; and I want to focus on that since I just finished preparing my presentation on the most recent ED for my upcoming update course in Chicago.  There may be some rules in that ED, but all except for the requirement to recognize some modicum of a lease liability on the balance sheet, are not near as consequential as the smorgasbord of loopholes set out for managers to manipulate their earnings without waking up their auditors or getting a call from an SEC investigator.

Some of these are carryovers from existing U.S. GAAP, but If any of the rest were to make you think they were concocted in the IASB’s central sausage factory, I wouldn’t argue with you:

The lease smoothie—For assets that meet the definition of “property” (a judgment call all by itself), subjective criteria will determine whether management can choose to recognize lease expense straight-line — as opposed to a pattern approximating the actual economics).  The boards are leaving it to management to determine if: the lease term is not for a “major” part of the remaining “economic life” of the asset; or whether the present value of the lease payments is not a “significant” part of the value of the asset; or whether there is a “significant economic incentive” to exercise a purchase option; or that land and/or building is the “primary asset” under contract.

Hide-the lease-payment trick #1—The lease payments to be recognized as an asset and corresponding liability generally are limited to the payments in the contract that are fixed.  However, judgment is required to determine if payments that are contingent on a level of activity (e.g., retail sales in leased store space) are in fact “disguised” as fixed lease payments.  In other words, management is supposed to say, “HA!  I caught myself disguising fixed lease payments as variable payments.”  (Gimme a break.)

Hide-the-lease-payment trick #2Judgment (are we getting tired of that word yet?) is required to treat “expected” (not defined—what a surprise) amounts to be paid under residual value guarantees as lease payments to be capitalized.

Who said buy-borrow?—Options to purchase the asset if they they are in-substance lease payments. (Another “HA!  I caught myself doing a bad thing.”)

Mix and matchJudgment is required to determine if part of the cash flows are not actually lease payments; and more judgment is required to estimate how much should be accounted for according to some other standard.  It could even get to the point that a lessee would have to estimate the fair value—i.e., a sales price—for services that it would never purchase separately and arbitrarily carve them out of the cash.

My all-time favorite—When to take account of renewal or termination options when estimating the lease term is based on whether there is a “significant economic incentive.”  For that, we have the old IASB chestnut of “management intent” as one of the factors to consider.

Don’t wake me from my dreamsJudgement is required to determine that the factors originally used to account for a lease have changed significantly enough to make reassessment appropriate.

There is still more, but that should be more than enough to illustrate that the FASB’s latest gift to investors is far from a compendium of “rules.”  More than a decade ago, a much more attuned SEC issued a clarion call to accounting standards setters, to finally end operating lease treatment; for it was seen then as now as the most pernicious form of off-balance sheet accounting.  This ED is nothing more than one last-ditch effort to take what was an extremely modest proposal for lease capitalization off life support.

Continued in article

Jensen Comment
I'm not sure which managers love the ED. Finance executives absolutely hate the ED.

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

A good example of this dissatisfaction is the May 18, 2013 reaction to the FASB from ELFA (Equipment Leasing and Finance Association) ---
http://www.elfaonline.org/Issues/Accounting/pdfs/LeaseProjectSummaryMay2013.pdf

...

The main problem areas are treating equipment leases differently than real estate leases for lessee accounting resulting in few equipment leases getting straight line rent expense, commingling capital lease and operating lease assets and liabilities, it is not appropriate for there to be symmetry in lease classification for lessees and lessors (rather business model, meaning financial lessor vs. operating lessor should be the guide to classify lessor leases), the failure to treat all guaranteed/insured residuals as a financial asset for the lessor, the loss of leveraged lease accounting (including the loss of treating ITC as a revenue item in a non- leveraged lease), failure to allow sale leaseback accounting where a purchase option is included in the lease back terms and complexity/compliance costs.

Continued in article

Note that the above criticism was published before the latest ED from the FASB. This begs the question of whether the items that made finance executives unhappy were corrected in the 2013 ED. In my opinion the answer is generally no to anticipated financial executives satisfaction.

The main concern seems to be the anticipated impact on earnings (especially for Type A leases subject to accelerated expense booking) --- which is something fair value accountants don't care much about since they are almost entirely focused on the balance sheet.

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


"U.K. Pension Fund Group Says Accounting Rules Clash With Law," by Howard Mustoe, Bloomberg, June 19, 2013 ---
http://www.bloomberg.com/news/2013-06-19/u-k-pension-fund-group-says-accounting-rules-clash-with-law-1-.html

Britain should review how it sets accounting rules after research found they may clash with U.K. law, the Local Authority Pension Fund Forum said.

International Financial Reporting Standards follow an incurred-loss model, which allow banks to wait until financial assets are close to default before realizing a loss. This contradicts the demand under U.K. law for “a true and fair” view of profit, the London-based LAPFF said in a statement today.

“These are extremely significant issues, given that they directly affect the accounting practices of systemically important financial institutions, and in turn affect the decisions made by those institutions,” LAPFF Chairman Kieran Quinn said in the statement.

IFRS has been the mandatory method of accounting for publicly traded companies in the European Union since 2005 and is drafted by the London-based International Accounting Standards Board. The Group of 20 industrial nations created a body to examine alternatives to the incurred-loss model following the 2008 financial crisis. Legal Opinion

George Bompas, a trial lawyer in London, provided the legal opinion on the rules for the LAPFF, the U.K.-based Universities Superannuation Scheme, Threadneedle Asset Management Ltd. and the U.K. Shareholders’ Association. The LAPFF supplied the view as evidence to the Parliamentary Commission on Banking Standards, which published its findings today.

The House of Lords Economic Affairs Committee or the Treasury Committee should consider how IFRS became part of EU law, the commission’s report said.

“There is clearly widespread concern about IFRS and the method by which it is introduced into EU law,” the commission’s report said.

Banks should recognize losses on loans before the assets go into default, the International Accounting Standards Board said in March.

Continued in article


Monopoly (historic Parker Bros. game) Would Be Way More Fun If We Got Rid Of Two Fake Rules ---
http://www.businessinsider.com/the-two-rules-of-monopoly-we-make-up-2013-6

A central idea, the idée fixe of Bankers Anonymous, is that as a society we do a poor job of teaching about finance, a consequently poor job as individuals of learning about finance, and therefore we all suffer an inevitable tendency to make bad decisions, both personal and political, about finance.

Sometime this Spring I realized why: We played Monopoly all wrong as kids. 

This explains everything that I’m trying to do with Bankers Anonymous.

Two ‘house rules’ prevailed when I used to play,[1] and both are absolutely terrible

1. Free Parking – We collected all taxes – luxury tax, income tax, and taxes accumulated from Chance and Community Chest cards – in the middle of the board.  In addition, we frequently ‘seeded’ Free Parking with an orange $500 bill.  When a player landed on Free Parking he collected all the accumulated taxes, plus the $500, in a lottery windfall.  None of this exists in the real rules on Monopoly.

2. No Property Auctions – When we played, the player who landed on an available property got the exclusive option to purchase it, at the listed price only.  In the real rules, if the initial player declines to pay the listed price, any player may bid on the property, at any price – starting if necessary at $1, with no upper limit to the final auction price.

These house rules turn an interesting game about capitalism into a boring monstrosity.  A monstrosity responsible for societal poverty, government debt, runaway inflation and the Crisis of 2008.

Real rules Monopoly is so much better for society

Let me explain why real rules Monopoly is far better.

Free Parking – Free Parking is stupid.  Growing up, my friend Brendan always, always, ALWAYS landed on Free Parking, collecting the taxes and the $500.  How did he do that?  I have no idea. 

Although he may have always won the game, I can be smug in my knowledge that Brendan learned bad lessons from Free Parking.  Free Parking never happens in real life.  Nobody actually wins the lottery. Clearly, Free Parking is a gateway drug for kids to learn about lotteries, casinos, and all the other terrible ways in which poor people pay taxes

Property Auctions – This would have been the ideal way to teach millions of children about valuable concepts like savings, real estate, competitive auctions, distressed investing and slum-lording.  Information, in other words, we can all use.

Instead, by eliminating the auction, we learned in Monopoly house rules that there’s just one price for property, take it or leave it, and that chance – rather than skill – determines whether you accumulate valuable properties.  But that’s never how it works in life.

In real life, sometimes you can nab the property nobody else wants on the cheap.[4]  In real life, sometimes you pay twice what the property is really worth and end up mortally wounded financially.

Bidding wars can break out in real rules Monopoly, which lead the ‘winner’ of the auction to actually be the ‘loser’ in the long run.  This is a valuable financial lesson.  It explains much of the real estate boom 2001 to 2007.

Monopoly isn’t a bad game, if played right

I was reminded of all this by a recent feature on Business Insider showing the odds-adjusted advantageous properties to buy. 

According to the feature, to play the odds, in sum:

1. Buy the orange properties,

2. Build 3 houses per property at one time (i.e. 9 houses, for most colors) for the fastest return on investment,

3. Take into account the likely dice rolls of your opponents.  (5, 6, 7, 8, and 9s happen more frequently, build accordingly), and

4. Note that “Jail” acts as a ‘sink,’ attracting more than your typical proportion of landings.  Other properties also have higher probabilities as landing spots, so invest accordingly.

All sound advice.

My advice is to play by the real rules, which turns Monopoly from an endless bore of a game to an interesting lesson in real financial skills.

I’m not saying Monopoly will become as interesting as The Settlers of CatanDominion, or my own nerdy group’s favorite, Cosmic Encounter.  But it’s worthwhile, especially with kids.

Epilogue – The bad news: I played real rules Monopoly for the first time in my life this Spring with Brendan, as well as with my 7 year-old.

My 7 year-old, with some coaching, won.  At least Brendan didn’t win.  I hate Monopoly. 

Continued in article
Read more: http://www.bankers-anonymous.com/blog/the-importance-of-real-rules-monopoly/#sthash.ZYJMzlfl.dpuf#ixzz2XhGRFL8X
 

 

The Math Behind a Game of Monopoly ---
http://www.businessinsider.com/we-swear-this-image-will-change-the-way-you-see-the-monopoly-board-forever-2013-6

Jensen Comment
Monopoly is widely used to teach accounting, economics, and other courses.
Bob Jensen's threads on the Game of Monopoly (and its variations) in college courses ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment

 


"'Digital Dementia':  Left Brain – Right Brain – and the Effects of Excessive Use of Smartphones," by Steven Mintz, Ethics Sage, June 28, 2013 ---
http://www.ethicssage.com/2013/06/digital-dementia.html


"Is Following the Law the Same as Being Ethical?" by Steven Mintz, Ethics Sage, June 12, 2013 ---
http://www.ethicssage.com/2013/06/is-following-the-law-the-same-as-being-ethical.html

Hi Marc,
 
I'm not certain that there is a whole lot of benefit of a law versus ethics debate without first focusing on a law versus ideology debate ---
http://plato.stanford.edu/entries/law-ideology/


 
Note especially Item 4 in the above link.

All this points to another and related tension. This is the tension between the ideology view and the concept of the rule of law, the centrepiece of a liberal legal order. At their most basic, the terms the rule of law, due process, procedural justice, legal formality, procedural rationality, justice as regularity, all refer to the idea that law should meet certain procedural requirements so that the individual is enabled to obey it. These requirements center on the principle that the law be general, that it take the form of rules. Law by definition should be directed to more than a particular situation or individual; the rule of law also requires that law be relatively certain, clearly expressed, open, prospective and adequately publicised.

Jensen Comment
The question is where do ethics codes fit in between law's rules and ideology. Also at issue is how rule-like codes of ethics become become laws over time. Also at issue are sanctions. With rules of law there are procedural requirements for enforcing those rules. Ethics seems to fit more into a gray zone when rules of laws are not broken but morality standards (ideologies) have been violated.

An interesting aspect of this thread would be examples where laws are not broken but ethics codes are violated. For example I don't think there are statutes dictating that a supervisor cannot date or have sexual relations with an employee being supervised. Many business firms and governmental agencies, however, consider this to be unethical and actually have rules against such behavior even if it is not illegal in the statutes.

There are no statutes to my knowledge that college instructors cannot campaign for particular political candidates in their classrooms. However, the AAUP and most colleges consider this a breach of ethics in the classroom. Instructors can and have been suspended for such political activism in classrooms. But more often than not the instructor is simply advised not to campaign in the classroom. Further actions are taken if the instructor repeatedly and egregiously ignores the advice.

The ideology in this case is that instructors should teach but not indoctrinate. Ethics codes become somewhat specific regarding what constitutes indoctrination. But the sanctions are often vague. Laws become even more specific what constitutes violation of law such as offering bribes or making physical threats. Such laws are enforceable to a point where the courts rather than the employer decides on the punishments. And the sentencing guidelines can be quite specific.

Respectfully,
 
Bob Jensen

"McGladrey 2011 Report Follows (awful) Trend for Major Firms," by Tammy Whitehouse, Compliance Week, June 4, 2013 ---
http://www.complianceweek.com/mcgladrey-2011-report-follows-trend-for-major-firms/article/296218/

Nearly two years after it began inspecting McGladrey in 2011, the Public Company Accounting Oversight Board published its report saying half of the audits it checked were deficient.

The PCAOB inspected 16 audits at McGladrey from August 2011 through December of that year and found problems with eight of the audits, in some cases numerous problems in a single audit. Many of the problems related to revenue recognition, allowances for loan losses, accounts receivable, taxes, inventory, and internal control over financial reporting.

In terms of the failure rate, McGladrey's 2011 report was a little worse than the 2010 report, where PCAOB inspectors checked 19 audit files and found problems with 9. In one case, follow-up based on the PCAOB's 2011 inspection finding led to a change in a company's accounting practices, the PCAOB said.

McGladrey said the firm has taken actions as appropriate under auditing standards to address the deficiencies called out by the PCAOB, including performing additional procedures and adding documentation to its work papers. “We believe the investments we have made and are continuing to make to audit processes and quality controls are resulting in improved audit quality,” the firm wrote in its letter to the PCAOB.

Audit reports across all major firms showed a marked increase in failure rates from 2009 to 2010 and showed no improvement for most firms from 2010 to 2011. Crowe Horwath remains the only firm in the Big 4 or second tier of global firms whose 2011 inspection report is still unpublished.

The PCAOB recently began offering a first view into 2012 inspection reports for the largest firms with the publishing of Deloitte's 2012 inspection results. The firm drew inspector criticism for 13 of the 52 audits examined for a failure rate of 25 percent, an improvement over rates of 42 percent in 2011 and 45 percent in 2010.

The PCAOB's inspection process follows a risk-based approach, so inspectors are targeting audit files where they consider problems to be most likely. As such, the board cautions against generalizing failure rates to the entire collection of audit work.

Continued in article

A Really Bad Audit by  McGladrey & Pullen, LLP The U.S. With Only a Hand Slapping Fine
 U.S. Commodity Futures Trading Commission (CFTC) Press Release on September 22, 2011 ---
http://www.cftc.gov/PressRoom/PressReleases/pr6114-11

CFTC Charges National Accounting Firm McGladrey & Pullen, LLP, and Partner David Shane with Failure to Properly Audit One World Capital Group, a Former Registered Futures Commission Merchant Firm to pay $900,000 and institute remedial measures, and Shane to pay $100,000 personally to settle CFTC action.

Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today filed and simultaneously settled an administrative proceeding against McGladrey & Pullen, LLP (McGladrey), a nationwide public accounting firm with offices in Chicago, Ill., and a McGladrey partner, David Shane, a certified public accountant (CPA) licensed in Illinois.

The proceeding arises from an audit McGladrey performed in 2006 of One World Capital Group, LLC (One World), at the time a CFTC-registered futures commission merchant. The CFTC sued One World in 2007, alleging that it failed to demonstrate compliance with capitalization requirements and to maintain required books and records (see CFTC Press Releases 5427-10, December 18, 2007, and 5786-10, March 4, 2010). One World ceased operation in 2007. Shane served as the engagement partner for the 2006 audit of One World.

According to the CFTC order, McGladrey issued an unqualified opinion that One World’s 2006 financial statements were free from material misstatements, and a report stating that it had not identified any deficiencies in One World’s internal controls that it considered to be material inadequacies. The CFTC order finds that, to the contrary, the 2006 financial statements were, in fact, materially misstated and there were material inadequacies in One World’s internal controls, as well. The order also finds that McGladrey did not conduct its audit of One World’s financial statements in accordance with generally accepted auditing standards (GAAS) as required by the CFTC’s regulations.

In particular, the order finds that One World’s 2006 financial statements were materially misstated in various ways including: (1) the 2006 Statement of Financial Condition states that liabilities payable to all customers were over $6.9 million, when in fact information available in One World’s records showed that it may have owed at least $15 million just to forex customers alone, for whom One World served as the counterparty; and (2) the 2006 financial statements materially misstated the nature of One World’s business by failing to reflect that One World served as the counter party to its forex customers for over 90 percent of its business, according to the order.

In addition, McGladrey failed to report material inadequacies in One World’s accounting system and internal accounting controls, including the lack of a customer ledger, and an accounting system that did not properly identify the number of forex customers or the amount of customer liabilities, according to the order. These material inadequacies reasonably could, and did, lead to material misstatements in One World’s 2006 financial statements, the order finds.

CFTC Division of Enforcement Director David Meister stated: “Auditors of Commission registrants perform a critical gatekeeper role in protecting the financial integrity of the futures markets and the investing public. Auditors must understand the business operations of their clients, and conduct financial audits in accordance with GAAS. As demonstrated by today's action, the Commission will not hesitate to impose significant sanctions on auditing firms and hold individuals personally responsible when they fail to adhere to their professional obligations as regrettably happened here.”

The CFTC’s order requires McGladrey to pay a $250,000 civil monetary penalty and orders Shane to pay a $100,000 civil monetary penalty, for which he may not be indemnified by the firm. The CFTC’s order also requires McGladrey to pay $650,000 in restitution to customers of One World who suffered losses as a result of One World’s fraud. The order also requires McGladrey and Shane to cease and desist from the violations found in the order.

Continued in article

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

"An Analysis of Alleged Auditor Deficiencies in SEC Fraud Investigations: 1998–2010"
Mark S. Beasley North Carolina State University
Joseph V. Carcello University of Tennessee Dana R. Hermanson Kennesaw State University
Terry L. Neal University of Tennessee
Center for Audit Quality, May 2013
http://www.thecaq.org/resources/pdfs/CAQ_deficienciesMay2013.pdf


"United Technologies Violates its own Ethical Standards," by Steven Mintz, Ethics Sage, June 24, 2013 ---
http://www.ethicssage.com/2013/06/united-technologies-violates-its-own-ethical-standards.html


From the CFO Journal's Morning Ledger on June 4, 2013

Ex-Porsche CFO convicted of credit fraud
Former Porsche CFO Holger Härter was convicted by a German court of credit fraud in a case over the refinancing of a €10 billion loan during the 2009 failed Volkswagen takeover bid,
Bloomberg reports. Mr. Härter downplayed the company’s liquidity needs and failed to disclose the correct number of put options on VW shares Porsche held when negotiating with BNP Paribas about the lender’s €500 million share of the syndicated loan, presiding Judge Roderich Martis said when delivering the verdict. Mr. Härter, who doesn’t face jail, will be fined, the judge said.

Bob Jensen's timeline on derivative financial instruments frauds ---
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

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


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

From the CFO Journal's Morning Ledger on June 26, 2013

States put heat on bitcoin
State regulators are warning virtual-currency exchanges and other companies that deal with bitcoin that they could be shut down if their activities run afoul of state money-transmission laws
, the WSJ’s Robin Sidel and Andrew R. Johnson report. Banking regulators in California, New York and Virginia have issued letters telling the companies that they need to follow the state rules or prove that the rules don’t apply to them. The warnings fall short of formal “cease and desist” orders, but they show that state regulators have moved beyond just scrutinizing virtual currencies and are taking steps to prevent companies from using them for illegal activities.


"The CIA, the FCPA and the double standard on policing corruption," by Alison Frankel, Thompson Reuters, May 8, 2013 ---
http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=76925&terms=%40ReutersTopicCodes+CONTAINS+ANV
Thank you Dennis Huber for the heads up.

It's been a busy couple of weeks for the Foreign Corrupt Practices Act, the Justice Department's versatile and hard-working anti-bribery law. On April 22, Ralph Lauren paid an $882,000 penalty in a non-prosecution agreement that resolved FCPA allegations of bribing a customs official in Argentina to permit the import of Ralph Lauren products. On May 7, prosecutors in Manhattan unsealed a criminal complaint accusing two Florida brokers of paying kickbacks to a Venezuelan state bank official who directed the bank's financial trading business to them. The FCPA has taken some recent lumps from judges, and last year prosecutions fell off slightly from their blistering pace in 2009, 2010 and 2011. But as Gibson, Dunn & Crutcher noted in its January report on FCPA enforcement, bribery prosecution has become routine. "This is a marathon, not a sprint," the report said, warning businesses not to let down their guard.

In between the reports of new Justice Department FCPA actions, The New York Times had a corker of a story about "ghost money" payments by the Central Intelligence Agency to Afghan president Hamid Kharzai. The Times reported that the CIA has passed tens of millions of dollars to Kharzai over the course of a decade, in cash packed into suitcases and shopping bags and dropped off at his office. The Afghan president subsequently confirmed the payments (though he called them "small amounts") and, according to the Times, said he expected the CIA to continue providing him with ready cash that he could, in turn, use to bribe warlords in the political elite.

Do you see a double standard here? The CIA and other government entities are not, of course, subject to the FCPA, which targets corruption with a commercial motive. The CIA declined to comment to The New York Times, but it would surely contend that any support for Kharzai is in the interest of the security of the United States and Americans in Afghanistan. But in a provocative post at his blog, The FCPA Professor, Michael Koehler of the Southern Illinois University School of Law argues that it's troubling to see the CIA sanctioning enormous cash payments to foreign officials while the Justice Department prosecutes businesses for similar behavior on a much smaller scale. The U.S. presents itself as the world's most vigorous enforcer of anti-corruption laws, Koehler said, but such proclamations seem hollow when the government sanctions bribery.

"During this era of FCPA enforcement, enforcement actions frequently include allegations of corporate payments to 'foreign officials' for such items as wine, watches, cameras, kitchen appliances, business suits, television sets, laptops, tea sets and office furniture," he wrote. "This conduct pales in relation to the conduct described in the NY Times article and is made even more egregious given that FCPA enforcement actions invariably involve use of private shareholder/owner funds, whereas the campaign of bribery in Afghan is using public funds."

Similarly, Richard Cassin of The FCPA Blog told me in an email that if the payments to Kharzai were sheer graft, "then everyone who's subject to the FCPA has a legitimate complaint." (If the payments are properly categorized as foreign aid, Cassin said, then there should have been a public accounting of how they were spent.) "Afghanistan is one of the world's most corrupt countries," Cassin said in the email. "By delivering cash to the president's office for ten years, the U.S. government certainly did nothing to end the corruption. And it probably did plenty to reinforce the corrupt culture among the country's leaders. If Afghanistan's leaders are taught to expect bribes from outsiders, that makes it harder for anyone to do legitimate business there."

In a phone interview, Koehler said prosecutors would probably laugh in the face of a defense lawyer who tried to argue that her client shouldn't face FCPA charges because the CIA is permitted to pass shopping bags full of cash to Hamid Kharzai. And almost all companies facing FCPA charges end their defense at the Justice Department, because they'd rather pay fines and receive non- or deferred-prosecution deals than face trial. As a result, Koehler said, the government's "black-and-white" view of corporate payments to foreign officials goes unchallenged.

But judges passing sentence on convicted FCPA defendants are more inclined to sense hypocrisy in the government's double standard, according to Koehler. He wrote about two different sentencing hearings in 2010 in which judges referred to the relative impunity of intelligence agents when they went easy on FCPA defendants. In one instance, U.S. District Judge William Pauley of Manhattan sentenced James Giffen to no jail time and said charges shouldn't have been brought after Giffen asserted that the CIA knew about and encouraged his contacts with Kazakh officials. In the other, U.S. District Judge Jackson Kiser of West Virginia cited the CIA's routine bribes to Afghan warlords and questioned the "morality" of prosecuting Bobby Jay Elkin for paying a bribe to a public official in Kyrgyzstan after being threatened with firing.

Continued in article

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


June 3, 2013 message from Dennis Huber

The former president of the Beth El Synagogue pleaded guilty on Friday to mail fraud in the embezzlement of more than $500,000 in synagogue funds, according to a statement from the U.S. Attorney.

http://www.courant.com/community/southbury/hc-southbury-synagogue-embezzlement-0601-20130531,0,4628524.story


FASB Post-Implementation Review of FAS 141 on Business Combinations, May 30, 2013 --- Click Here
http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176162713156

FAS 141 --- Click Here
http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1175802017611

Jensen Comment
The history of some accounting standards is that they are not neutral in the economy. Exhibit A is FAS 123R that virtually ended employee stock options as a means of compensation. Exhibit B is comprised of FAS 141, 142, and 147 that virtually ended the synthetic leasing industry ---
http://en.wikipedia.org/wiki/Synthetic_lease

Synthetic Lease = a financing structured to be treated as a lease for accounting purposes and a loan for tax purposes. The structure is used by corporations that are seeking OBSF reporting of their asset based financing, and that can efficiently use the tax benefits of owning the financed asset ---
www.trinity.edu/rjensen//theory/00overview/speOverview.htm

  1. A common approach is for the sponsor to sell the asset to the SPE and then lease it back from the SPE via what is known as synthetic leasing.  A synthetic lease is structured under FAS 140 rules such that a sale/leaseback transaction takes place where the fair value of the assets "sold" can be reported by the sponsor as "revenue" for financial reporting.  In a synthetic lease, this "revenue" does not have to be reported up-front for tax purposes even though it is reported up-front for financial reporting purposes. 

     

  2. Proceeds from the sale to an SPE in this instance are generally long-term receivables rather than cash (which is the primary reason the sale revenues are not taxed up-front).

     

  3. The synthetic leaseback terms are generally such that the sponsor does not have to book the leased asset or the lease liability under FAS 13 as a capital lease (i.e., some clause in the lease contract allows the asset to be kept off balance sheet as an operating lease).  Hence the financing of the lease asset remains off balance sheet.  This is one ploy used by airlines and oil companies to keep assets and "debt" off the balance sheet as well as deferring taxes.

     

  4. If the SPE actually manages the transferred assets (e.g., a pipeline or a refinery), then throughput or take-or-pay contracts may take the place of leasing.

 


Teaching Case from The Wall Street Journal Accounting Weekly Review on May 31, 2013

Accounting Fraud Targeted
by: Jean Eaglesham
May 28, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Accounting Fraud, Auditor Changes, Auditor/Client Disagreements, Disclosure, Ethics, SEC, Securities and Exchange Commission

SUMMARY: "As the volume of [financial] crisis-related cases ebbs, top SEC officials are expected to announce soon a broad shuffling of resources in the agency's enforcement division that will include an increased focus on accounting fraud...[T]he SEC already is developing a computer program to sift language in financial reports for clues that executives might be misstating results, agency officials say."

CLASSROOM APPLICATION: The article may be used in a financial accounting or auditing class given that the enforcement-related topics fall into each of these areas. It also could be used in an ethics class.

QUESTIONS: 
1. (Advanced) Define fraudulent financial reporting. Cite your source for this information but write the description in your own words.

2. (Introductory) What proportion of SEC enforcement actions in the year ended September 30, 2012 related to accounting fraud? How does that rate compare to past history?

3. (Introductory) What reason could be behind reduced numbers of accounting fraud occurrences in more recent years as compared to the early 2000s?

4. (Advanced) According to the article, what types of factors may associate with fraudulent financial reporting? In your answer, identify which of these factors relate to numerical reporting and which relate to discussion and descriptive components of financial reports.

5. (Advanced) How does the SEC expect to become "more proactive in looking for" accounting fraud?
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Accounting Fraud Targeted," by Jean Eaglesham, The Wall Street Journal, May 28, 2013 ---
https://mail.google.com/mail/u/0/?shva=1#inbox/13ef8dbd829b353e

U.S. securities regulators are turning back toward Main Street, renewing their focus on accounting fraud and other financial-disclosure failings.

Such cases were long a staple of the Securities and Exchange Commission's enforcement efforts, leading to more than 25% of civil-enforcement actions filed by the agency in its 2003 to 2005 financial years. The financial crisis shifted attention and money elsewhere. In the year ended last September, accounting fraud and financial-disclosure problems made up just 11% of SEC enforcement actions.

But as the volume of crisis-related cases ebbs, top SEC officials are expected to announce soon a broad shuffling of resources in the agency's enforcement division that will include an increased focus on accounting fraud, according to people close to the agency.

The decision to hunt for wrongdoing by Main Street, as well as Wall Street, puts America's corporations in the SEC's cross hairs.

The move is led by SEC Chairman Mary Jo White and co-enforcement chiefs George Canellos and Andrew Ceresney, said the people close to the agency. It isn't clear how much money or manpower will be devoted to the effort, though the SEC already is developing a computer program to sift language in financial reports for clues that executives might be misstating results, agency officials say.

Mr. Ceresney, a former federal prosecutor who joined the SEC in April, and Mr. Canellos have told employees there are no plans to get rid of five specialized enforcement units started in 2009 that are devoted to market abuse, asset management, foreign corrupt practices, municipal securities and structured products. People close to the SEC expect changes to some of the units, though, which they say could give the agency more leeway to make accounting fraud a top priority.

"We have to be more proactive in looking for it," Scott Friestad, a senior SEC enforcement official, told a legal conference last month. "There's a feeling internally that the issue hasn't gone away."

During and after the financial crisis, SEC enforcement officials devoted much of their energy to reining in alleged crisis-related malfeasance, such as misleading investors about the risks of subprime loans or mortgage bonds. Few crisis-era enforcement cases remain.

The falloff in accounting-fraud crackdowns by the SEC also may reflect improved financial reporting by companies because of Sarbanes-Oxley rules that took effect in 2002 after the Enron Corp. and WorldCom Inc. scandals.

An initial step in the SEC's new effort is software that analyzes the "management's discussion and analysis" section of annual reports where executives detail a company's performance and prospects.

Officials say certain word choices appear to reveal warning signs of earnings manipulation, and tests to determine if the analysis would have detected previous accounting frauds "look very promising," said Harvey Westbrook, head of the SEC's office of quantitative research.

Companies that bend or break accounting rules tend to play a "word shell game," said Craig Lewis, the SEC's chief economist and head of the division developing the model. Such companies try to "deflect attention from a core problem by talking a lot more about a benign" issue than their competitors, while "underreporting important risks."

If the word-analysis program works, officials say it will be added to a new "Accounting Quality Model" that SEC enforcement staff started using recently. The model trawls data from nearly 9,000 publicly traded companies. A similar computer-powered search for unusual performance patterns at hedge funds has led to seven enforcement actions in recent years.

Success won't be easy, partly because suspicious language or numbers in securities filings aren't necessarily illegal. Some companies and their lawyers are expected to respond to the crackdown by trying to outsmart the agency's computers.

"As soon as the SEC suggests it's going to look at this in terms of the numbers of words, lawyers will be more loquacious," said John Coffee, a law professor at Columbia University.

The fraud-detection software looks for big differences between net income and actual cash outflows available to investors, according to officials. It then looks for other warning signs, such as declining market share or weak profitability compared with rivals.

The system also looks for companies with an unusually high number of off-balance sheet transactions. Enron, Adelphia Communications Corp. and other large accounting frauds involved the use of such transactions to hide debt and inflate earnings.

Another sign of possible trouble: auditor changes. About 9% of companies that file financial reports with the SEC had their auditor leave last year, according to research firm Audit Analytics. Of the 866 companies that lost their auditor, 66 had two auditors depart, while two companies went through three auditors.

Sounding an alarm at the SEC "doesn't necessarily mean the company's done anything wrong," Mr. Lewis said. But his aim is that something "kicked out of our model as being unusual" is "much more likely to be associated with a fraud" than having a benign explanation.

Jacob Frenkel, a former SEC enforcement lawyer now at law firm Shulman, Rogers, Gandal, Pordy & Ecker PA, said computer power might help the agency refocus attention on financial-reporting issues that were "the bread and butter of the agency's enforcement program" for decades.

Continued in article

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


"Professors Are About to Get an Online Education:  Georgia Tech's new Internet master's degree in computer science is the future." by Andy Kessler, The Wall Street Journal, June 2, 2013 ---
http://online.wsj.com/article/SB10001424127887324659404578504761168566272.html?mod=djemEditorialPage_h

Anyone who cares about America's shortage of computer-science experts should cheer the recent news out of Georgia Tech. The Atlanta university is making major waves in business and higher education with its May 14 announcement that the college will offer the first online master's degree in computer science—and that the degree can be had for a quarter of the cost of a typical on-campus degree. Many other universities are experimenting with open online courses, or MOOCs, but Georgia Tech's move raises the bar significantly by offering full credit in a graduate program.

It comes just in time. A shortfall of computer-science graduates is a constant refrain in Silicon Valley, and by 2020 some one million high-tech job openings will remain unfilled, according to the Commerce Department.

That's why Georgia Tech's online degree, powered by Udacity, is such a game-changer. For the same $7,000 a year that New York City spends per student on school buses, you can now get a master's from one of the most well-respected programs in the country. Moore's Law says these fees should drop to $1,000 by 2020—a boon for students and for the economy.

Sadly, MOOCs are not without controversy. Consider what happened at San Jose State after the university last fall ran a test course in electrical engineering paid for by the Bill and Melinda Gates Foundation. Students who worked with online content passed at a higher rate than classroom-only students, 91% to 60%. The course was so successful that the school's president decided to expand online courses, including humanities, which will also be rolled out to other California State universities.

You'd think professors would welcome these positive changes for students. Some teachers across the country are, however cautiously, embracing the MOOC model. But plenty of professors smell a threat to their livelihood. In an April 29 open letter to the university, San Jose State philosophy professors wrote: "Let's not kid ourselves; administrators at the CSU are beginning a process of replacing faculty with cheap online education."

In April, an Amherst faculty committee decided against online courses, since they apparently run afoul of the school's mission of "learning through close colloquy." As it happens, Amherst professors rank seventh in salary of top liberal arts colleges, pulling in $137,700. And at Duke, where my son is a student, a faculty council at the school's arts and sciences college voted 16 to 14 against granting graduation credits for taking a Duke MOOC. By the way, Duke professors' average salary is $180,200.

I have nothing against teachers—or even high salaries, if the teachers are worth it. But half of recent college graduates don't have jobs or don't use their degree in the jobs they find. Since 1990, the cost of college has increased at four times the rate of inflation. Student loans are clocking in at $1 trillion.

Something's got to give. Education is going to change, the question is how and when. Think about it: Today's job market—whether you're designing new drugs, fracking for oil, writing mobile apps or marketing Pop Chips—requires graduates who can think strategically in real time, have strong cognitive skills, see patterns, work in groups and know their way around highly visual virtual environments. This is the same generation that grew up playing online games like Call of Duty and World of Warcraft, but who are almost never asked to use their online skills in any classroom.

MOOCs will inevitably come to K-12 education too. Everyone knows great public school teachers. But we also all know the tenured type who has been mailing it in for years. Parents spend sleepless nights trying to rearrange schedules to get out of Mr. Bleh's fourth-period math class. Online education is about taking the "best in class" teachers and scaling them to thousands or millions of students rather than 25-30 at a time.

The union-dominated teaching corps can be expected to be just as hostile as college professors to moving K-12 to MOOCs. But a certain financial incentive will exist nonetheless. I noted this in a talk recently at an education conference where the audience was filled with people who create education software and services.

I began by pointing out that in 2011 only 7.9% of 11th graders in Chicago public schools tested "college ready." That's failure, and it's worse when you realize how much money is wasted on these abysmal results. Chicago's 23,290 teachers—who make an average salary of $74,839, triple U.S. per capita income and 50% more than median U.S. household income—cost Chicago taxpayers $1.75 billion out of the city's $5.11 billion budget.

Why not forget the teachers and issue all 404,151 students an iPad or Android tablet? At a cost of $161 million, that's less than 10% of the expense of paying teachers' salaries. Add online software, tutors and a $2,000 graduation bonus, and you still don't come close to the cost of teachers. You can't possibly do worse than a 7.9% college readiness level.

Continued in article

Masters of Accounting and Taxation Online Degree Programs
http://www.trinity.edu/rjensen/CrossBorder.htm#MastersOfAccounting

Bob Jensen's threads on online training and education alternatives ---
http://www.trinity.edu/rjensen/CrossBorder.htm


Teaching Case from The Wall Street Journal Accounting Weekly Review on May 31, 2013

Curious IRS Timing
by: WSJ Opinion Page Editors
May 29, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Charitable Deduction, Tax Regulations

SUMMARY: The scandal of excessive scrutiny into non-profit organizations by the Internal Revenue Service is expanding. At a House Oversight Committee hearing, Treasury Inspector General Russell George spoke about the results of an audit into IRS practices in choosing 501(c)(3) and 501(c)(4)applications for special scrutiny. Politically-oriented groups have a great possibility for undertaking activities that would violate their non-profit status. But the WSJ Opinion page editors propose that the IRS tactics could have been directed according to the White House Administration desires for specific political ends. The related video shows assistant Editor James Freeman who describes the Commissioner of the IRS meeting with White House Officials over 180 times whereas his predecessor went to the White House just once in many more years. The related article by former Deputy Chief of Staff to President George W. Bush provides background on one organization that faced IRS scrutiny but is written from the perspective of a supporter of the entity in question.

CLASSROOM APPLICATION: The article may be used in a tax class or in an ethics class to discuss the potential for political influence on a process that should seem, at first glance, to be purely a bureaucratic control over a straightforward status as a non-profit entity registered with the IRS.

QUESTIONS: 
1. (Advanced) What is the role of a newspaper opinion page editor? From what general political viewpoint do you expect a WSJ editor to speak?

2. (Introductory) According to this editorial, what are two possible explanations for the focus of some of the problems at the Internal Revenue Service?

3. (Advanced) How do you think the editors' political viewpoint could influence these thoughts on possible explanations for the IRS conduct?

4. (Introductory) Refer to the related video. Why does James Freeman discuss the number of times that the Commissioner of the Internal Revenue Service visited the White House?

5. (Advanced) As an accountant who could potentially work for the IRS, how do you view the possibility of political influence on your work?
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
Dick Durbin, the IRS, and Me
by Karl Rove
May 30, 2013
Page: A13

 

"Curious IRS Timing," by WSJ Opinion Page Editors, The Wall Street Journal, May 31, 2013 ---
http://online.wsj.com/article/SB10001424127887323975004578503040989151234.html?mod=djem_jiewr_AC_domainid

The IRS has admitted targeting groups that wanted to speak on issues during the 2012 election season. But did the agency also target tax-exempt groups that opposed Administration policy priorities?

At a House oversight hearing last week, Treasury Inspector General Russell George opened the door on the possibility of more IRS political targeting. Asked by Chairman Darrell Issa whether there were other political criteria that IRS workers had been told to "be on the lookout" for, Mr. George said he could "not give you a definitive answer, sir, at this time. But I certainly will."

A definitive answer is needed because troubling cases are surfacing. The Arlington, Virginia-based Leadership Institute, a 501(c)(3) that trains young conservative activists, says it was audited in 2011-2012 and had to produce some 23,000 pages of documents for the IRS as well as answer questions about where its interns came from and where they are currently employed.

Curiously, the intrusive questionnaire came from the IRS's Baltimore office on February 14, 2012, soon after the Cincinnati office asked the Hawaii Tea Party on January 26, 2012 to "provide details regarding your relationship with the Leadership Institute" and "provide copies of their training materials." The group's audit fell squarely within the IRS's 2010-2012 season for conservative targeting.

A Pennsylvania pro-Israel group called Z Street says it filed for 501(c)(3) status in December 2009, intending to operate purely as an educational group. Founder Lori Lowenthal Marcus says that its tax counsel called the IRS in July 2010 to check on the slow pace of approval, and the IRS acknowledged its targeted enforcement.

Asked about the slow pace of approval, the IRS auditor on the case, Diane Gentry, said the application was taking so long because auditors were supposed to give special scrutiny to groups "connected with Israel." Ms. Marcus says Ms. Gentry further explained that many applications related to Israel had to be sent to "a special unit in D.C. to determine whether the organization's activities contradict the Administration's public policies." Z Street filed suit in August 2010 in federal court in Pennsylvania alleging "viewpoint discrimination," and its case has since been moved to Washington, D.C. Ms. Gentry did not return our phone calls.

Why the special scrutiny for pro-Israel groups? A New York Times article in July 2010 provided a clue: Tax-exempt groups were donating to West Bank settlers, and State Department officials wanted the settlers out. "As the American government seeks to end the four-decade Jewish settlement enterprise and foster a Palestinian state in the West Bank," the Times wrote, "the American Treasury helps sustain the settlements through tax breaks on donations to support them."

Did the T-men take their political cues from such stories, or did Administration officials give them orders? Either explanation would be a violation of public trust.

This would also suggest a pattern: Washington officials sent a message for tougher scrutiny of certain 501(c) groups, and the IRS coincidentally adjusted its enforcement regime. That's what happened in 2010 and 2012 when Democrats Max Baucus and Chuck Schumer encouraged the IRS to tighten the screws on conservative tax-exempt groups.

Most tea party groups targeted by the IRS were applying for 501(c)(4) status, which allows considerable leeway for political engagement. A 501(c)(4) group can spend 100% of its money on lobbying and may spend directly in support of candidates or campaigns as long as that activity isn't its primary purpose.

Continued in article

 


WASHINGTON (AP) — The Internal Revenue Service inappropriately flagged conservative political groups for additional reviews during the 2012 election to see if they were violating their tax-exempt status, a top IRS official said Friday.

Organizations were singled out because they included the words "tea party" or "patriot" in their applications for tax-exempt status, said Lois Lerner, who heads the IRS division that oversees tax-exempt groups.

In some cases, groups were asked for their list of donors, which violates IRS policy in most cases, she said.

"That was wrong. That was absolutely incorrect, it was insensitive and it was inappropriate. That's not how we go about selecting cases for further review," Lerner said at a conference sponsored by the American Bar Association.

"The IRS would like to apologize for that," she added.

Continued at
http://twittweb.com/taxes+pay+civilized+soc-32550060


Question
What's the difference between Japanese miniskirts and the Nikkei stock price index?

Answer
Miniskirts have an upper bound.

Meet The Japanese Girlband Whose Skirts Get Shorter When The Nikkei Goes Up --- Click Here
http://www.businessinsider.com/meet-the-japanese-girlband-whose-skirts-get-shorter-when-the-nikkei-goes-up-2013-6

Jensen Comment
I guess skirt lengths could be asymptotic. But the epsilon increments near the upper bound could be so infinitesimal that it's impossible for the human eye to detect the skirt shortenings as the Nikkei goes up and up and up.


Question
When does an initiative for a change in auditors or the tightening of audit fees seem the least likely?

Royal Bank of Scotland has no fewer than three former KPMG executives on its board, all of whom sit on the nominations committee which will select the new chief executive ---
"Fears raised over close ties between RBS and top accountant KPMG," by Jim Armitage, The Independent, June 14, 2013 ---
http://www.independent.co.uk/news/business/news/fears-raised-over-close-ties-between-rbs-and-top-accountant-kpmg-8658370.html


"A Technical Dictionary That Fits the Definition of User-Friendly," by David A. Pogue, The New York Times, June 20, 2013 ---
http://pogue.blogs.nytimes.com/2013/06/20/a-technical-dictionary-that-fits-the-definition-of-user-friendly/#more-6881

Everybody talks about how Amazon has killed the American bookstore, how Facebook is isolating our children, how tiny changes in Google’s search algorithms can destroy small businesses. But Wikipedia has left some damage in its wake, too.

There was the Encyclopedia Britannica, of course, which ceased printed publication in 2010. But there was another, less visible casualty: the Computer Desktop Encyclopedia (C.D.E.).

It’s an online dictionary of 25,000 computer and consumer electronics terms, written over 30 years by Alan Freedman, his wife, Irma Morrison, and occasional part-timers. Until about eight years ago, the C.D.E. served as the built-in computer dictionary for 20 technology-related Web sites. (They used their own names for it: TechEncyclopedia, ChannelWeb Encyclopedia, ZDNet Dictionary, and so on.) Today, PCMag.com is the only tech site that still builds in the C.D.E. (FreeDictionary and YourDictionary.com also incorporate it.)

Mr. Freedman, a corporate computer trainer for many years, has therefore taken the only logical path: He’s now made the C.D.E. free online to all, at computerlanguage.com. And he challenged me to compare his definitions with its rivals.

One thing is for sure: There’s something to be said for having a single editor. Wikipedia entries, of course, are written collaboratively by strangers with different agendas and writing styles. And its technology definitions tend to be by engineers, for engineers.

Continued in article

Computer Desktop Encyclopedia ---
http://computerlanguage.com/

Jensen Comment
I no longer update my own technology glossary, but it is better than most current computer-term glossaries and encyclopedias (although it's impossible to beat Google Advanced Search if you take the trouble) for obsolete terms ---
http://www.trinity.edu/rjensen/245gloss.htm
My glossary today is more for historians seeking technical terms that have dropped from current use. For example, how many of you remember CD-I. This was my first exposure to great interactive computing (on an analog television set). I still have an early and long-neglected CD-I player in my studio. I also have a collection of commercial CD-I disks as well as some of my own creations. Those were the days my friend. I thought CD-I would never end.

 


"McGladrey settles fraud lawsuit over Abbate embezzlement," by Paul Brinkman, Biz Journal, June 14, 2013 ---
http://www.bizjournals.com/southflorida/blog/2013/06/mcgladrey-settles-fraud-lawsuit-over.html

The McGladrey accounting firm has settled a lawsuit that accused the firm of fraud in connection with embezzlement by Miami Beach Community Health Center CEO Kathryn Abbate.

Although terms of the settlement were not confidential, the center’s attorney Richard E. Brodsky declined to reveal the terms.

Abbate was sentenced to six years in prison on Wednesday for embezzling $7 million over a period of five years.

During that period, accountants working for McGladrey and CohnReznick audited the center’s accounts.

The center sued both McGladrey and CohnReznick after learning about Abbate’s theft of funds in August. The center accused its auditors of failing to detect the embezzlement for years. McGladrey prepared federal tax returns for the center from 2007 to 2009.

According to the center’s lawsuit, McGladrey fired its main auditor on the center’s account, Steven D. Schwartz, in January 2011, and Schwartz went to work for CohnReznick.

The lawsuit alleges that Schwartz no longer performed regular work on the center’s accounts after leaving McGladrey, but continued to supervise others who did.

The center states in its lawsuit that it was eventually Schwartz who alerted someone besides Abbate to her embezzlement in May 2012.

An amended complaint in the lawsuit alleged that auditors had failed to adequately detect problems with procedures governing checks and other financial transactions and failed to report those properly to management and the board of directors.

Continued in article

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


"Who Is The PwC Partner Responsible For MF Global? Someone With A Lot of Baggage," by Francine McKenna, re:TheAuditors, June 14, 2013 --- Click Here
http://retheauditors.com/2013/06/14/who-is-the-pwc-partner-responsible-for-mf-global-someone-with-a-lot-of-baggage/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+ReTheAuditors+%28re%3A+The+Auditors%29

Bob Jensen's threads on MF Global ---
http://www.trinity.edu/rjensen/Fraud001.htm
Search for the phrase "MF Global"


"Benjamin Lawsky Fills in for AWOL Feds," by Jonathan Weil, Bloomberg, June 20, 2013 ---
http://www.bloomberg.com/news/2013-06-20/benjamin-lawsky-fills-in-for-awol-feds.html

The superintendent of the New York State Department of Financial Services today said Bank of Tokyo Mitsubishi-UFJ Ltd. agreed to pay $250 million to settle allegations that it violated state banking laws when it carried out transactions with Iran and other countries subject to international sanctions. You have to wonder, too, what's going on over at the Treasury Department's Office of Foreign Assets Control.

In December, the Treasury division concluded a parallel investigation of Bank of Tokyo and settled for only $8.5 million. The contrast reinforces the perception that the feds are going light on large financial institutions, and that Lawsky is out to fill the vacuum where he can using New York state laws.

It's the second big case for Lawsky this week. On June 18, Lawsky said Deloitte Financial Advisory Services would pay $10 million to resolve the agency's investigation into its consulting work for Standard Chartered Plc, the London-based bank that paid $340 million to the state to settle money-laundering claims last year. The agreement with Deloitte included a one-year ban on accepting new consulting work related to matters pending before the New York agency.

The Deloitte agreement had one feature that was particularly striking -- and rare for a regulator. The consulting firm, which is an affiliate of the Big Four accounting firm Deloitte & Touche LLP, admitted to violations of state banking law.

In the settlement agreement, Deloitte admitted that it broke state law by "knowingly disclosing confidential supervisory information to'' Standard Chartered about other banking clients.
Admissions such as these should be a model for all regulators. The New York department's consent order with Bank of Tokyo didn't include any direct acknowledgements, but at least it didn't have the dreaded language saying the company "neither admits nor denies" the allegations.

The way the consent order with Bank of Tokyo was structured, representatives for both the company and the regulator signed their names to a list of the agency's findings, which made it seem that Bank of Tokyo agreed they were true. One of the provisions said Bank of Tokyo "estimates that it cleared approximately 28,000 U.S. dollar payments through New York worth close to $100 billion involving Iran, and additional payments involving Sudan and Myanmar."

There's a glimmer of hope that other regulators may change their usual "no-admit" approach, at least on the margins. Securities and Exchange Commission Chairman Mary Jo White this week said the agency's enforcement division will seek more admissions of wrongdoing from defendants as a condition of settling cases. The agency's default position for decades has been for defendants to neither admit nor deny its claims.

Continued in article

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


From the Scout Report on June 21, 2013

My Study Life --- https://www.mystudylife.com/ 

Some young scholars may ask the question: "What time do I need to be at general chemistry?" or "When does my review group meet?" Keeping track of such matters is a snap with My Study Life, a free online planner. Visitors can color-code each activity for easy visual recognition and insert various tasks that might be due on any given day. Unlike more conventional calendars, this one integrates classes, tasks, and exams to give students and teachers a full picture of what remains to be done. This program is available for Chrome, Windows 8, Windows Phone, and Android, and will soon be available for iOS.


Skype Recorder --- http://im.simkl.com/ 

In an increasingly connected world, it's often necessary to conduct interviews, customer support, and more over Skype. Simkl is a good way to keep track of conversations users need to reference later. The conversations can be stored on any computer or to the cloud. Additionally, visitors can use the same application to record IM conversations. The program is available in over a dozen languages and it is compatible with all operating systems


Politicians call for closer consideration of the planned merger between
US Airways and American Airlines
Senators urge scrutiny of American Airlines and US Airways merger
http://www.latimes.com/business/money/la-fi-mo-senators-inquiry-american-us-airways-merger-20130618,0,7109590.story

American and US Airways name merged airline leadership
http://www.usatoday.com/story/todayinthesky/2013/06/10/american-airlines-us-airways-leadership-merger/2407605/

How A Merger Could Affect Congress' Favorite Airport
http://www.npr.org/2013/06/19/191106900/how-a-merger-could-affect-congress-favorite-airport

New American Arriving
http://newamericanarriving.com/

CNN Money: Airline mergers and bankruptcies
http://money.cnn.com/infographic/news/companies/airline-merger/

American Airlines: Company History
http://www.aa.com/i18n/amrcorp/newsroom/company-history.jsp


So often success is trouble turned inside out.
"The Gift of Doubt Albert O. Hirschman and the power of failure," by Malcolm Gladwell The New Yorker, June 24, 2013 ---
http://www.newyorker.com/arts/critics/books/2013/06/24/130624crbo_books_gladwell?currentPage=all

Jensen Comment
This is a very upbeat review of the Worldly Philosopher: The Odyssey of Albert O. Hirschman (Princeton) by Princeton historian Jeremy Adelman." Adelman brilliantly and beautifully brings Hirschman to life, giving us an unforgettable portrait of one of the twentieth century’s most extraordinary intellectuals."

As was nearly always the case with Hirschman’s writing, he made his argument without mathematical formulas or complex models. His subject was economics, but his spirit was literary. He drew on Brecht, Kafka, Freud, Flaubert, La Rochefoucauld, Montesquieu, Montaigne, and Machiavelli, not to mention Homer—he had committed huge sections of the Odyssey to memory. The pleasure of reading Hirschman comes not only from the originality of his conclusions but also from the delightfully idiosyncratic path he took to them. Consider this, from the same essay (and, remember, this is an economist who’s writing):


While we are rather willing and even eager and relieved to agree with a historian’s finding that we stumbled into the more shameful events of history, such as war, we are correspondingly unwilling to concede—in fact we find it intolerable to imagine—that our more lofty achievements, such as economic, social or political progress, could have come about by stumbling rather than through careful planning. . . . Language itself conspires toward this sort of asymmetry: we fall into error, but do not usually speak of falling into truth.

Is it really possible to make a complicated and deeply intellectual argument "without mathematical formulas and complex models?" Probably not by today's standards in the Academy.


Just Horsing Around Again
"My Latest Forbes Magazine Article: 'The Madoff of Munis'," by Francine McKenna, re:TheAuditors, June 11, 2013 ---
http://retheauditors.com/2013/06/11/my-latest-forbes-magazine-article-the-madoff-of-munis/


"Where Should SEC Start A Fraud Crack Down? Maybe Look At Fake Restatements," by Francine McKenna, Forbes, June 18, 2013 --- Click Here
http://www.forbes.com/sites/francinemckenna/2013/06/18/where-should-sec-start-a-fraud-crack-down-maybe-look-at-fake-restatements/

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


Will the Latest Fight Between NASBA and the AICPA Last for 10 Rounds? ---
http://goingconcern.com/post/aicpa-knows-nasba-mad-its-okay-nasba-gets-mad-sometimes

"NASBA Blackballs AICPA from the Standard Setters’ Club," by Tom Selling, The Accounting Onion, June 19, 2013 ---
http://accountingonion.com/2013/06/nasba-blackballs-aicpa-from-the-standard-setters-club.html

Jensen Comment
After the APB in the 1960s trembled and sputtered when taking on controversial accounting standard positions and Congressional pressures mounted for the SEC (big government) to take over the standard setting responsibilities, the CPA profession in desperation funded the FASB to become the primary accounting standard setting body. However, since the 1930s the SEC has always had the power to trump accounting standards --- a power that's rarely been used except in some sad issues like oil and gas capitalization of dry holes ---
http://www.trinity.edu/rjensen/Theory01.htm#AccountingHistory

After 1933, the AICPA and the SEC seriously attempted to generate accounting standards, enforce accounting standards, and provide academic justification for promulgated standards.

At the moment the SEC is blocking the shift of standard setting from the FASB to the IASB.

Historically, the SEC prefers to put its resources into enforcement of financial markets rules and regulations --- not wanting to get sucked into the pit of month-to-month setting of accounting standards and regulations for registered companies.

All accounting standard setting authority has not been transferred to the FASB from the AICPA, especially where the focus of the accounting standards are not so much to protect investors. For example, I think standards of accounting for estates (where exit value rules generally are in effect) primarily in the realm of the AICPA.

Tom's posting concerns the fuzzy realm of standard setting for private companies where it's questionable that the SEC and FASB have authority to set accounting standards that still seem to be in the hands of the AICPA. But there is much controversy at the moment.


"IRS targeted conservative college interns," by Patrick Howley, The Daily Caller, May 22, 2013 ---
http://dailycaller.com/2013/05/20/irs-targeted-conservative-college-interns/
Thank you Dennis Huber for the heads up.

The Internal Revenue Service (IRS) demanded information about conservative groups’ college-aged interns, prompting outrage from one of the country’s top conservative activist organizations and leading one former intern to wonder whether his family’s pizza parlor would be endangered.

The IRS requested, in an audit, the names of the conservative Leadership Institute’s 2008 interns, as well as specific information about their internship work and where the interns were employed in 2012, according to a document request the IRS sent to the Leadership Institute, dated February 14, 2012.

“Copies of applications for internships and summer programs; to include: lists of those selected for internships and students in 2008.
– In regards to such internships, please provide information regarding where the interns physically worked and how the placement was arranged.
– After completing internships and courses, where were the students and interns
employed?”

The Arlington, Virginia-based Leadership Institute is a conservative activist training organization founded in 1979 by Virginia Republican National Committeeman Morton C. Blackwell, the youngest elected delegate to the 1964 Republican convention that nominated Barry Goldwater. The institute was audited in 2011. As The Daily Caller has reported, at least two different IRS offices made a concerted effort to obtain the group’s training materials.


Read more: http://dailycaller.com/2013/05/20/irs-targeted-conservative-college-interns/#ixzz2U9HSJp1B
 

"Shakespeare Knew all About Deniability," by Paul Greenberg, Townhall, May 25, 2013 --- Click Here
http://townhall.com/columnists/paulgreenberg/2013/05/25/shakespeare-knew-all-about-deniability-n1605943?utm_source=thdaily&utm_medium=email&utm_campaign=nl

. . .

Here's the latest example of how the Great Game of Deniability is played: It now comes out that, despite earlier claims from the president's press secretary, the White House knew that an inspector general's report was about to show that the IRS had targeted conservative groups like the tea party for special scrutiny. The president's counsel knew it, the president's chief of staff knew it. But it seems they were careful not to tell the president about it.

The current presidential press secretary's name is Jay Carney, but it might as well be Ron Ziegler, who was Richard Nixon's mouthpiece and was always being caught up in his own contradictions.

How could Mr. Carney claim the president didn't know that this scandal at the IRS was about to blow up on him -- even though his closest advisers did? Jay Carney explained that "some matters are not appropriate to convey to him, and this (was) one of them."

That way, like any gang boss called to testify before the old McClellan Committee back in the mobsterish Fifties, the president can claim, "I didn't know nuttin.' " It seems you can take a president out of Chicago, but not the Chicago out of a president.

. . .

Deniability. It's become almost a standard feature of modern presidential politics, whether the subject is Watergate, Iran-Contra, L'Affaire Lewinsky and now the games at the IRS. But the history of deniability goes back a lot further. All the way back to an Elizabethan playwright of some note, W. Shakespeare.

Master Will knew all about deniability and how it works. See Act II, Scene 7 of Antony and Cleopatra. The names may be different now, but the way White House counsel Kathryn Ruemmler and Chief of Staff Denis McDonough served their president is pretty much how a Roman statesman named Pompey wished his friend and servant Menas had had the subtlety to pull off.

In Shakespeare's account, Pompey is entertaining the Roman triumvirate -- Marc Antony, Octavius Caesar and Lepidus -- aboard his galley when Menas interrupts him during cocktail hour. It seems Pompey's major-domo has devised a scheme that's sure to work, and he can't resist letting his boss know how clever he's been to come up with it.

Menas begins his whispered aside with Pompey by tempting him with the one lure no politician may be able to resist -- power. Great power.

"Wilt thou be lord of all the world?" asks Menas.

"What says't thou?" asks Pompey, who heard him very well.

"Wilt thou be lord of all the world? That's twice."

"How should that be?"

"But entertain it, and, although thou think me poor, I am the man will give thee all the world."

"Hast thou drunk well?" asks Pompey, who's been the one drinking.

"Now, Pompey, I have kept me from the cup. Thou art, if thou dar'st be, the earthly Jove: Whate'er the ocean pales or sky inclips is thine, if thou wilt have't."

"Show me which way," says Pompey, who is not an unambitious man, and Menas shows him:

"These three world-sharers, these competitors, are in thy vessel: let me cut the cable; and when we are put off, fall to their throats: All then is thine."

. .

Given the deterioration of the English language since its Elizabethan zenith, such a scheme might today be known as Policy Proposal 89, Operation Globe. And given the growth of bureaucracy since Pompey's time (it was not inconsiderable then) Menas' draft proposal might have to go through three different levels of the National Security Council before being considered, debated, redrafted and then indefinitely postponed.

Not so in one of Shakespeare's historical plays, which require, among other things, clarity and moral force as well as drama.

. .

Menas gets an immediate response to his proposal, though it is not the one he had hoped for:

 

"Ah," says Pompey, "this thou shouldst have done, and not have spoken on't! In me 'tis villainy; in thee't had been good service. Thou must know 'tis not my profit that does lead mine honour; mine honour it. Repent that e'er thy tongue hath so betray'd thine act: being done unknown, I should have found it afterwards well done; but must condemn it now. Desist, and drink."

Ah, well, so go the best-laid plans of mice and White House courtiers. Pompey, saddled with a jabbering aide like Menas, would have found the current White House counsel and chief of staff much more to his liking. More important than knowing what to advise him, they would know what to keep from him.

Yes, much better to let the dirty work go forward and have the president learn the grimy details only later, if ever. And then, if necessary, he can deny ever knowing about it and, in the most righteous tones, fire a head bureaucrat or two and snuff out the whole scandal. That's the essence of what in our era has come to be known as Plausible Deniability. It's also called "insulating" the chief executive. Pompey would have called it good service.

As Shakespeare has Pompey say, "being done unknown, I should have found it afterwards well done; but must condemn it now." Describing how the IRS had targeted his critics, the president sounded shocked, shocked! And proceeded to fire the IRS' top administrator. For his presidential aides had provided him with ... deniability. Pompey would have been proud of them.

 

Why Lois Lerner Took the Fifth --- Click Here
http://live.wsj.com/video/opinion-why-lois-lerner-took-the-fifth/C11E472E-9339-44C9-A2D0-7439F4B6DA33.html?mod=djemEditorialPage_h#!C11E472E-9339-44C9-A2D0-7439F4B6DA33

Jensen Comment
President Obama asked Lois Learner to resign. She flatly refused! President Obama could fire her, but the fear is that she might then talk.

As a result she could become a lifelong Federal employee on paid (over $200,000 per year plus benefits) who never has to go to work. Nice job if you can get it.


World Bank: Annual Report 2012 --- Click Here
http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/EXTANNREP/EXTANNREP2012/0,,menuPK:8784414~pagePK:64168427~piPK:64168435~theSitePK:8784409,00.html


June 1, 2013 message from Bryce Walker

Hi Bob,

After recently passed the CPA exam, I created a website to help others avoid the same mistakes I made. I wrote an article to help inspire accounting students that plan on pursuing a CPA license and to let them know that all their hard work will pay off in the end.

http://crushthecpaexam.com/becoming-a-cpa/ 

If you find value in my article I would love to be listed on your bookmarks page as I think many others would find my story motivating. Thanks for you time,

Bryce

Bryce Welker, CPA
CRUSHtheCPAexam.com

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


"30 Terrific (mostly Fee-Based) Tools for Small Businesses," by Jason Nazar, Forbes. May 28, 2013 --- Click Here
http://www.forbes.com/sites/jasonnazar/2013/05/28/30-terrific-tools-for-small-businesses/?utm_source=email&utm_medium=email&utm_campaign=222&utm_content=5483&alt=76b29ed3-52e2-4085-85e8-3aa4370ed238
This are essentially Docstock advertisements that are nevertheless informative for academics as well as small businesses.

 

1.     Accounting & Finance

2.     Customer Support

3.     Human Resources

4.     Legal

5.     Sales

Continued in article


The Efficient Market Hypothesis Has Run Into Bankruptcy
George Soros --- http://www.businessinsider.com/financial-advisor-insights-june-26-2013-6

Book Review of:

JUSTIN FOX, The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street (New York, NY: HarperCollins Publishers, 2009/11 (paper), ISBN 978-0-06-059903-4 (paper), pp. xvi, 390).

The Accounting Review, Vol. 88, No. 3, May 2013, pp. 1129-1131

. . .

The ideas of finance academics taking hold on Wall Street is a remarkable story. Some examples are the acceptance of portfolio theory, asset pricing models, the rise of the index fund, the need to systematically collect data to test the theories, and the massive rise of derivative trading due to option pricing models developed by Black and Scholes, and Merton and Roll. Such success is also tempered by examples such as the failure of portfolio insurance to hedge stock market risk and the fallout from Long Term Capital Management's inability to cover its positions. Jensen's influential work on the theory of the firm is also presented as extending market discipline to the firm.

Fama and Jensen will feature throughout the remainder of the book, but the later chapters will focus on the rise of behavioral finance and insights that challenge the EMH. For example, Richard Thaler's work on challenging the notion of efficient markets and rational choice models is followed by Chapter 11, titled “Bob Shiller Points Out the Most Remarkable Error,” which refers to Shiller's famous quotation arguing that observing no patterns in stock prices is not the same as stock prices being right. The response to such challenges is portrayed as one where the EMH definition shifts due to counter-arguments being made. In addition, some previous supporters concede that market anomalies do exist, and this is accompanied by the rise of work such as Andrei Shleifer's “noise traders” research. There is now a significant body of literature that highlights that individuals do not always behave rationally. That does not mean one can exploit this behavior consistently—particularly if you are a large investor.

Toward the end of the book, Fox crafts a debate between Fama and Dick Thaler, and Fox makes it clear that the ground has shifted. However, those who are preaching the demise of the EMH perhaps do not understand that, while the prices may not always be “right,” the recommendation to buy an index fund is still good advice, as “markets are hard to beat” and still harder if you pay someone to manage your portfolio (p. 306). Furthermore, Markowitz's diversification principle holds, and “[s]tock prices contain lots of information” (p. 307).

Understanding the powerful forces that make current prices hard to exploit consistently is one key lesson. On the other hand, understanding when prices can be manipulated is equally important. The collapse of financial markets requires us to consider what went wrong. We should not assume ….

The book encourages the reader to not only acknowledge the genuine benefits afforded by theoretical advances in finance, but also to understand the limitations to theory.

Fox is able to provide compelling evidence of the developments and shortcomings of the past, moralize about the issue, and conclude that, despite much progress, we have much more to learn.

Is Fox blaming the EMH for the financial crisis? He gives enough hints for others to draw that conclusion. In spite of this, this remains a book that provides a balanced discussion. For example, he acknowledges that stock and bond prices do convey information, are hard to beat, and that many in Wall Street never accepted the EMH. He also outlines Shiller's repeated warnings of irrational exuberance and that by definition the EMH could not predict such an event (prices are random). Academics have also long acknowledged that the EMH is a theoretical concept; otherwise, incentives to analyze information would not exist.

So, while Justin Fox's book is fair, balanced, insightful, and highlights the need to continue to understand why markets may or may not be efficient, I found some of the commentary around the book were more critical of the EMH.1

It is as if the critics believe the proposed theory was accepted beyond question. Post-earnings drift is shown in Ball and Brown's 1968 paper. Agency and positive accounting theory highlight the role of incentives, information processing costs, and moral hazard. Active investors never believed in the EMH, and lessons from behavioral finance have been well debated.

So why does the message create such controversy, and are we doing enough as educators to ensure that the complexity of the issues is communicated? Part of the problem may be the need to search for a scapegoat, but are we ensuring that investors fully understand issues such as the paradox of the market, or why some markets are efficient and others are not?

Textbooks in accounting and finance tend to have simplistic discussions of the topic, with the evidence concentrating on the U.S. stock market. It is relatively easy to understand the concept but much harder to appreciate the complexity of the issue. Have we let loose a generation of undergraduates who are inadequately trained, and who end up either treating the EMH as a piece of magic or simply rejecting the whole concept without the ability to explain why?

Consider those who accept market efficiency on faith. While they may be price-protected in a well-traded market, they will be more exposed in illiquid markets and out of their depth in a market where price setters can exist.

Perhaps the more dangerous groups are those who do not understand why markets can be difficult to beat and are ill-informed about the evidence and counter-evidence. Fox concludes that “while mindless conformism was characteristic of financial bubbles and panics long before there were finance professors, fostering even more of it has been the gravest sin of modern finance” (p. 328).

I think this book will challenge readers to better understand how some of the key developments in finance have evolved—the characters involved, the contradictions that occurred, and the maturing of thought, so that the difficult issues surrounding finance can continue to receive the attention that they deserve. Fox allows the characters to come alive, and he shows their willingness to be challenged by new ideas and evidence. Finance is not perfect, but Fox also makes sure that we know of the contribution that finance has made in better managing and pricing risk.

Reviewer
David Lont
Professor of Accounting
University of Otago

 
Great Nova Video: Can a market of irrational people be a "rational market?"
PBS Nova Video:  "Mind Over Money," http://video.pbs.org/video/1479100777 
 

Jensen Question
This seems to beg the question of how accountants can contribute information to irrational people with an underlying goal of helping their markets themselves be more rational.

Of course many scholars argue that markets themselves are not " rational" ---
http://en.wikipedia.org/wiki/Justin_Fox

Behavioral Economics --- http://en.wikipedia.org/wiki/Behavioral_economics

Bounded Rationality --- http://en.wikipedia.org/wiki/Bounded_rationality

Bob Jensen's threads on the Efficient Market Hypothesis are at
http://www.trinity.edu/rjensen/Theory01.htm#EMH


Fraud Beat:
Canadians Massively Screwed by Their City, Province, and Local Governments ---
http://www.businessinsider.com/the-three-reasons-canada-is-in-big-trouble-2013-6

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


Why a $1 million retirement nest egg just isn't enough unless a nearby soup kitchen is not available
"For Retirees, a Million-Dollar Illusion," by Jeff Sommer, The New York Times, June 8, 2013 --- Click Here
http://www.nytimes.com/2013/06/09/your-money/why-many-retirees-could-outlive-a-1-million-nest-egg.html?ref=business&_r=1&pagewanted=all&

In 1953, when “How to Marry a Millionaire” was in movie theaters, $1 million bought the equivalent of $8.7 million today. Now $1 million won’t even buy an average Manhattan apartment or come remotely close to paying the average salary of an N.B.A. basketball player.

Still, $1 million is more money than 9 in 10 American families possess. It may no longer be a symbol of boundless wealth, but as a retirement nest egg, $1 million is relatively big. It may seem like a lot to live on.

But in many ways, it’s not.

Inflation isn’t the only thing that’s whittled down the $1 million. The topsy-turvy world of today’s financial markets — particularly, the still-ultralow interest rates in the bond market — is upending what many people thought they understood about how to pay for life after work.

“We’re facing a crisis right now, and it’s going to get worse,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. “Most people haven’t saved nearly enough, not even people who have put away $1 million.”

For people close to retirement, the problem is acute. The conventional financial advice is that the older you get, the more you should put into bonds, which are widely considered safer than stocks. But consider this bleak picture: A typical 65-year-old couple with $1 million in tax-free municipal bonds want to retire. They plan to withdraw 4 percent of their savings a year — a common, rule-of-thumb drawdown. But under current conditions, if they spend that $40,000 a year, adjusted for inflation, there is a 72 percent probability that they will run through their bond portfolio before they die.

Suddenly, that risk-free bond portfolio is looking risky. “The probabilities are remarkably grim for retirees who insist on holding only bonds in the belief that they are safe,” says Seth J. Masters, the chief investment officer of Bernstein Global Wealth Management, a Manhattan-based firm, which ran these projections for Sunday Business. “Because we live in this world we tend to think of it as ‘normal,’ but from the standpoint of financial market history, it’s not normal at all,” Mr. Masters said. “And that’s very clear when you look at fixed-income returns.”

Several rounds of intervention by the Federal Reserve and other central banks, aimed at stimulating a moribund economy, have helped to suppress rates, and so has low inflation. Low rates have led to cheaper mortgages and credit cards, helping to balance family budgets.

But for savers, low rates have been a trial. The fundamental problem is that benchmark Treasury yields have been well below 4 percent since early in the financial crisis. That creates brutal math: if your portfolio’s income is below 4 percent, you can’t withdraw 4 percent annually, and add inflation adjustments, without depleting that portfolio over time.

And with rising life expectancies, many people will have a lot of time: the average 65-year-old woman today can be expected to live to 86, a man to 84. One out of 10 people who are 65 today will live past 95, according to projections from the Social Security Administration.

“If you’re invested only in bonds and you’re withdrawing 4 percent, plus inflation, your portfolio will decline,” said Maria A. Bruno, senior investment analyst at Vanguard. “That’s why we recommend that most people hold some equities. And why it’s important to be flexible.” In some years, investors may need to withdraw less than 4 percent, she said, and in some years they can take more.

Clearly, such flexibility depends on individual circumstances. Billionaires can afford to be very flexible: just 2 percent of a $1 billion portfolio is still $20 million. With economizing, even a big spender should be able to scrape by on that. But $20,000 — the cash flow from a $1 million portfolio at 2 percent — won’t take you very far in the United States today.

And if you’re not close to being a millionaire — if you’re starting, say, with $10,000 in financial assets — you’ve got very little flexibility indeed. Yet $10,890 is the median financial net worth of an American household today, according to calculations by Edward N. Wolff, an economics professor at New York University. (He bases this estimate on 2010 Federal Reserve data, which he has updated for Sunday Business according to changes in relevant market indexes.)

A millionaire household lives in elite territory, even if it no longer seems truly rich. Including a home in the calculations, such a family ranks in the top 10.1 percent of all households in the United States, according to Professor Wolff’s estimates. Excluding the value of a home, a net worth of $1 million puts a household in the top 8.1 percent. Yet even such families may have difficulty maintaining their standard of living in retirement.

“The bottom line is that people at nearly all levels of the income distribution have undersaved,” Professor Wolff said. “Social Security is going to be a major, and maybe primary, source of income for people, even for some of those close to the top.”

Professor Munnell said that in addition to relying on Social Security, which she called “absolutely crucial, even for people with $1 million,” other options include saving more, spending less, working longer and tapping home equity for living expenses. “There aren’t that many levers we can use,” she said. “We have to consider them all.”

THE bond market has always been a forbidding place for outsiders, but making some sense of it is important for people who rely on bond income.

Low bond yields have been a nightmare for many investors, but that’s not the only issue. Today’s market rates aren’t stable. Steve Huber, portfolio manager at T. Rowe Price, said, “Current yields are an anomaly when you consider where rates have been over the last decade or more.”

Rates are expected to rise. While that will eventually mean more income for bond buyers, it will create a host of problems. Already, the market has been rattled by speculation that after years of big bond-buying, the Fed may soon begin to taper its appetite. In May, a half-point climb in the yield of 10-year Treasury notes produced the biggest monthly bond market losses in nine years. (Yields and prices move in opposite directions.) Yet yields remain extraordinarily low on a historical basis. The yield on the benchmark 10-year Treasury note is just under 2.2 percent, compared with more than 6.5 percent, on average, since 1962, according to quarterly Bloomberg data.

And bond investing is likely to remain challenging for years to come. Investors may face a double-whammy — low yields now and the prospect of significant losses as yields rise. On Friday, after the Labor Department reported that the unemployment rate edged up to 7.6 percent from 7.5 percent, yields rose further, amid uncertainty about the Fed’s intentions.

Despite this market instability, bonds tend to be the investment of choice as people retire, because they throw off steady income. But as the projections from Bernstein Global Wealth Management suggest, over-reliance on bonds leads to financial quandaries.

These projections, based on proprietary market and economic forecasts and portfolio analyses, as well as on standard actuarial and tax data, estimate future probabilities for investors. That’s a quixotic task at best, intended to illustrate possible outcomes rather than to provide precise forecasts, said Mr. Masters at Bernstein.

Still, they are worrisome. Consider again the 65-year-old couple who are starting to draw down $1 million in savings this year: if they withdrew 3 percent, or $30,000, a year, rather than that standard rate of 4 percent, inflation-adjusted, there is still a one-in-three chance that they will outlive their money, under current market conditions.

There are ways to improve these outcomes, but they have their own hazards. Adding stocks to a portfolio is an obvious counterbalance. And there is now a broad consensus among asset managers and academics that stocks have an unusually high likelihood of outperforming bonds over the next decade. That was the finding of a recent study by two economists at the Federal Reserve Bank of New York.

The Bernstein projections concur that adding stocks to a portfolio reduces the risk of outliving your savings. But it also increases the risk of big losses.

Continued in article

This is another reason why financial literacy should be a general education requirement in every college ---
http://www.trinity.edu/rjensen/HigherEdControversies.htm#FinancialLiteracy

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

 


"Thunderbird Alumni Protest Link to For-Profit Laureate," Inside Higher Ed, May 30, 2013 ---
http://www.insidehighered.com/quicktakes/2013/05/30/thunderbird-alumni-protest-link-profit-laureate

Jensen Comment
Since the AACSB has never accredited a for-profit university in North America, it will be interesting if the AACSB will change its ways and allow for-profit joint ventures.


May 30, 2013 message from Scott Bonacker

Ernst & Young Latest Big 4 Firm to Have Part II of PCAOB Inspection Report Released

http://goingconcern.com/post/ernst-young-latest-big-4-firm-have-part-ii-pcaob-inspection-report-released 

[The Board] said it had "cause for concern" about whether the firm's auditors were skeptical enough of their clients' assertions.

- That was a major reason I quit performing audits when I became a sole practitioner, wasn't skeptical enough and couldn't maintain independence. Along with the others, too much of a time commitment for small offices, etc..

Scott Bonacker CPA –
McCullough and Associates LLC –
Springfield, MO

 


"The Truth About Paying Down Your Mortgage Early," Business Insider, June 21, 2013 ---
http://www.businessinsider.com/paying-off-mortgage-with-leftover-money-2013-6

Jensen Comment
Much depends on what your intend to do with the funds that you would otherwise use to pay down part or all of your mortgage. If it all goes to wine, women, and casino gambling then pay down at least part of your mortgage. If it goes to buy gold coins then pay down your mortgage (I'm against buy gold coins in any circumstances since the transactions costs on resale are so high).  If it goes for home improvements the answer is uncertain and depends upon your particular real estate market and how much those improvements add to the monetary and personal value of your home.

Of course your particular income, savings, and tax situation trumps almost everything.

I have an enormous refinanced mortgage that will not be paid off until I'm nearly 100 years of age. My strategy is to carry a jumbo mortgage for tax purposes and invest in an insured tax-exempt fund where the after-tax returns of my annual tax-exempt cash flow exceed the after-tax cash outflow of my mortgage costs. Of course this is not a good strategy for everyone because there are risks in tax-exempt fund values, and tax-exempt bonds are not good inflation hedges. Old guys like me don't worry so much about inflation. Young investors should worry about inflation.

What I'm saying is that your outlook on investments and life change with the seasons of your life. When I was young I always purchased the highest price home with the biggest mortgage that I could possibly afford. When on the faculty at the University of Maine in the 1970s  I had a big and beautiful house in town plus a cottage on 12 acres of ocean front. In those days real estate values just kept going up and up and up.

Two things have changed in my life. One is that I'm no longer young with worries about inflation and home real estate values. My children will inherit enough to a point that I'm not worried about inflation or the value of my home over the next 20 years --- Ka Sara Sara!

The other thing that has changed in my lifetime is the real estate market. Up in the mountains where I now live expensive property is just not selling. The market is also limited for other types of property since northern New England is in an economic and population growth slump. Also the market for second (vacation) homes is changing --- in part due to higher risk of losing money on these investments. I sold an Iowa farm a few years ago. This is a totally different type of investment where values have been rising in large measure because of the corn ethanol disaster for consumers. Today, however, I think Iowa farm land is a better investment for farmers who actually drive the tractors on Iowa farm land relative to far away landlords with no intent to farm the land themselves. Having said that, farm land is a pretty good long-term inflation hedge for investors not needing much interim cash flow. At the moment Iowa farm land may be too high priced. Who really knows? Nobody!

My point is that both your economic and personal situation changes with seasons of life and states of the economy and tax reforms that might finally get enacted. Advice is cheap and possibly misleading. It's best to study your particular situation to a point where you can advise yourself.

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


Teaching Case on the Special Problems of Accounting for Intangibles in a Company that is Mostly Human Resources and Intangible Assets
From The Wall Street Journal Accounting Weekly Review on May 24, 2013

Yahoo Deal Shows Power Shift
by: Joann Lublin, Amir Efrati and Spencer Ante
May 20, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Intangible Assets, Mergers and Acquisitions

SUMMARY: "Valuations placed on social media sites like Tumblr make little sense under typical financial analysis' concludes the authors in this piece on Yahoo's biggest acquisition under Chief Executive Marissa Mayer. Yahoo has faced challenges in competing against Google, Facebook, and other Internet companies as the market of online activities--that its founders essentially developed--has grown and matured. Tumblr's value to Yahoo may be its appeal to a younger audience and the value to be obtained by Yahoo, which will produce needed financial results, is clearly discussed in the related video.

CLASSROOM APPLICATION: The article may be used to introduce strategic reasons for business combinations or accounting for intangible assets.

QUESTIONS: 
1. (Introductory) Based on the description in the article, what are the strategic reasons for Yahoo to acquire Tumblr? The related video available on one of the top tabs to the online article is also helpful to answer this question.

2. (Introductory) Why is consumer attention focused on social media important for profitability of Internet based companies? Explain the importance of advertising in this scenario.

3. (Introductory) Why is it valuable for Yahoo to acquire Tumblr when the management of Tumblr will not change?

4. (Introductory) Yahoo is paying a premium to acquire Tumblr for $1 billion. How is that premium measured?

5. (Advanced) Explain how the funding invested in Tumblr by the venture-capital firm in 2011 must have been based on some "typical financial analysis" model.

6. (Advanced) Despite what the author concludes, how must the price paid by Yahoo be determined at least partly on the basis of a financial model?

7. (Advanced) How will the model determining the price paid for Tumblr lead to the accounting for this $1 billion by Yahoo when this acquisition eventually closes? What types of assets are most likely to be recorded from this transaction?
 

Reviewed By: Judy Beckman, University of Rhode Island

 

"Yahoo Deal Shows Power Shift," by Joann Lublin, Amir Efrati and Spencer Ante, The Wall Street Journal, May 20, 2013 ---
http://online.wsj.com/article/SB10001424127887324787004578493130789235150.html?mod=djem_jiewr_AC_domainid

Yahoo Inc. YHOO -1.00% has agreed to pay $1.1 billion for Tumblr, a six-year-old company with more than 100 million users but very little revenue, a deal that highlights the shifting balance of power in the technology business.

Veterans like Yahoo have shown they have staying power—and they have cash to spend. But companies like Yahoo's target, a blogging site, have something valuable as well: the rapt attention of fast-growing communities of users. That has pushed up the price tags as more established companies fear getting left behind as people's online habits evolve.

Yahoo and Tumblr announced the agreement on Monday. Tumblr will be independently operated as a separate business, "per the agreement and our promise not to screw it up," the companies said. CEO and founder David Karp will stay on as chief executive. More on Tumblr

In a 2012 interview, Tumblr's David Karp spoke to the Wall Street Journal about how he started the company and where he's headed with it. Read the interview.

MoneyBeat: Yahoo Promises 'Not to Screw It Up' Heard on the Street: Tumblr of Opportunity ATD: Board Approves Deal as Expected Earlier: Will Yahoo Try to Get Its 'Cool Again' Why Yahoo Is Sweet on Tumblr Yahoo Wants Out of Microsoft Deal (5/7/2013) Yahoo Scraps Deal for French Video Site (4/30/2013) Yahoo's Ad Struggles Persist (4/16/2013) Yahoo, Apple Discuss Deeper iPhone Partnership (4/9/2013)

Timeline: A Changing Internet Pioneer

See key dates in the history of Yahoo, which helped to revolutionize the Web.

View Graphics

More photos and interactive graphics

The transaction adds Yahoo to the list of established Internet companies, including Google Inc. GOOG -1.47% and Facebook Inc., FB -3.24% that have spent $1 billion or more apiece to buy startup companies in hopes of gaining an edge in growth. Facebook, for instance, last year paid cash and stock initially valued at about $1 billion to buy revenue-free Instagram, a popular photo-sharing service.

Google famously paid $1.65 billion in stock seven years ago for YouTube, the online-video behemoth. In a smaller deal, in dollar terms, but one that reflects the appetite among old-line Internet companies for fresh blood, AOL bought Huffington Post for $315 million in 2011.

Yahoo Chief Executive Marissa Mayer's deal for Tumblr gives Yahoo, one of the original big Internet companies, a fast-growing Web service that could fill one of its many holes—namely, the lack of a thriving social-networking and communications hub. Tumblr is popular with many younger adults, in contrast with Yahoo's older customer base. Tumblr is also growing more quickly on smartphones than Yahoo.

"You only do an acquisition of this size and scale if you find an exceptional company, which Tumblr is," Ms. Mayer said Monday.

Some Tumblr users will take time to migrate to Yahoo's core websites and might never join the fold of its parent, Ms. Mayer said. At the same time, the blogging service offers several advantages Yahoo executives said could benefit Yahoo, like a successful track record snagging users on mobile devices.

"Part of our strategy here is to let Tumblr be Tumblr," Ms. Mayer said.

Yahoo is paying a premium for the company. When Tumblr last raised money, in late 2011, the $85 million venture-capital investment it received valued the company at $800 million.

Yahoo already has plans to generate more revenue from some Tumblr features like its top-of-site "dashboard" by possibly including some extra ads. Ms. Mayer credited the company for its already rich base of big-brand advertisers, which include all of the major film studios.

The deal is a big win for Mr. Karp, who remains a large shareholder, and the site's early venture investors, which include Union Square Ventures, Spark Capital and Sequoia Capital.

Ms. Mayer praised Mr. Karp for his enthusiasm for entertaining and compelling ads on other media, like TV, that can be "every bit as good as the content" when pitching products like cars.

"Where are the ads that are like that, where are the ads that are aspirational?" she asked. "We want that kind of richness in the online atmosphere."

The acquisition is a big bet for Yahoo, given Tumblr's financial performance so far. But Yahoo needs the growth. Its annual revenue has been stuck for years around $5 billion, and the company's big presence on personal computers hasn't translated well to mobile devices, where it lacks the advantage of Apple Inc.'s AAPL +0.81% coveted hardware or Google's ubiquitous smartphone operating software, Android.

Yahoo Chief Financial Officer Ken Goldman said Yahoo expects its acquisition to add "relatively modest" revenue to its top line in the second half, when the deal is expected to close, with its contribution ramping up next year.

Bob Jensen's threads on accounting for intangibles ---
http://www.trinity.edu/rjensen/Theory02.htm#Paradox


"The GAAP Lock-Out Effect and the Investment Behavior of Multinational Firms," Fadi Shaheen, SSRN, May 30, 2013 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2271403 
Thank you Paul Caron for the heads up.

Abstract:
This paper looks into the investment behavior of multinational firms with respect to earnings of their foreign subsidiaries that are locked-out abroad against the firms’ own real income (present value) interest in order to avoid the repatriation tax and the associated GAAP “penalty.” The paper extends the analysis of the existing theoretical models beyond the optimal repatriation-versus-retention point in order to explore what would be a second-best optimal investment strategy with respect to locked-out earnings. The paper shows that the choice of investment in this second-best optimal setting should differ from that in the first-best optimal setting. One example is that investing locked-out earnings in passive investments would generally generate higher present value than in active investments with higher rates of return. This in turn magnifies the conflict between real and book income considerations, leading firms to act again against their own real income interest when investing locked-out earnings abroad, and resulting in efficiency costs not yet identified, both at the firm level and to the economy in general.


From Ernst & Young Week in Review on June 6, 2013

11 June 2013 EITF meeting

The Task Force is scheduled to discuss:

 


Free MBA Degree at the University of Iowa:  Just Submit the Winning PowerPoint File

"Iowa’s Latest MBA Admissions Gimmick: The $38,000 PowerPoint Deck," Geoff Gloeckler, Bloomberg Businessweek, June 4, 2013 ---
http://www.businessweek.com/articles/2013-06-04/iowas-latest-mba-admissions-gimmick-the-38-000-powerpoint-deck

Jensen Comment
It might be interesting to develop a thread on alternative themes for this PowerPoint contest. For example, I like the idea of a theme based upon a technical question that tests the students skills at research and critical thinking. It probably should be a theme that students will be exposed to in the curriculum of the MBA program.


"HARD TIMES:  COLLEGE MAJORS, UNEMPLOYMENT AND EARNINGS," by Anthony E. Carnivale, Georgetown University, May 2013 ---
http://www9.georgetown.edu/grad/gppi/hpi/cew/pdfs/HardTimes.2013.2.pdf

Jensen Comment
I'm somewhat dubious of the data in this study. For example, the attribution of $43,000 to accounting graduates is inconsistent with other findings of over $50,000 per year starting salaries in the years under study ---
http://www.naceweb.com/salary-survey-data/?referal=research&menuID=71&nodetype=4

I suspect that in virtually all disciplines the outcomes are skewed by the variances in the size and quality of the colleges and universities under study.

Unlike engineering, there is a wide variation in accounting jobs ranging from low-paying clerical jobs to higher-paying professional jobs. Similarly in finance, jobs vary from low-paid bank tellers to Wall Street bond sellers earning six figures.


"For Whom Does the FASB Toil? (Not for Investors)," by Tom Selling, The Accounting Onion, May 31, 2013 ---
http://accountingonion.com/2013/05/for-whom-does-the-fasb-toil-not-for-investors.html

Jensen Comment
Ironically it's not investors and financial analysts who vocally agree with Tom on wanting the status quo for market valuation of loan losses. The big banks, however, vocally side with Tom on not wanting to change to the FASB's proposed change to an accrual system.

From the CFO Journal's Morning Ledger on June 13, 2013

Regulators are raising the alarm about rising risks in business loans. Lending to companies has been a boon for banks searching for revenue. But regulators worry that sweetened loan terms could put banks in jeopardy if corporate borrowers can’t repay, the WSJ’s Shayndi Raice and Michael R. Crittenden report.

Looser standards have made it easier for corporate borrowers to negotiate bargains. Bill Shea, CFO of 1-800-Flowers.com, arranged a $200 million revolving credit line with six banks, including J.P. Morgan, which led the deal in April. The banks fought for the leading role, Mr. Shea tells Raice and Crittenden, giving him power to negotiate rate, fees, covenants and the structure of the deal. “It put us in a very good position to negotiate a very attractive deal.” Mr. Shea says the fees his company paid to J.P. Morgan for leading the deal were the lowest he has seen since before the crisis.

But bankers, consultants and regulators tell the Journal that bank examiners are now pulling out more loans for inspection, questioning loan officers more thoroughly about credit standards and studying other underwriting functions more closely than they have in years. The regulators are worried that some banks are making loans to companies without proper protections in place. “There’s a consistent theme of ‘do not lower your underwriting standards in order to attract volume,’ ” said Scott Polakoff, a former acting director of the Office of Thrift Supervision who now advises banks on their dealings with regulators at consulting firm FinPro

Jensen Comment
It's not surprising industry is lobbying against the proposed credit loss and loan loss (bad debts) accounting model proposed by the FASB that will beef up bad debt reserves ---
http://www.elfaonline.org/issues/accounting/pdfs/ELFACreditLossesCommentLtr.pdf

From the CFO Journal's Morning Ledger on June 13, 2013

Regulators are raising the alarm about rising risks in business loans. Lending to companies has been a boon for banks searching for revenue. But regulators worry that sweetened loan terms could put banks in jeopardy if corporate borrowers can’t repay, the WSJ’s Shayndi Raice and Michael R. Crittenden report.

Looser standards have made it easier for corporate borrowers to negotiate bargains. Bill Shea, CFO of 1-800-Flowers.com, arranged a $200 million revolving credit line with six banks, including J.P. Morgan, which led the deal in April. The banks fought for the leading role, Mr. Shea tells Raice and Crittenden, giving him power to negotiate rate, fees, covenants and the structure of the deal. “It put us in a very good position to negotiate a very attractive deal.” Mr. Shea says the fees his company paid to J.P. Morgan for leading the deal were the lowest he has seen since before the crisis.

But bankers, consultants and regulators tell the Journal that bank examiners are now pulling out more loans for inspection, questioning loan officers more thoroughly about credit standards and studying other underwriting functions more closely than they have in years. The regulators are worried that some banks are making loans to companies without proper protections in place. “There’s a consistent theme of ‘do not lower your underwriting standards in order to attract volume,’ ” said Scott Polakoff, a former acting director of the Office of Thrift Supervision who now advises banks on their dealings with regulators at consulting firm FinPro

Jensen Comment
It's not surprising industry is lobbying against the proposed credit loss and loan loss (bad debts) accounting model proposed by the FASB that will beef up bad debt reserves ---
http://www.elfaonline.org/issues/accounting/pdfs/ELFACreditLossesCommentLtr.pdf

 

 

Question
Why do banks hate the new loan loss (bad debt estimation) model proposed by the FASB in place of the prior fair value estimation model?

"U.S. banks push back on change in loan loss accounting," by Dena Aubin, Fox Business, May 13, 2013 ---
http://www.foxbusiness.com/news/2013/05/13/us-banks-push-back-on-change-in-loan-loss-accounting/ 

More than a dozen of the biggest U.S. banks have questioned a proposed accounting change meant to boost reserves for risky loans, saying the results would be vastly different from those of a similar rule being developed by global standard-setters.

A key reform arising out of the 2007-08 global financial crisis, the proposal would require banks to look ahead and reserve for expected losses on the day a loan is made.

Currently, banks do not have to reserve for risky loans until there are signs of a loss.

Reserves were criticized as being "too little, too late" during the global crisis, when major banks were buffeted by defaults on loans and other debt. Many had to be bailed out because they had not set aside enough for losses.

Numerous banking regulators have called for more timely reserves, though critics have also warned that proposed accounting changes would make quarterly earnings more volatile as banks adjust their expectations for losses.

In a letter to accounting rule-makers, banks suggested that trying to predict losses too far ahead would be unreliable.

Banks signing the letter included Bank of America Corp, Citigroup Inc, JPMorgan Chase & Co and Morgan Stanley. Spokesmen for the banks either declined to comment or did not respond to requests for comment.

The letter, dated May 10, was addressed to the Connecticut-based Financial Accounting Standards Board, which sets U.S. accounting standards, and the London-based International Accounting Standards Board, which sets international rules.

FASB is seeking comment on its proposal through May 31, and its details may change. Analysts said it would likely not be effective before 2015. A separate rule on loan losses was proposed by the IASB in March.

50 PCT JUMP IN RESERVES POSSIBLE

The letter intensified pressure on the two boards to align their rules. U.S. companies use FASB's generally accepted accounting principles, or GAAP. Much of the rest of the world uses IASB's international financial reporting standards (IFRS).

The two boards have been working for over a decade to merge their standards. Financial accounting has been a key focus since the global crisis, but the boards parted ways on loan loss accounting last year.

"Relative to the IASB's proposal, the FASB's proposal would generally require entities to recognize allowances for credit losses sooner and in larger amounts," said Bruce Pounder, director of professional programs at Loscalzo Associates, a Shrewsbury, New Jersey-based accounting education company.

The balance sheets of U.S. banks could look significantly worse than that of banks using international standards, even in identical economic conditions, he said.

Continued in article

Will bad loans look worse under U.S. GAAP versus IFRS?
How Bad is a Bad Bank Loan:  Rule Split to Put U.S. Banks at a Loss

From the CFO Morning Ledger on February 28, 2013

How bad is a bad bank loan?
Accounting regulators in the U.S. and Europe disagree on the standards for how banks book loan losses, and their rift could lead to tens of billions of dollars being carved off U.S. lenders’ current profits, writes the WSJ’s Michael Rapaport. The FASB and the IASB have separate proposals in the works that would require banks to record losses on soured loans earlier than they do now. But the U.S. proposal goes a step further and would force American banks to accelerate even more losses more quickly than foreign banks would. If U.S. and overseas banks end up using different models for booking losses, that could create an apples-to-oranges situation that would make it more difficult for investors to tell how they stack up against one another
.

"Rule Split to Put U.S. Banks at a Loss," by Michael Rapoport, The Wall Street Journal, February 27, 2013 --- Click Here
http://professional.wsj.com/article/SB10001424127887323293704578330490452665994.html?mod=ITP_moneyandinvesting_0&mg=reno64-wsj

How bad is a bad bank loan? Accounting regulators in the U.S. and Europe disagree, and their rift could lead to tens of billions of dollars being carved off U.S. lenders' current profits.

American and global rule makers have separate proposals in the works that would require banks to record losses on soured loans earlier than they do now. The plans aim to give investors a more accurate picture of banks' health, after many critics felt banks, both in the U.S. and abroad, took losses too slowly during the financial crisis.

But the U.S. proposal goes a step further: In a split with their overseas counterparts, U.S. rule makers would force American banks to accelerate even more losses more quickly than foreign banks would.

That could severely crimp current results for U.S. banks, some observers believe—an example of how a host of regulatory actions on both sides of the Atlantic may cause disparities. It also could hurt how investors perceive the health and performance of U.S. banks versus their competitors.

"If overseas banks don't have to record losses as early as U.S. banks, I think that puts [the U.S. banks] at a disadvantage," said Patrick Dolan, a finance and securitization attorney with Dechert LLP.

The gap between the two proposals is "a big difference," said Donna Fisher, a senior vice president at the American Bankers Association. Banks "all agreed globally that we want one standard" for booking losses, she said.

If U.S. and overseas banks end up using different models for booking losses, that could create an apples-to-oranges situation that would make it more difficult for investors to tell how they stack up against one another.

"They will be harder to compare than they are at present," said Peter Elwin, head of European pensions, valuation and accounting research for J.P. Morgan JPM +3.41% Cazenove, part of J.P. Morgan Chase & Co.

The changes aren't imminent. The plans from both the U.S.'s Financial Accounting Standards Board and International Accounting Standards Board, its London-based global counterpart, are still in the early stages: The IASB proposal hasn't even been formally issued yet, and both boards will listen to public comment on their plans before making a final decision. No changes are expected to take effect before 2015.

But FASB has suggested that some large U.S. banks might have to increase bad-loan reserves by 50% in some areas of their business. U.S. industry-wide reserves were $162 billion at the end of 2012, according to the Federal Deposit Insurance Corp. Currently, banks wait to record loan losses until there is evidence that losses have actually occurred.

During the financial crisis, net loan charge-offs booked by U.S. banks didn't peak until late 2009, according to FDIC data, more than a year after the heart of the crisis.

That left banks carrying huge piles of bad loans even after it was apparent they were souring in droves, making the banks appear healthier to investors than they really were and delaying the banks' reckoning with the crisis's impact.

Banks charged off $189 billion in bad loans in 2009 and $187 billion in 2010, according to the FDIC—much of which arguably should have been charged off earlier. (Charge-offs were $100 billion in 2008 and only $44 billion in 2007.)

Both FASB and IASB now want to change that system, so that projections of future losses would be the standard for booking loan losses. That is expected to speed up recognition of bad loans.

Until last summer, the two panels also had agreed on the details of how and when to book the losses: Largely, only those losses based on events expected over the following 12 months would be booked upfront. But FASB pulled away from that method, saying that it had heard concerns from some banks, investors and regulators that it was too complex.

Now, the FASB proposal, issued in December, calls for all losses banks expect over the life of a loan to be booked upfront. If that expectation changes, so will the recorded amount of losses.

Continued in article

A good example of this dissatisfaction is the May 31, 2013 reaction to the FASB from ELFA (Equipment Leasing and Finance Association) ---
http://www.elfaonline.org/issues/accounting/pdfs/ELFACreditLossesCommentLtr.pdf

Teaching Case
From The Wall Street Journal Accounting Weekly Review on April 5, 2013

Regulators Let Big Banks Look Safer Than They Are
by: Sheila Bair
Apr 02, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Banking, Derivatives, Fair-Value Accounting Rules, Investments, Regulation

SUMMARY: The point of this opinion page piece by the former chairman of the FDIC is that "capital-ratio rules...[lead to the view that] fully collateralized loans are considered riskier than derivatives positions.... The recent Senate report on the J.P. Morgan Chase 'London Whale' trading debacle revealed emails, telephone conversations and other evidence of how Chase managers manipulated their internal risk models to boost the bank's regulatory capital ratios.... [B]ecause regulators allow banks to use a process called 'risk weighting,' [banks] raise their capital ratios by characterizing the assets they hold as 'low risk.'" Ms. Bair goes on to describe the process of asset measurement by comparing risk-weighted to "accounting-based" assets.

CLASSROOM APPLICATION: The article may be used in a class when introducing fair value disclosures, accounting for derivatives, financial statement analysis for banking, or just the various asset valuation methods that may be used as identified in the U.S. FASB's or IASB's Conceptual Framework.

QUESTIONS: 
1. (Introductory) Who is Sheila Bair? What is Ms. Bair's concern with bank regulation and banks' capital ratios? In your answer, define the latter term.

2. (Advanced) Define the contents of a bank's balance sheet: identify major assets, major liabilities, and the types of capital, or shareholders' equity you expect to see on a bank balance sheet.

3. (Advanced) "On average, the three big universal banking companies (J.P. Morgan Chase, Bank of America and Citigroup) risk-weight their assets at only 55% of their total assets. For every trillion dollars in accounting assets, these megabanks calculate their capital ratio as if the assets represented only $550 billion of risk." How is it possible that total assets as reported in a bank balance sheet only contain risk representing a little more than half of their reported amounts?

4. (Advanced) What are the different valuation methods that may be used for a bank's assets-in fact, for any company's assets? Cite authoritative literature from a conceptual framework discussing the use of these valuation methods and the types of assets for which they should be used.

5. (Advanced) What are the three levels of determining fair values for which accounting standards require different types of disclosure? For which of these categories of assets is Ms. Bair concerned about bank's risk assessment? (Note that the bank regulatory capital requirements are different from the accounting disclosure requirements for assets reported at fair values.)

6. (Advanced) Refer to the related article. Who was the London Whale and how did his and his manager's actions show that valuation models can be manipulated?

7. (Advanced) Refer again to the London Whale. How do "capital regulations create incentives for even legitimate models to be manipulated," as stated by Ms. Bair?
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
JP Morgan 'Whale' Report Signals Deeper Problem
by Dan Fitzpatrick and Gregory Zuckerman
Jul 14, 2012
Online Exclusive

"Regulators Let Big Banks Look Safer Than They Are," by Sheila Bair, The Wall Street Journal, April 2, 2013 ---
http://online.wsj.com/article/SB10001424127887323415304578370703145206368.html?mod=djem_jiewr_AC_domainid

The recent Senate report on the J.P. Morgan Chase JPM +0.21% "London Whale" trading debacle revealed emails, telephone conversations and other evidence of how Chase managers manipulated their internal risk models to boost the bank's regulatory capital ratios. Risk models are common and certainly not illegal. Nevertheless, their use in bolstering a bank's capital ratios can give the public a false sense of security about the stability of the nation's largest financial institutions.

Capital ratios (also called capital adequacy ratios) reflect the percentage of a bank's assets that are funded with equity and are a key barometer of the institution's financial strength—they measure the bank's ability to absorb losses and still remain solvent. This should be a simple measure, but it isn't. That's because regulators allow banks to use a process called "risk weighting," which allows them to raise their capital ratios by characterizing the assets they hold as "low risk."

For instance, as part of the Federal Reserve's recent stress test, the Bank of America BAC +0.33% reported to the Federal Reserve that its capital ratio is 11.4%. But that was a measure of the bank's common equity as a percentage of the assets it holds as weighted by their risk—which is much less than the value of these assets according to accounting rules. Take out the risk-weighting adjustment, and its capital ratio falls to 7.8%.

On average, the three big universal banking companies (J.P. Morgan Chase, Bank of America and Citigroup C +0.75% ) risk-weight their assets at only 55% of their total assets. For every trillion dollars in accounting assets, these megabanks calculate their capital ratio as if the assets represented only $550 billion of risk.

As we learned during the 2008 financial crisis, financial models can be unreliable. Their assumptions about the risk of steep declines in housing prices were fatally flawed, causing catastrophic drops in the value of mortgage-backed securities. And now the London Whale episode has shown how capital regulations create incentives for even legitimate models to be manipulated.

According to the evidence compiled by the Senate Permanent Subcommittee on Investigations, the Chase staff was able to magically cut the risks of the Whale's trades in half. Of course, they also camouflaged the true dangers in those trades.

The ease with which models can be manipulated results in wildly divergent risk-weightings among banks with similar portfolios. Ironically, the government permits a bank to use its own internal models to help determine the riskiness of assets, such as securities and derivatives, which are held for trading—but not to determine the riskiness of good old-fashioned loans. The risk weights of loans are determined by regulation and generally subject to tougher capital treatment. As a result, financial institutions with large trading books can have less capital and still report higher capital ratios than traditional banks whose portfolios consist primarily of loans.

Compare, for instance, the risk-based ratios of Morgan Stanley, MS 0.00% an investment bank that has struggled since the crisis, and U.S. Bancorp, USB 0.00% a traditional commercial lender that has been one of the industry's best performers. According to the Fed's latest stress test, Morgan Stanley reported a risk-based capital ratio of nearly 14%; take out the risk weighting and its ratio drops to 7%. USB has a risk-based ratio of about 9%, virtually the same as its ratio on a non-risk weighted basis.

In the U.S. and most other countries, banks can also load up on their own country's government-backed debt and treat it as having zero risk. Many banks in distressed European nations have aggressively purchased their country's government debt to enhance their risk-based capital ratios.

In addition, if a bank buys the debt of another bank, it only needs to include 20% of the accounting value of those holdings for determining its capital requirements—but it must include 100% of the value of bonds of a commercial issuer. The rules governing capital ratios treat Citibank's debt as having one-fifth the risk of IBM IBM -0.05% 's. In a financial system that is already far too interconnected, it defies reason that regulators give banks such strong capital incentives to invest in each other.

Regulators need to use a simple, effective ratio as the main determinant of a bank's capital strength and go back to the drawing board on risk-weighting assets. It does make sense to look at the riskiness of banks' assets in determining the adequacy of its capital. But the current rules are upside down, providing more generous treatment of derivatives trading than fully collateralized small-business lending.

The main argument megabanks advance against a tough capital ratio is that it would force them to raise more capital and hurt the economic recovery. But the megabanks aren't doing much new lending. Since the crisis, they have piled up excess reserves and expanded their securities and derivatives positions—where they get a capital break—while loans, which are subject to tougher capital rules, have remained nearly flat.

Continued in article

 

Jensen Comment
I am opposed in large measure to fair value accounting for troubled loans because in most instances there just is no market for troubled loans.

Tom and I have already gone round and round for the granulation issue where two identical loans such as hog farming sewage lagoon loans where one bankrupt borrower (Sven) is a certain to eventually make good on the loan whereas Ole will take advantage of bankruptcy to never pay back bank losses on his hog farming corporation. How would Tom value these otherwise identical troubled loans?

The FDIC position is closer to the new FASB proposed accounting for loan losses.

He never mentions that the FDIC "stress tests" require granulation of details about why Ole's loan is more troublesome than Sven's loan. An assumed market for hog sewage lagoon loans does not drill (granulate) down as to why Ole's loan is more troublesome than Sven's loan even though both loans are in default. The FASB approach allows for recognition of expected payback differences between the two hog farmers. The FDIC, on the other hand, requires this type of information in stress tests.

Tom implies that fair values of troubled loans are not disclosed unless they are booked into the ledgers. He doesn't mention our AECM debates where I propose multi-column reporting with hard-to-estimate and volatile fair values reported in an adjoining column.

He does not mention the volatility in earnings that results from fair value bookings that are not realized and may never be realized.

Since we've been round and round previously I see no need to debate Tom's version of "Truth" once again since he insists that fair values be booked rather than simply reported in an adjoining column.

My answer on fair value accounting is and will remain that the best way to report fair values and changes in OCI are in multiple columns of financial statements.

 

In this thread Tom Selling wrote:

If bankers had their way, there would be no change to current standards.  
 

Jensen Comment
That would leave differences between how impairments are calculated between IFRS and US GAAP. The following is a passage from the 2012 edition of "IFRS and US GAAP: similarities and differences" by PWC ---
http://www.pwc.com/en_US/us/issues/ifrs-reporting/publications/assets/ifrs-and-us-gaap-similarities-and-differences-2012.pdf

 

Page 91
For available-for-sale debt instruments, the impairment models for financial assets may result in different impairment triggers and different impairment measurement criteria. In considering whether a decline in fair value is other than temporary, US GAAP looks to (1) management’s intent and ability to hold the security and (2) expectations of recovery of the cost basis in the security. The impairment trigger drives the measurement of the impairment loss. Under IFRS, the impairment triggers for available-for-sale debt instruments and loans and receivables are the same; however, the available-for-sale impairment loss is based on fair value while impairment of loans and receivables is calculated by discounting estimated cash flows (excluding credit losses that have not been incurred) by the original effective interest rate. Additional differences around reversals of impairment losses and impairment of equities also must be considered.

Jensen Comment
Under both IFRS and US GAAP prior to the proposed 2013 revisions, the financial instruments are carried at fair value even when fair values decline as long as the fair value movements are deemed "temporary." This led to an enormous dispute between the IASB and European banks holding Greek bonds when the banks deemed that the value decline in those Greek bonds were "temporary."

 

Thus it's no wonder that the bankers prefer this fair value model to the 2013 proposed changes in loan impairment accounting.

And I'm sorry that you are questioning the "independence" of the FASB from industry pressure on this issue without considering the track record of the FASB on resisting industry pressure on other issues. The bottom line is that the USA bankers do not like the 2013 Exposure Draft revising the above 2012 impairment models for financial assets.
 

I hope the FASB does not abandon the ED due to banking industry pressures.

Respectfully,

Bob Jensen

Bob Jensen's threads on fair value accounting and bad debts ---
http://www.trinity.edu/rjensen/Theory02.htm#FairValueFails

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


Another Socialism Failure
"The Big Money Is Bailing On Argentina, Again, Over Fears Of Fresh Crisis," by Brian Winter, Business Insider, June 13, 2013 ---
http://www.businessinsider.com/investors-are-leaving-argentina-2013-6

More than a decade after Argentina's epic financial collapse of 2001-02, many investors are rushing for the door once again.

From big Chinese and Brazilian companies like miner Vale do Rio Doce SA, to small-business owners and savers, the fear of a new crisis has led to canceled investments and suitcases of cash leaving the country.

The mass exodus, which has been limited only by leftist President Cristina Fernandez's capital controls, is threatening to undermine Latin America's No. 3 economy even further by leaving it short of hard currency and new jobs.

The underlying problems range from Fernandez's hostile treatment of the private sector, to severe financial distortions such as a parallel exchange rate, to the general feeling that Argentina is due for one of the periodic spasms that have racked the country every 10 years or so going back to the 1930s.

Some say such worries are overblown, arguing that Argentina has defied doomsday predictions for the past decade, which was by some measures its best economic run since World War Two.

Yet for many, the feeling is of a gathering storm.

"The end of this story has already been written, and it ends in crisis," said Roberto Lavagna, who as economy minister from 2002 to 2005 helped create Argentina's current export-driven policy framework, and is still widely respected on Wall Street.

While everyone agrees any crisis won't be as bad as the 2001-02 meltdown - which saw nationwide riots, two presidents quit, and the economy shrink by one-fifth - it could still be enough to severely disrupt lives and business plans.

By relying on short-term fixes such as price controls and bans on Argentines buying dollars, Fernandez may just be delaying the inevitable while piling up even more problems.

"The longer they try to delay things, the worse they will be," said Lavagna, who worked for Fernandez's late husband and predecessor, Nestor Kirchner, before falling out over what he saw as the couple's increasingly anti-business agenda.

"You can't have growth without investment."

Continued in article

   

Another Capitalism Success
Miracle in Chile --- http://en.wikipedia.org/wiki/Miracle_of_Chile
Note that Chile did not end the wealth gap in Chile nearly as much as it raised the levels of income and opportunity for the poor higher than the rest of Latin and South America. The rich got richer and the poor got richer.

Also see where the Chilean state lends a hand ---
http://link.springer.com/article/10.1007/BF02719329

Programs for New Small Businesses in Chile ---
http://startupchile.org/


Control Fraud --- "cases where the officers who control what look like legitimate entities use them as “weapons” to commit crimes. Each time, Alan Greenspan, former chairman of the Federal Reserve, played a catastrophic role. First, his policies created the fraud-friendly (criminogenic) environment that produces epidemics of control fraud, then he failed to identify those epidemics and incipient crises, and finally, he failed to counter them."

"The Age of Fraud," by Bill Black, by Barry Ritholtz, June 14, 2013 ---
http://www.ritholtz.com/blog/2013/06/the-age-of-fraud/

. . .

At the heart of Greenspan’s failure lies an ethical void in the brand of economics that has dominated American universities and policy circles for the last several decades, a brand known as “free market fundamentalism” or the “neoclassical school.” (I call it “theoclassical economics” for its quasi-religious belief system.) Mainstream economists who follow this school assert a deeply flawed and controversial concept known as the “efficient market hypothesis,” which holds that financial markets magically regulate themselves (they automatically “self-correct”) and are thus immune to fraud. When an economist starts believing in that kind of fallacy, he is bound to become blind to reality. Let’s take a look at what blinded Greenspan:

  1. Greenspan knew that markets were “efficient” because the efficient market hypothesis is the foundational pillar underlying modern finance theory.
  2. Markets can’t be efficient if there is control fraud, so there must not be any.
  3. Wait, there are control frauds! Tens of thousands of them.
  4. Then control fraud must not really be harmful, or markets would not be efficient.
  5. Control fraud, therefore, must not be immoral. As crime boss Emilio Barzini put it in The Godfather, “It’s just business.”

As delusional and immoral as this “logic” chain is, many elite economists believe it. This warped perspective has spawned policies so perverse that they turn the world of finance into the optimal environment for criminals. The upshot is that most of our elite financial leaders and professionals have thrown integrity out the window, and we end up with recurrent, intensifying financial crises, de factoimmunity for our most elite criminals, and the rise of crony capitalism. Let’s do a little time travel to see exactly how this plays out.

. . .

How to create a regulatory black hole

Alan Greenspan was Ayn Rand’s protégé, but he moved radically to the wacky side of Rand on the issue of financial fraud. And that, friends, is pretty wacky. Greenspan pushed the idea that preventing fraud was not a legitimate basis for regulation, and said so in a famous encounter [3] with Commodities Futures Trading Commission (CFTC) Chair Brooksley Born. “I don’t think there is any need for a law against fraud,” Born recalls Greenspan telling her. Greenspan actually believed the market would sort itself out if any fraud occurred. Born knew she had a powerful foe on any regulation.

She was right. Greenspan, with the rabid support of the Rubin wing of the Clinton administration, along with Republican Chairman of the Senate Banking Committee Phil Gramm, crushed Born’s effort to regulate credit default swaps (CDS). The plutocrats and their political allies deliberately created what’s known as a regulatory black hole – a place where elite criminals could commit their crimes under the cover of perpetual night.

Greenspan chose another Fed economist, Patrick Parkinson, to testify on behalf of the bill to create the regulatory black hole for these dangerous financial instruments. Parkinson offered the old line that efficient markets easily excluded fraud — otherwise, they wouldn’t be efficient markets! (Parkinson would later tell the Financial Crisis Inquiry Commission in 2011 that the “whole concept” of a related financial instrument known as an “ABS CDO” had been an “abomination”). Greenspan’s successor richly rewarded Parkinson for being stunningly wrong in his belief: Ben Bernanke appointed Parkinson — who had no experience as a supervisor or examiner — as the Fed’s head of supervision.

Lynn Turner, former chief accountant of the SEC, told me of Greenspan’s infamous question to his group of senior officials who met at the Fed in late 1998 or early 1999 (roughly the same time as Greenspan’s conversation with Born): “Why does it matter if the banks are allowed to fudge their numbers a little bit?” What’s wrong with a “little bit” of fraud?

Conservatives often support the “broken windows” theory of criminal activity, which asserts that you stop serious blue-collar crime by cracking down on minor offenses. Yet mysteriously, they never apply the concept to white-collar financial crimes by elites. The little-bit-of fraud-is-ok concept got made into law in the Commodities Futures Modernization Act of 2000, which created the regulatory black hole for credit default swaps. That black hole was compounded by the Commodity Futures Trading Commission under the leadership of Wendy Gramm, spouse of Senator Phil Gramm.

Enron’s fraudulent leaders were delighted to exploit that black hole, because they were engaged in a massive control fraud. They appointed Wendy Gramm to their board of directors and proceeded to use derivatives to manipulate prices and aid their cartel in driving electricity prices far higher on the Pacific Coast. In a bizarre irony, the massive increase in prices led to the defeat of California Governor Gray Davis (the leading opponent of the cartel) and his replacement by Governor Schwarzenegger – a man who was part of the group that met secretly with Enron’s leadership to try to defeat Davis’s efforts to get the federal regulators to kill the cartel.

How damaging was Greenspan’s dogmatic and delusional defense of elite financial frauds in the case of Enron? If you look closely, you can see that Enron brought together all the critical elements of a financial crisis: big-time accounting control fraud, derivatives, cartels, and the use of off-balance sheet scams to inflate income and hide real losses and leverage. On top of all that, many of the world’s largest banks aided Enron and its extremely creative CFO Andrew Fastow to create frauds. The Fed could have responded by adopting and enforcing mandates to end the criminal practices that were driving the epidemic, but it didn’t. Instead, Greenspan and other Fed economists championed Enron’s leadership and cited the company as proof that regulation was unnecessary to prevent control fraud. They were so extreme that they attacked their own senior supervisors for daring to criticize the banks’ role in aiding and abetting Enron’s activities.

Later, when risky derivatives activities and control frauds at large financial institutions were pushing us toward the catastrophic crash of 2007-2008, the Fed took no meaningful action based on the lessons learned from Enron. Greenspan and the senior leadership of the Fed had learned absolutely nothing, which shows how disabling economic dogma is to regulators – making them worse than simply useless. They become harmful, again attacking their supervisors for criticizing the banks’ fraudulent “liar’s” loans. When Bernanke placed Patrick Parkinson (an economist blind to fraud by elite banksters) in a supervisory role at the Fed, he sealed the fate of millions of Americans whose financial well-being would be sucked right into that regulatory black hole – and removed the ability of the accursed supervisors to criticize the largest banks.

How to protect predatory lenders

Finally, we come to the mortgage meltdown of 2008, when the entire housing industry went into freefall. Central to this crisis is the story of the liar’s loan — mortgage-industry slang for a mortgage that a lender gives without checking tax returns, employment history, or anything else that might reliably indicate that the borrower can make the payments.

The Fed, and only the Fed, had authority under the Home Ownership and Equity Protection Act (HOEPA) to ban liar’s loans by all lenders. At a series of hearings mandated by Congress, dozens of witnesses representing home mortgage borrowers and state and local criminal investigators urged the Fed to do this. The testimony included a study that found a 90 percent incidence of fraud in liar’s loans.

What did Greenspan and Bernanke do? Exactly nothing. They consistently refused to act.

Greenspan went so far as to refuse pleas to send Fed examiners into bank holding company affiliates to find the facts and collect data on liar’s loans. Simultaneously, the Fed’s economists dismissed the warnings from progressives about fraudulent liar’s loans as “merely anecdotal.” In 2005, the desperate Fed regulators, blocked by Greenspan from sending in the examiners to get data from the banks, resorted to simply sending a letter to the largest banks requesting information. The Fed supervisor who received the banks’ response to that letter termed the data “very alarming.”

If you suspect that the banks would typically respond to such requests by understating their problem assets significantly, then you have the right instincts to be a financial regulator.

. . .

We did not have to suffer this crisis. Economists who were not blinded by neoclassical theory, like George Akerlof (who won the Nobel Prize in 2001) and Christina Romer (adviser to President Obama from 2008-2010), had warned their colleagues about accounting control fraud and liar’s loans, as did criminologists and regulators like me. But Greenspan (and Timothy Geithner) refused to see the obvious truth.

Alan Greenspan had no excuse for assuming fraud out of existence, and his exceptionally immoral position on fraud and regulation proved catastrophic to America and much of the world. We cannot afford the price, measured in many trillions of dollars, over 10 million jobs, and endless suffering, of unethical economists.

Bob Jensen's threads on the Efficient Market Hypothesis ---
http://www.trinity.edu/rjensen/Theory01.htm#EMH


From the CFO Journal's Morning Ledger on June 5, 2013

KPMG: Safeguards ‘sound and effective’
KPMG
is completing an internal review that’s likely to result in only minor changes to the accounting firm’s controls,
the WSJ’s Michael Rapoport reports. The insider-trading scandal involving Scott London, a former KPMG senior partner, prompted the firm to review its internal safeguards, which the firm has said already were “world-class.” The review is almost done, and the KPMG “will be considering possible enhancements to our training and monitoring,” a spokesman said. But the review “supports the conclusion that the fundamental architecture of our insider-trading policies is sound and effective.” The firm’s code of conduct states that employees “should not disclose any confidential or private information to third parties.”

Jensen Comment
This is on the heels of KPMG having to pay out $153 million in a negotiated settlement on its botched Fannie Mae audit (from which it was fired).

KMPG was fired from what was arguably its largest client in history. Fannie Mae under a bonus-seeking CEO perpetrated one of the largest earnings management frauds in history ---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation

"Fannie, KPMG Settle Class-Action Suit," by Michael Rapoport and Nick Timiraos, The Wall Street Journal, May 7, 2013 ---
http://online.wsj.com/article/SB10001424127887324326504578469591902348434.html?mod=WSJ_Markets_LEFTTopStories

This is on the heels of one of the felonious partner insider trading scandal:
"Another 'Rogue' Audit Partner; Another 'Duped' Audit Firm," by Francine McKenna, Forbes, April 10, 2013 ---
http://www.forbes.com/sites/francinemckenna/2013/04/10/another-rogue-audit-partner-another-duped-audit-firm/

KPMG is at it again. In the most recent allegation of violating independence standards of the accounting profession
"Threats to Independence Raise Ethical Questions for the Big-Four CPA Firms," by Steven Mintz, Ethics Sage, May 7, 2013 ---
http://www.ethicssage.com/2013/05/threats-to-independence-raise-ethical-questions-for-the-big-four-cpa-firms.html

"Someone Convinced KPMG and GE to End Their Little Loan Staff Arrangement," by Caleb Newquist, Going Concern, January 24, 2012 ---
http://goingconcern.com/post/someone-convinced-kpmg-and-ge-end-their-little-loan-staff-arrangement

And the list of the happy face and sad face incidents involving KPMG go on and on and on at
http://www.trinity.edu/rjensen/Fraud001.htm#KPMG

Teaching Case from The Wall Street Journal Accounting Weekly Review on June 6, 2013 ---
 

KPMG Finds Its Safeguards 'Sound and Effective'
by: Michael Rapoport
Jun 04, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Internal Controls

SUMMARY: Following the admission by Scott London--former KPMG senior partner responsible for the Herbalife Ltd., Skechers USA Inc. , and other audit engagements-that he disclosed inside information to a friend, KPMG reviewed its internal control systems. System controls in place are described by the firm as 'world-class' and "...the review 'supports the conclusion that the fundamental architecture of our insider trading policies is sound and effective,'...." The article then describes the actions taken by the firm to inform its clients before they might learn on the news of accusations about Mr. London's actions.

CLASSROOM APPLICATION: The article may be used in an auditing class or in another class covering internal control systems.

QUESTIONS: 
1. (Introductory) Who is Scott London? To what wrongdoing has he admitted?

2. (Advanced) What is the objective of internal controls at public accounting firms?

3. (Introductory) According to the article, what are some of the internal control procedures in place at KPMG?

4. (Advanced) Given the actions to which Mr. London has confessed, how can KPMG conclude that its own internal control systems are "sound and effective" as stated in the title?

5. (Introductory) At how many of the large public accounting firms have there been cases of insider trading?

6. (Introductory) According to the article, what factors have led to KPMG not having lost significant numbers of clients due to this debacle? In your answer, comment on who selects a company's auditor.

7. (Advanced) Access the related graphic "Keeping Clients", also available by direct link on the WSJ web site at http://online.wsj.com/article/SB10001424127887323469804578525603736288878.html How was this list of KPMG southwestern office compiled? How were the data points determined?

8. (Advanced) What is the importance of "tone at the top" in maintaining an effective system of internal control?
 

Reviewed By: Judy Beckman, University of Rhode Island

"KPMG Finds Its Safeguards 'Sound and Effective'," by Michael Rapoport, The Wall Street Journal, June 4, 2013 ---
http://online.wsj.com/article/SB10001424127887324423904578523570186372226.html?mod=djem_jiewr_AC_domainid

KPMG LLP is completing an internal review that is likely to result in only minor changes to the accounting firm's controls in the wake of an insider-trading scandal.

Scott London, a former KPMG senior partner, last week agreed to plead guilty to securities fraud after admitting in April that he had passed confidential information on Herbalife Ltd., HLF +1.66% Skechers USA Inc. SKX +0.36% and other KPMG auditing clients to a friend, who made profits by illegally trading on the tips.

Mr. London is expected to enter his plea in court in the next few weeks.

The case prompted KPMG to review its internal safeguards, which the firm has said already were "world-class." They include training for employees, a whistleblower system and monitoring of the personal investments of partners and managers. All KPMG employees must agree annually to comply with the firm's code of conduct, which prohibits insider trading and warns against practices that could lead to the release of confidential client information.

The review is nearing completion, and the firm "will be considering possible enhancements to our training and monitoring," a KPMG spokesman said. But the review "supports the conclusion that the fundamental architecture of our insider trading policies is sound and effective," he said.

The firm's code of conduct states that employees "should not disclose any confidential or private information to third parties." Even with other KPMG partners and employees, such information should be shared only on "a need-to-know basis." Documents with confidential information are supposed to be placed in secure bins for shredding when they are disposed of.

Mr. London has said KPMG had no involvement in the scheme. Nevertheless, the firm acted quickly to protect its reputation and prevent any loss of clients when it learned of Mr. London's conduct.

In a matter of hours, KPMG moved to tell clients the news, before they could find it out elsewhere. The firm even tracked down a client in Tokyo, and issued a news release to inform the public after 9 p.m. on a Monday night. KPMG's message: Mr. London was a rogue partner who flouted its rules, an isolated case that wasn't reflective of the firm.

Clients said the quick response was critical. "There would have been nothing worse than reading it in the paper before I got a call," said Lester Aaron, chief financial officer of Unico American Corp., UNAM +0.85% a Woodland Hills, Calif., insurance company that uses KPMG as its auditor.

The outreach is one major reason KPMG has been able to avoid serious damage to its reputation, attorneys and accounting experts said. KPMG hasn't lost any audit clients in the Pacific Southwest region, where Mr. London headed the firm's audit practice and where a tally by The Wall Street Journal suggests KPMG has about 40 clients. Many of them have publicly reiterated their support for KPMG since the London incident by issuing proxy statements recommending that shareholders ratify the company's continuing use of the firm.

Another reason KPMG has emerged relatively unscathed: Clients and investors recognize how hard it is for even the most-stringent safeguards to prevent all misconduct, and realize that such cases could happen at their own companies, some say.

"As long as it appears to be a one-off, a rogue employee, they're not going to take a hit," said Charles Elson, a corporate-governance expert at the University of Delaware. "Only if you can demonstrate the issue is systemic should it have any impact on them."

There was "disappointment and a sense of betrayal" in KPMG's Los Angeles practice after Mr. London's conduct was disclosed, said a person familiar with the situation, but the practice has since "gotten back to business."

Harland Braun, Mr. London's lawyer, doesn't dispute KPMG's characterization of his client as a lone wolf, but he noted Mr. London came clean quickly once he was exposed. Mr. Braun said the confession freed up KPMG to move to prevent any damage.

If Mr. London had contested the case against him, "the thing could have dragged on for months," Mr. Braun said, hurting the firm and causing uncertainty for its clients. "There would have been no way for KPMG to protect itself if Scott kept his mouth shut."

Companies' reluctance to bolt also might reflect the sometimes entrenched, long-term relationships between companies and audit firms, some auditing experts said. Many companies have used the same auditor for decades or even a century or more. Critics have said that leads to coziness that can threaten the independence of an audit. Some favor "term limits" for audit firms, which the accounting industry opposes.

Continued in article

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


"Former PWC consultant Nicholas Glynatsis jailed for insider trading," by Andrew Main, The Australian June 07, 2013 --- Click Here
http://www.theaustralian.com.au/business/former-pwc-consultant-nicholas-glynatsis-jailed-for-insider-trading/story-e6frg8zx-1226659294782


From the CFO Journal's Morning Ledger on June 5, 2013

The long-awaited money-market-fund overhaul appears to be moving forward. The SEC is scheduled to vote this morning on a proposal that could eventually do away with the dollar-a-share value that has defined money-market funds, DealBook’s Nathaniel Popper reports. The proposal, which aims to fix structural problems that make the funds susceptible to investor runs, would require “prime” funds whose shares are held by corporations and other institutional investors to allow their values to float like those of other mutual funds, the WSJ’s Andrew Ackerman and Jessica Holzer note. If it passes, the proposal will still face months of public comment before a final vote.

Today’s vote is the culmination of efforts to resurrect reform, which appeared to be on life support late last year. The SEC had been facing pressure from Fed Chairman Ben Bernanke and then-Treasury Secretary Timothy Geithner, who threatened to override the commission if it failed to act. In November, the Financial Stability Oversight Council issued its own recommendations to overhaul money funds after the SEC failed to agree on a plan.

Industry executives have warned that big institutions would stop using money funds if they had a floating share value, Popper notes, though some have struck a more conciliatory note recently. As CFOJ reported back in April, some corporate treasurers have been looking for alternative investments because they think the looming changes could complicate accounting and leave companies facing potential tax liabilities.


From the CFO Journal on June 6, 2013

IFRS makes progress around the world
Over 100 countries use International Financial Reporting Standards, but as more consider adopting those accounting rules, the foundation that oversees them is taking stock for the first time of how they are being applied and enforced,
Emily Chasan writes. In a new report, the IFRS Foundation, which oversees the IASB, studied 66 jurisdictions for information about how IFRS is being used. The group found that 55 of those jurisdictions require the use of IFRS for all, or almost all, public companies. Even a handful of countries that have not formally required the rules are using them. While the U.S. has yet to make a decision on whether to incorporate IFRS, more than 450 foreign companies are filing their reports in IFRS.

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


From the CFO Journal on June 6, 2013

FASB’s Seidman: Americans prefer rules to principles
Outgoing FASB Chairman Leslie Seidman has had plenty of time to tackle long-standing questions about whether accounting principles are more desirable than specific accounting rules,
writes Emily Chasan. The debate over whether detailed rules and bright-line exceptions are more or less useful than broad principles that require management judgment has dominated her past 1o years on the board. “I think it’s undeniable that we Americans like our rules,” Ms. Seidman said at a Financial Executives International conference in New York on Tuesday, where she was discussing the accounting rulemakers’ soon-to-be-completed joint project on revenue-recognition accounting. She made the comments in her final public speech as chairman of the U.S. accounting rulemaker.

"Study: Rules-based Accounting Shields Firms From Lawsuits," by Jr. Deputy Accountant Adrienne Gonzalez, Going Concern, January 15, 2013 ---
http://goingconcern.com/post/study-rules-based-accounting-shields-firms-lawsuits

According to groundbreaking research by Richard Mergenthaler, assistant professor of accounting at the University of Iowa Tippie College of Business, shareholders are more likely to sue firms that use principles-based accounting standards over rules-based standards.

Continued in article

Jensen Comment
I would have hypothesized that it would be the other way around on the basis that it's really hard to nail Jello to a wall.

Principles-Based standards also complicate enforcement of regulations
There are some hurdles that have to be passed before we’re going to be comfortable making the ultimate decision about whether to incorporate IFRS into the U.S. reporting regime. Sticking points include the independence of the International Accounting Standards Board and “the quality and enforceability of standards.
 Mary Shapiro, U.S. Securities and Exchange Commission Chairman, January 5, 2012 ---
 http://www.businessweek.com/news/2012-01-06/sec-s-schapiro-says-she-regrets-loss-in-investor-access-battle.html



Jensen Comment
I interpret "enforceability of standards" to center around the increased difficulty of issuing citations for rule breaking under IFRS principles-based standards. The IFRS-like principle may be to "drive safely in a school zone" whereas the FASB bright line might be to drive under 20 mph. It is much easier to issue citations for rule breakers who drive over the posted speed limit.  

Pat Walters and I have a friendly debate running over bright lines (FASBs) versus principles-based rules (IFRS) in accountancy. I'm a bright lines guy who favors 20 mph signs in front of the schools and the historic 3% SPE outside equity bright line that was the smoking gun that brought down Andersen and Enron. I don't know how Pat feels about speed limit signs, but I suspect she worries that these bright lines might encourage us old folks to press the pedal to 20 mph when we can only safely drive in a school zone at 5 mph.

Be that as it may, Daniel Henninger has a WSJ article that seems to take my side in this debate. What's interesting is that new technology sometimes favors rules. Serena Williams will pass on knowing that she indeed had a foot fault in the 2009 U.S. Open women's semifinal, because new technology records bright line violations that are virtually impossible to dispute. The feuding Jimmy Connors and John McEnroe will pass on never knowing for certain who was right and who was wrong in most of their disputed calls.

If there was no bright line for a foot fault, then Serena Williams would not have to concede that she was wrong. In principle she may have been totally fair in her serve. And Enron and Andersen might still be thriving. And Franklin Raines might still be managing the earnings levels and his bonus amounts at Fannie Mae --- http://www.trinity.edu/rjensen/theory01.htm#Manipulation

 

Bob Jensen's threads on Bright Lines Versus Principles-Based Rules ---
http://www.trinity.edu/rjensen/Theory01.htm#BrightLines


From the CFO Journal's Morning Ledger on June 14, 2013

SEC says Revlon misled investors, directors
Revlon agreed to pay $850,000 to settle SEC charges that it misled shareholders during a “going-private transaction,” and kept critical information from independent board members, the WSJ’s Serena Ng and Saabira Chaudhuri report. The company didn’t admit or deny the findings. The SEC complaint stemmed from Revlon’s attempt four years ago to go private. The move was part of a complicated plan by the heavily indebted company to pay down a loan from MacAndrews & Forbes, the holding company of Ronald Perelman, the billionaire who controls Revlon.

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


From the CFO Journal's Morning Ledger on June 6, 2013

Companies turn to 3-D printing to cut costs
Thanks to cheaper equipment and better technology, 3-D printing is moving into the mainstream of business faster than many people realize,
CIO Journal’s Clint Boulton reports. GE‘s Aviation unit prints fuel injectors and other components within the combustion system of a jet engine. GE is also experimenting with 3-D printing to produce a medical device, the ultrasound probe. Researchers at GE say that 3-D printing could help cut the costs of manufacturing certain parts of the probe by 30%.

Jensen Comment

This technology seems to be betting for an accounting research case study in cost accounting.

Bob Jensen's Helpers for Case Writers ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Cases


I had a genuinely wonderful teaching experience this past semester. As I discussed in a blog posting on January 1, 2013, I helped set up a class in Victorian Literature for 10 second semester senior accounting majors. We read and discussed Great Expectations, North & South, and The Mill on the Floss.
"A Good Suggestion," by Joe Hoyle, Teaching Blog, June 1, 2013 ---
http://joehoyle-teaching.blogspot.com/2013/06/a-good-suggestion.html

Jensen Comment
This makes me wonder what role a Victorian Literature professor might play in setting up an accounting course for 10 second semester senior English majors. If she listened to what her students want most it might be more of a skills course in financial literacy, personal finance, and business law and ethics pertaining to accounting.

What do you think it should contain for graduating English majors?

It would be a lot of work, but it might be interesting to have students do a project on detecting accountants in literature or accounting frauds in literature.


"Advice to practicing accountants who might want to teach," by Jim Martin, MAAW's Blog, June 8, 2013 ---
http://maaw.blogspot.com/2013/06/7-advice-to-practicing-accountants-who.html


Collateralized Debt Obligation (CDO) --- http://en.wikipedia.org/wiki/Collateralized_debt_obligation

"One of Wall Street's Riskiest Bets Returns," by Katy Burne, The Wall Street Journal, June 4, 2013 ---
http://online.wsj.com/article/SB10001424127887324423904578525701936124838.html?mod=djemCFO_h

Investors are once again clamoring for a risky investment blamed for helping unleash the financial crisis: the synthetic CDO.

In a sign of how hard Wall Street is trying to satisfy voracious demand for higher returns amid rock-bottom interest rates, J.P. Morgan Chase JPM -0.83% & Co. and Morgan Stanley MS -0.71% bankers in London are moving to assemble so-called synthetic collateralized debt obligations.

CDOs give investors a chance to bet on the creditworthiness of a basket of companies. Basic CDOs pool bonds and offer investors a slice of the pool. Synthetic CDOs pool, instead of the bonds themselves, insurance-like derivative contracts on the bonds.

Like their crisis-era predecessors, the new CDOs would be sliced up into different levels of risk and returns. Investors who want a chance at the highest returns would have to buy the riskiest slice.

While spreading risk in some ways, synthetic CDOs also can multiply the financial damage if companies fall behind on their debt payments.

During the financial crisis, CDOs pegged to soured mortgage loans caused losses to careen around the world.

Their catastrophic impact was denounced by many lawmakers and investors, and the market for all kinds of highly engineered financial instruments evaporated.

Some details of the deals being worked on at J.P. Morgan and Morgan Stanley aren't clear, including the size of the CDOs and which investment firms have expressed an interest in buying slices of them.

The banks declined to comment.

A small number of institutional investors recently approached the two banks and asked them if they would put together the synthetic CDOs, according to people familiar with the discussions.

The requests were made in London, a global center of derivatives trading.

J.P. Morgan and Morgan Stanley now are trying to line up more investors as buyers for the instruments, said a person familiar with the talks. An investor usually buys just one slice of a CDO, which usually is chopped into about six pieces.

The banks likely won't proceed with the CDOs unless they can sign up enough investors.

J.P. Morgan and Morgan Stanley aren't expected to invest in their own deals because of postcrisis rules that require banks to set aside large amounts of capital against possible losses on these types of investments.

The interest by potential investors in new synthetic CDOs shows that demand for higher returns is intense, said Brian Reynolds, chief market strategist at brokerage firm Rosenblatt Securities Inc. "Wall Street will create new, more complex, more risky structures to satisfy that demand," he said.

In the peak year of 2007, financial firms issued $634 billion of synthetic CDOs, according to data provider Creditflux. Sales fell to $98 billion in 2009. Since then, some hedge funds and banks have worked together to bundle derivatives into custom-made trades, but those private deals were often small and weren't evaluated by credit-rating firms.

A CDO driven by a different aim is also in the works. Citigroup Inc. C -1.42% now is selling a CDO using derivatives tied to the bank's portfolio of loans to shipping companies, but this deal isn't motivated by investor demand for higher returns.

Instead, the impetus for the roughly $500 million deal, being pitched only outside the U.S., is Citigroup's desire to make room on its balance sheet for new loans and hold less capital as a cushion against potential losses on the shipping loans, said a person familiar with the transaction.

Investors in the deal will be on the hook for some losses. In return, the deal is expected to pay an annual yield of 13% to 15%, according to the person familiar with the offering. Citigroup declined to comment.

It isn't clear how much investors would stand to earn on the synthetic CDOs being assembled by J.P. Morgan and Morgan Stanley. Investment-grade corporate bonds now yield less than 5%.

Efforts to pull off the deals show that banks and investors battered by CDOs during the financial crisis are increasingly willing to ignore bad memories in order to reach for higher returns. In markets ranging from commercial mortgage-backed securities to junk bonds, investors are eager to buy even the very riskiest investments, some of which now deliver yields of more 20% per year.

Before the crisis, CDOs and synthetic CDOs were a big cog in Wall Street's so-called structured-finance machine, bringing in substantial fees for securities firms that put together the deals.

In 2007, Goldman Sachs Group Inc. GS -1.15% created a CDO called Abacus 2007-AC1 for hedge-fund firm Paulson & Co., which wanted to magnify a bet against the U.S. housing market.

Continued in article

Jensen Comment
If the CDO market is not manipulated by Wall Street brokers, I see nothing wrong with the return of the CDO markets. CDOs allow diversification of mortgage investment risk. The huge financial scandal was caused not so much by the CDOs themselves as by the poisoned mortgages bundled in the CDOs, mortgages that had 100% probability of default. If the mortgages bundled in CDOs have much lower probability of default then the CDO market is a good idea.

Safeguards must always be put in place with respect to how any products on Wall Street are marketed and the fairness and efficiency of those markets.

Bob Jensen's threads of frauds in Wall Street marketing and market manipulation are summarized in a timeline at
http://www.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds


I wrote the following at
http://www.trinity.edu/rjensen/TheoryTAR.htm#Replication

Introduction to Replication Commentaries
In this message I will define a research "replication" as an experiment that exactly and independently reproduces hypothesis testing of an original scientific experiment. The replication must be done by "independent" researchers using the same hypotheses and models that test those hypotheses such as multivariate statistical models. Researchers must be sufficiently independent such that the replication is not performed by the same scientists or students/colleagues of those scientists. Experimental data sets may be identical in original studies and replications, although if replications generate different data sets the replications also test for errors in data collection and recording. When identical data sets are used, replicators are mainly checking analysis errors apart from data errors.

Presumably a successful replication "reproduces" exactly the same outcomes and authenticates/verifies the original research. In scientific research, such authentication is considered extremely important. The IAPUC Gold Book makes a distinction between reproducibility and repeatability at
http://goldbook.iupac.org/
For purposes of this message, replication, reproducibility, and repeatability will be viewed as synonyms.

This message does not make an allowance for "conceptual replications" apart from "exact replications," although such refinements should be duly noted ---
http://www.jasnh.com/pdf/Vol6-No2.pdf

This message does have a very long quotation from a study by Watson et al. (2008) that does elaborate on quasi-replication and partial-replication. That quotation also elaborates on concepts of external versus internal validity grounded in the book:
Cook, T. D., & Campbell, D. T. (1979). Quasi-experimentation: Design & analysis issues for field settings. Boston: Houghton Mifflin Company.

I define an "extended study" as one which may have similar hypotheses but uses non-similar data sets and/or non-similar models. For example, study of female in place of male test subjects is an extended study with different data sets. An extended study may vary the variables under investigation or change the testing model structure such as changing to a logit model as an extension of a more traditional regression model.

Extended studies that create knew knowledge are not replications in terms of the above definitions, although an extended study my start with an exact replication.

Replication Research May Take Years to Resolve
Purdue University is investigating “extremely serious” concerns about the research of Rusi Taleyarkhan, a professor of nuclear engineering who has published articles saying that he had produced nuclear fusion in a tabletop experiment, The New York Times reported. While the research was published in Science in 2002, the findings have faced increasing skepticism because other scientists have been unable to replicate them. Taleyarkhan did not respond to inquiries from The Times about the investigation.
Inside Higher Ed, March 08, 2006 --- http://www.insidehighered.com/index.php/news/2006/03/08/qt
The New York Times March 9 report is at http://www.nytimes.com/2006/03/08/science/08fusion.html?_r=1&oref=slogin 

"Climategate's Phil Jones Confesses to Climate Fraud," by Marc Sheppard, American Thinker, February 14, 2010 ---
http://www.americanthinker.com/2010/02/climategates_phil_jones_confes.html

Interesting Video
"The Placebo Effect,"  by Gwen Sharp, Sociological Images, March 10, 2011 --- Click Here
http://thesocietypages.org/socimages/2011/03/10/the-placebo-effect/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+SociologicalImagesSeeingIsBelieving+%28Sociological+Images%3A+Seeing+Is+Believing%29

A good example of replication in econometrics is illustrated by the inability of obscure graduate students and an economics  professor at the University of Massachusetts to to replicate the important findings of two famous Harvard monetary economics scientists named Carmen Reinhart and Kenneth Roghoff ---
http://en.wikipedia.org/wiki/Carmen_Reinhart#Research_and_publication

In 2013, Reinhart and Rogoff were in the spotlight after researchers discovered that their 2010 paper "Growth in a Time of Debt" in the American Economic Review Papers and Proceedings had a computational error. The work argued that debt above 90% of GDP was particularly harmful to economic growth, while corrections have shown that the negative correlation between debt and growth does not increase above 90%. A separate and previous criticism is that the negative correlation between debt and growth need not be causal.  Rogoff and Reinhardt claimed that their fundamental conclusions were accurate, despite the errors.

A review by Herndon, Ash and Pollin of [Reinhart's] widely cited paper with Rogoff, "Growth in a time of debt", argued that "coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period."

Their error detections that received worldwide attention demonstrates that high debt countries grew at 2.2 percent, rather than the −0.1 percent figure claimed by Reinhart and Rogoff.

I'm critical of this replication example in one respect. Why did it take over two years. In chemistry such an important finding would've most likely been replicated in weeks or months rather than years.

Thus we do often have a difference between the natural sciences and the social sciences with respect to how immediate replications transpire. In the natural sciences it is common for journals to not even publish findings before they've been replicated. The social sciences, also known as the softer sciences, are frequently softer with respect to timings of replications.

How Accountics Scientists Should Change: 
"Frankly, Scarlett, after I get a hit for my resume in The Accounting Review I just don't give a damn" ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm

Sudipta Basu has posted a new comment in Research Tools, on the post titled "Gaming Publications and Presentations at Academic...".

To view the comment (and 3 other comment(s) in the thread), or to post your own, visit: http://commons.aaahq.org/comment/19181

posted 05:13 PM EST by Sudipta Basu
Comment: You (Bob Jensen) will probably love the new issue of Perspectives on Psychological Science (November 2012) which is entirely devoted to (lack of) Replication and other Research (mal)Practice issues in psychology (behavioral research). I think there is lots of thought-provoking material with implications for accounting research (not only of the accountics variety). The link for the current issue is (will change once the next issue is uploaded):

http://pps.sagepub.com/content/current

One website that provides useful documentation on errors in standard accountics databases, differences between databases, and their implications for previously published research is (even as I agree that many researchers pay little attention to these documented problems):

http://www.kellogg.northwestern.edu/rc/crsp-cstat-references.htm

I note that several accounting researchers appear as authors in the website above, although likely fewer than desired (possible biases in database coverage...)

 

 




Humor for June 1-30, 2013

Explanations To 15 Jokes Only Smart People Can Understand ---
http://www.businessinsider.com/smart-joke-explanations-2013-6

Buzz Aldrin and Thomas Dolby Geek Out and Sing “She Blinded Me With Science” --- Click Here
http://www.openculture.com/2013/06/buzz_aldrin_and_thomas_dolby_geek_out_and_sing_she_blinded_me_with_science.html

The (Humor) Challenge: Zachary Quinto vs. Leonard Nimoy ---
http://www.ritholtz.com/blog/2013/06/the-challenge-zachary-quinto-vs-leonard-nimoy/

Want to Know What Makes the Troops Laugh? Comedian Louis CK in Afghanistan (Quite NSFW) --- Click Here
http://www.openculture.com/2013/06/want_to_know_what_makes_the_troops_laugh_comedian_louis_ck_in_afghanistan_quite_nsfw.html

Throw Mamma from the train
"Mich. man recognizes mom as bank robbery suspect," Yahoo News, June 26, 2013 --- Click Here

Very Old Accountant Jokes (and a few like the constipated accountant's budge it remedy) that I'd not heard before
Ever wonder why they call it a Form 1040?

For every $50 you earn, you get $10, they get $40.

What is the definition of an accountant?
Someone who solves a problem you did not know you had in a way you don't understand.

How many accountants does it take to change a light bulb?
How much money do you have?

What is the definition of a good tax accountant?
Someone who has a loophole named after him.

When does a person decide to become an accountant?
When he realizes he doesn't have the charisma to succeed as an undertaker.

What does an accountant use for birth control?
His personality.

What's an extroverted accountant?
One who looks at your shoes while he is talking to you instead of his own.

What is an auditor?
Someone who arrives after the battle and bayonets the wounded.

Why did the auditor cross the road?
Because he looked in the file and that's what they did last year.

Why did the auditor get run over crossing the road?
Auditors never actually do the risk assessment well until after the accident happens.

How do you drive an accountant completely insane?
Tie him to a chair, stand in front of him and fold a road map the wrong way.

What do accountants suffer from that ordinary people don't?
Depreciation.

If an accountant's wife cannot sleep what does she say?
"Darling, tell me about your work."

What did the accountant say when he got a blank check?
My deductions have at last caught up with the salary.

What did the accountant say when he looked at the tax form?
The man who set the standard deduction must have been a bachelor. I am lying when I am listing myself as a head of household.

Why the accountant started smoking?
So he can deduct cigarettes from his income tax. Called it loss by fire. So his medical expenses went above the 71/2% threshold.

How does an accountant stay out of debt?
He learns to act his wage.

Where do homeless accountants live?
In a tax shelter.

Did you hear about the constipated accountant?
He couldn't budget so he had to work it out with paper and pencil.

Did you hear about the shy and retiring accountant?
The accountant is $1 million shy and hence is retiring.

 


God Made a Dog --- http://www.youtube.com/watch_popup?feature=player_embedded&v=lJ7AfSO2fKs


The Problem of George's Socks by Barbara Bush ---
https://www.youtube.com/watch?v=dx5ZE5nE9X8

The Johnny Carson Story ---
http://offtheedgehumorpics.blogspot.com/2013/03/the-johnny-carson-story-in-5-minutes.html

Things we don't do in the latter seasons of life ---
https://www.youtube.com/watch_popup?v=A6XUVjK9W4o

Italian Spelling Bee --- http://www.jest.com/e/153248


June 26, 2013
Anthony Weiner Surges to Lead in Democratic Mayoral Race: NBC NY/WSJ/Marist Poll
He stood erect for the media upon hearing the good news.


50 Common Misquotations --- http://www.ritholtz.com/blog/2013/05/50-common-misquotations/

Unconfirmed Facts forwarded by Auntie Bev

It takes glass one million years to decompose, which means it never wears out and can be recycled an infinite amount of times!

Gold is the only metal that doesn't rust, even if it's buried in the ground for thousands of years.

Your tongue is the only muscle in your body that is attached at only one end.

If you stop getting thirsty, you need to drink more water. When a human body is dehydrated, its thirst mechanism shuts off.

Each year 2,000,000 smokers either quit smoking or die of tobacco-related diseases.

Zero is the only number that cannot be represented by Roman numerals.

Kites were used in the American Civil War to deliver letters and newspapers.

The song, Auld Lang Syne, is sung at the stroke of midnight in almost every English-speaking country in the world to bring in the new year.

Drinking water after eating reduces the acid in your mouth by 61 percent.

Peanut oil is used for cooking in submarines because it doesn't smoke unless it's heated above 450F.

The roar that we hear when we place a seashell next to our ear is not the ocean, but rather the sound of blood surging through the veins in the ear.

Nine out of every 10 living things live in the ocean.

The banana cannot reproduce itself. It can be propagated only by the hand of man.

Airports at higher altitudes require a longer airstrip due to lower air density.

The University of Alaska spans four time zones.

The tooth is the only part of the human body that cannot heal itself.

In ancient Greece , tossing an apple to a girl was a traditional proposal of marriage. Catching it meant she accepted.

Warner Communications paid $28 million for the copyright to the song Happy Birthday.

Intelligent people have more zinc and copper in their hair.

A comet's tail always points away from the sun.

The Swine Flu vaccine in 1976 caused more death and illness than the disease it was intended to prevent.

Caffeine increases the power of aspirin and other painkillers, that is why it is found in some medicines.

The military salute is a motion that evolved from medieval times, when knights in armor raised their visors to reveal their identity.

If you get into the bottom of a well or a tall chimney and look up, you can see stars, even in the middle of the day.

When a person dies, hearing is the last sense to go. The first sense lost is sight.

In ancient times strangers shook hands to show that they were unarmed.

Strawberries are the only fruits whose seeds grow on the outside.

Avocados have the highest calories of any fruit at 167 calories per hundred grams.

The moon moves about two inches away from the Earth each year.

The Earth gets 100 tons heavier every day due to falling space dust.

Due to earth's gravity it is impossible for mountains to be higher than 15,000 meters.

Mickey Mouse is known as "Topolino" in Italy.

Soldiers do not march in step when going across bridges because they could set up a vibration which could be sufficient to knock the bridge down.

Everything weighs one percent less at the equator.

For every extra kilogram carried on a space flight, 530 kg of excess fuel are needed at lift-off.

The letter J does not appear anywhere on the periodic table of the elements.


Forwarded by Auntie Bev

79

I just took a leaflet out of my mailbox, informing me that I can have sex at 79.

I'm so happy, because I live at number 71.

So it's not too far to walk home afterwards.

And it's the same side of the street.

I don't even have to cross the road!

~~~~~

Answering machine message,

"I am not available right now,

but thank you for caring enough to call.

I am making some changes in my life.

Please leave a message after the beep.

If I do not return your call,

you are one of the changes."

~~~~~

Aspire to inspire before you expire.

~~~~~

My wife and I had words,but I didn't get to use mine.

~~~~~

Frustration is trying to find your glasses without your glasses.

~~~~~

Blessed are those who can give without remembering

and take without forgetting.

~~~~~

The irony of life is that,

by the time you're old enough to know your way around,

you're not going anywhere.

~~~~~

God made man before woman so as to give him time

to think of an answer for her first question.

~~~~~

I was always taught to respect my elders,

but it keeps getting harder to find one.

~~~~~

Every morning is the dawn of a new error.

~~~~~

The quote of the month is by Jay Leno:

"With hurricanes, tornados, fires out of control,mud slides, flooding,

severe thunderstorms tearing up the country from one end to another,

and with the threat of bird flu and terrorist attacks,

are we sure this is a good time to take God out of the

Pledge of Allegiance?"

 

 


Forwarded by Paula

While  I sat in the reception area of my doctor's office, a woman  rolled  an elderly man in a wheelchair into the room.  As  she went to the receptionist's desk, the man sat  there,  alone and silent. Just as I was thinking I  should  make small talk with him, a little boy slipped  off  his mother's lap and walked over to the wheelchair.  Placing his hand on the man's, he said, “I  know  how you feel. My Mom makes me ride in the  stroller  too.”
*****
As  I was nursing my baby, my cousin's six-year-old daughter,  Krissy,  came into the room. Never having seen anyone  breast  feed before, she was intrigued and full of  all kinds of questions about what I was doing.  After  mulling over my answers, she remarked, “My mom  has  some of those, but I don't think she knows how to  use  them.”
*****
Out  bicycling one day with my eight-year-old granddaughter, Carolyn,  I  got a little wistful. “In ten years,” I said, “you'll want to be  with your friends  and you won't go walking, biking, and swimming with me like you do  now. Carolyn  shrugged. “In ten years you'll be too old to do all  those  things anyway.”
******
Working  as a pediatric nurse, I had the difficult assignment of  giving  immunization shots to children. One day, I entered the  examining  room to give four-year-old Lizzie her injection.  “No,  no, no!” she screamed. “Lizzie,”  scolded her mother, "that's not polite behavior.”  With  that, the girl yelled even louder, “No, thank you! No, thank  you!"
******
On  the way back from a Cub Scout meeting, my grandson innocently said  to my son, “Dad, I know  babies come from mommie's tummies, but how do they get there in the  first place?” After  my son hemmed and hawed awhile, my grandson finally spoke up  in disgust, “You  don't have to make up something, Dad. It’s okay if you don’t know the  answer.”
*****
Just  before I was deployed to Iraq, I sat my eight-year-old son down  and  broke the news to him. “I’m going to be away for a  long  time,” I told him. “I’m going to Iraq.”
“Why?”  he asked. “Don't you know there’s a war going on over  there?”
*****
Paul  Newman founded the Hole  in the Wall Gang Camp  for children  stricken with cancer, AIDS, and blood diseases.  One afternoon, he and his wife, Joanne Woodward,  stopped by to have lunch with the kids. A  counselor  at a nearby table, suspecting the young patients  wouldn’t know Newman was a famous movie star,  
explained, “That’s the man who  made this camp possible. Maybe you’ve seen his  picture on his salad dressing bottle?” Blank stares. "Well, you’ve  probably seen his face on his lemonade carton.” An eight-year-old girl perked up.  “How long was he missing?”

  *****
And  my personal favorite…God’s  Problem Now!
  
His  wife's graveside service was just barely finished, when there  was  a massive clap of thunder, followed by a  tremendous  bolt of lightning, accompanied by even more  
thunder rumbling in the distance.  The little old man looked at the pastor and calmly  said, "Well, she’s there."


Forwarded by Paula

Jacob, age 92, and Mary, age 89, living in Fort Myers, are all excited about their decision to get married. They go for a stroll to discuss the wedding, and on the way they pass a drugstore. Jacob suggests they go in.

Jacob addresses the man behind the counter: "Are you the owner?"

The pharmacist answers, "Yes."

Jacob: "We're about to get married. Do you sell heart medication?"

Pharmacist: "Of course, we do."

Jacob: "How about medicine for circulation?"

Pharmacist: "All kinds."

Jacob: "Medicine for rheumatism?"

Pharmacist: "Definitely."

Jacob: "How about suppositories?"

Pharmacist: "You bet!"

Jacob: "Medicine for memory problems, arthritis and Alzheimer's?"

Pharmacist: "Yes, a large variety. The works."

Jacob: "What about vitamins, sleeping pills, Geritol, antidotes for Parkinson's disease?"

Pharmacist: "Absolutely."

Jacob: "Everything for heartburn and indigestion?" Pharmacist: "We sure do.."

Jacob: "You sell wheelchairs and walkers and canes?"

Pharmacist: "All speeds and sizes."

Jacob: "Adult diapers?"

Pharmacist: "Sure." Then, getting concerned he asked "Are you both feeling alright, is there something you need?"

Jacob: "No...We'd like to use this store as our Bridal Registry.


Forwarded by Paula

Charlie was installing a new door and found that one of the hinges was missing.

cid:4F7AEC5226DF41428EAB98877AEA4F1C@ADWCF30cid:CF72AAAEEEED4971A376C1159C1616D2@ADWCF30

He asked his wife Mary if she would go to Lowes and pick up a hinge.

cid:A80B308A1EB94325BFE3E402FD3255AB@ADWCF30

Mary agreed to go. While she was waiting for the manager to finish serving a customer, her eye caught a beautiful bathroom faucet.

cid:EA2C748235BC44C1A97B8CFF55D3EE5B@ADWCF30

When the manager was finished, Mary asked him, "How much is that faucet?"

cid:686C61D760FF48CBA52C8D829BD7C6F3@ADWCF30

The manager replied, "That's a gold plated faucet and the price is $500.00.

Mary exclaimed, "My goodness, that’s an expensive faucet -- certainly out of my price range."

She then proceeded to describe the hinge that Charlie had sent her to buy.

The manager said that he had them in stock and went into the storeroom to get one.

From the storeroom the manager yelled. "Ma'am, you wanna screw for the hinge?"

Mary shouted back, "No, but I will for the faucet."

This is why you can't send a woman to Lowes or Home Depot.

 


Forwarded by Jim Kirk

1. Johnny 's mother had three children. The   first child  w as  named April The second child was named May .  What was   the  third child 's name?
 
Answer: Johnny of course
 
2. There is a clerk at the butcher shop, he is five feet ten inches tall, and he wears size 13 sneakers. What does he weigh?
 
Answer:  Meat.
 
3. Before Mt. Everest was discovered, what was the highest mountain in the world?
 
Answer:  Mt. Everest; it just wasn 't discovered yet. [ You 're not very good at this are you?]
 
4. How much dirt is there in a hole that measures two feet by three feet by four feet?
 
Answer:  There is no dirt in a hole.
 
5. What word in the English Language is always spelled incorrectly?
 
Answer:  Incorrectly
 
6. Billy was born on December 28th, yet his birthday is always in the summer. How is this possible?
 
Answer:  Billy lives in the Southern Hemisphere
 
7. In California , you cannot take a picture of a man with a wooden leg. Why not?
 
Answer:  You can 't take pictures with a wooden leg. You need a camera to take pictures.
 
8. What was the President 's Name in 1975?
 
Answer: Same as is it now -  Barack Obama [Oh, come on ...]
 
9. If you were running a race, and you passed the person in 2nd place, what place would you be in now?
 
Answer:  You would be in 2nd. Well, you passed the person in second place, not first.
 
10. Which is correct to say, "The yolk of the egg are white" or "The yolk of the egg is white"?
 
Answer:  Neither, the yolk of the egg is yellow [Duh]
 
11. If a farmer has 5 haystacks in one field and 4 haystacks in the other field, how many haystacks would he have if he combined them all in another field?
 
Answer:  One. If he combines all of his haystacks, they all become one big one.

Forwarded by Sid and Eileen

NO NURSING HOME FOR US!!!

No nursing home for us. We'll be checking into a Holiday Inn! With the average cost for a nursing home care costing $188.00 per day, there is a better way when we get old and too feeble. I've already checked on reservations at the Holiday Inn. For a combined long term stay discount and senior discount, it's $59.23 per night. Breakfast is included, and some have happy hours in the afternoon. That leaves $128.77 a day for lunch and dinner in any restaurant we want, or room service, laundry, gratuities and special TV movies. Plus, they provide a spa, swimming pool, a workout room, a lounge and washer-dryer, etc. Most have free toothpaste and razors, and all have free shampoo and soap. $5-worth of tips a day and you'll have the entire staff scrambling to help you. They treat you like a customer, not a patient. There's a city bus stop out front, and seniors ride free. The handicap bus will also pick you up (if you fake a decent limp). To meet other nice people, call a church bus on Sundays. For a change of scenery, take the airport shuttle bus and eat at one of the nice restaurants there. While you're at the airport, fly somewhere. Otherwise, the cash keeps building up.

It takes months to get into decent nursing homes. Holiday Inn will take your reservation today. And you're not stuck in one place forever -- you can move from Inn to Inn, or even from city to city. Want to see Hawaii ? They have Holiday Inn there too. TV broken? Light bulbs need changing? Need a mattress replaced? No problem.. They fix everything, and apologize for the inconvenience.

The Inn has a night security person and daily room service. The maid checks to see if you are ok. If not, they'll call an ambulance . .. . or the undertaker.

If you fall and break a hip, Medicare will pay for the hip, and Holiday Inn will upgrade you to a suite for the rest of your life.

And no worries about visits from family. They will always be glad to find you, and probably check in for a few days mini-vacation.

The grand-kids can use the pool.

What more could I ask for?

So, when I reach that golden age, I'll face it with a grin.

AIDS WARNING!

To all of you approaching 50 or have REACHED 50 and past, this email is especially for you......

SENIOR CITIZENS ARE THE NATION'S LEADING CARRIERS OF AIDS!

HEARING AIDS

BAND AIDS

ROLL AIDS

WALKING AIDS

MEDICAL AIDS

GOVERNMENT AIDS

MOST OF ALL,

MONETARY AID TO THEIR KIDS!

Not forgetting HIV (Hair is Vanishing)

I'm only sending this to my mature friends.

I love to see you smile.

 

 


 




Humor Between June 1-30, 2013 --- http://www.trinity.edu/rjensen/book13q2.htm#Humor063013

Humor Between June 30, 2013 --- http://www.trinity.edu/rjensen/book13q2.htm#Humor063013

Humor Between May 1-31, 2013 --- http://www.trinity.edu/rjensen/book13q2.htm#Humor053113

Humor Between April 1-30, 2013 --- http://www.trinity.edu/rjensen/book13q2.htm#Humor04301

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 June 30, 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/

 

 

May 31, 2013

Bob Jensen's New Bookmarks May 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

Technical Tax Course Materials from Lexis-Nexus
Graduate Tax Series --- http://taxprof.typepad.com/files/graduate-tax-series-description-082911.pdf

CGMA Portfolio of Tools for Accountants and Analysts ---
http://www.cgma.org/Resources/Tools/Pages/tools-list.aspx
Includes ethics tools and learning cases.

From the IRS
IRS Criminal Investigation Issues Fiscal 2012 Report, IR-2013-50, May 10, 2013 ---
http://www.irs.gov/uac/Newsroom/IRS-Criminal-Investigation-Issues-Fiscal-2012-Report




Humor Between May 1-31, 2013 --- http://www.trinity.edu/rjensen/book13q2.htm#Humor053113

Humor Between April 1-30, 2013 --- http://www.trinity.edu/rjensen/book13q2.htm#Humor043013

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




Is the AAA Leadership Abandoning the AAA Commons?

How many of you heard about "Brilliantly Disguised Opportunities" until the cover story in the Winter 2013 Edition of Accounting Education News arrived in your snail mail boxes? That by the way is the theme of the 2013 forthcoming AAA Annual Meetings in Anaheim.

None of the recent past presidents of the AAA showed much interest in the Commons until they took office as Presidents-Elect and eventually President. But after being elected to this top office they actively used the AAA Commons as a primary vehicle for communicating with the AAA Membership. Mostly their postings were about AAA matters, although Sue Haka and Greg Waymire were inspired to post about their research interests as well.

Current President Karen Pincus has not had a single posting to the AAA Commons in 2013, although she had seven posts before becoming President.

President Elect Mary Barth as never had a single post to the Commons and never even posted a comment. Since Mary arguably is our leading accountics scientist,  I urged her to commence a Quant Corner on the Commons where editors of TAR, JAR, JAE, and other accountics science journal editors would encourage authors to post discussions about forthcoming articles in those journals. Mary never answered my appeal.

There's huge problem of inspiring any of our accountics scientists to become active in the Commons on behalf of accountics scientists ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm

My good friend A, Rashad Abdek-Khalik has a grand total of one posting to the Commons and that was a long time ago. He certainly is not a leading candidate for becoming President of the AAA on the basis of his Commons contributions. Competition from his opponent is more encouraging. Christine Botosan accumulated 88 postings and 14 comments on the Commons. Good work Kathy. If elected I look forward to even more postings.

My intent here is not to make any of our current or future AAA leaders feel guilty about neglect of the Commons. They are very, very busy professors in other regards. However, the AAA is paying a lot of money to maintain the Commons, and I sense membership in the Commons is waning. The lack of interest of our current and future leaders, other than Christine Botosan, is certainly not helping to revive interest in the Commons.

Personally, I would rather go to the Commons more often to learn something instead of post something I already know. I am by far and above the most prolific professor posting the AAA Commons, but I take no pride in this. In retirement I would instead like to back off and let the younger generation overwhelm me with their postings to the Commons.

And the AAA leadership could certainly do more to encourage this expensive AAA resource. It is an expensive resource. Without more AAA leadership promotion and guidance I fear it's becoming wasted money.

April 13, 2013 reply from Dan Stone

Thanks Bob,

1. Do we really know the costs of AAA commons? Is this really an expensive resource? What evidence exists for this assertion?

2. I'm President of the AAA IS section. I've had trouble even getting the IS section leadership to use AAA commons. The reactions are that having to logon, and check another messaging source, is more trouble than it is worth, particularly in light of cloud sources (which don't require logons) for sharing online resources.

I'm not sure the AAA leadership is really the problem here. It may simply be that the commons was a good idea whose time never came (as is true of many, many technologies)..

April 14, 2013 reply from Bob Jensen

Hi Dan,

The Commons still has great potential for practitioners , researchers, and AAA leaders (including section and region presidents) to communicate with accounting teachers.

I'm still in favor of the Commons and feel that it was growing in popularity when AAA Presidents like Sue Haka were putting out messages that members wanted to access. It also helped when Julie Smith David, bless her heart, was putting out challenges for people to use the Commons.

Before dropping the Commons I would like to see the AAA leadership making a push to promote usage. I still like my idea of a Tech Corner where editors of our top accountics science journals arm twist authors with forthcoming articles to discuss their research in a language that communicates better with accounting teachers and practitioners.

When IFRS was front and center in curriculum revisions in the USA the large accounting firms, not just the Big Four, were putting up very helpful IFRS learning links as free teaching resources. I think we can get expanded activity from the large firms for other topics they would like to see in our college courses, topics that are not just in accounting.

I think there's still a chance for the Commons to be a very valuable resource. What we need is less Jensen and more members on the Commons. Jensen will gladly back off when members commence to post more and more to the Commons.

Respectfully,
Bob Jensen


Congratulations to Bob May and Best Wishes for a Happy Retirement
Bob was one of my Ph.D. students
I feel like I'm closer to the twilight zone each time one of my former doctoral students retire

Bob's Resume --- http://acsprod.mccombs.utexas.edu/FEG/index.asp?uid=126

From AccountingWeb on May 14, 2014

 
Celebrated Accounting Professor Robert May Retires
Robert May, PhD, who has served as KPMG Centennial Professor of Accounting, chairman, and dean of the accounting department at the University of Texas at Austin McCombs School of Business, is retiring this month after thirty-four years. In an interview with AccountingWEB's Jason Bramwell, May talks about the McCombs School of Business Master in Professional Accounting (MPA) program, which he is credited with developing. The MPA program has been widely recognized as the leading graduate accounting program in America and has been ranked number one by US News & World Report for the past six years.
 
    Gail Perry, CPA
Publisher/Editor-in-Chief,
AccountingWEB
    editor@accountingweb.com
    May Day: Retiring Texas Accounting Professor to Give Commencement Speech
    After a forty-three-year academic career – the last thirty-four of which were spent as professor, chairman, and dean in the department of accounting at the University of Texas at Austin McCombs School of Business – Robert May, PhD, will be addressing 2013 graduating Master in Professional Accounting (MPA) students one last time.

 


Some Comments About Accountics Science Versus Real Science

This is the lead article in the May 2013 edition of The Accounting Review
"On Estimating Conditional Conservatism
Authors

Ray Ball (The University of Chicago)
S. P. Kothari )Massachusetts Institute of Technology)
Valeri V. Nikolaev (The University of Chicago)

The Accounting Review, Volume 88, No. 3, May 2013, pp. 755-788

The concept of conditional conservatism (asymmetric earnings timeliness) has provided new insight into financial reporting and stimulated considerable research since Basu (1997). Patatoukas and Thomas (2011) report bias in firm-level cross-sectional asymmetry estimates that they attribute to scale effects. We do not agree with their advice that researchers should avoid conditional conservatism estimates and inferences from research based on such estimates. Our theoretical and empirical analyses suggest the explanation is a correlated omitted variables problem that can be addressed in a straightforward fashion, including fixed-effects regression. Correlation between the expected components of earnings and returns biases estimates of how earnings incorporate the information contained in returns. Further, the correlation varies with returns, biasing asymmetric timeliness estimates. When firm-specific effects are taken into account, estimates do not exhibit the bias, are statistically and economically significant, are consistent with priors, and behave as a predictable function of book-to-market, size, and leverage.

. . .

We build on and provide a different interpretation of the anomalous evidence reported by PT. We begin by replicating their [Basu (1997). Patatoukas and Thomas (2011)] results. We then provide evidence that scale-related effects are not the explanation. We control for scale by sorting observations into relatively narrow portfolios based on price, such that within each portfolio approximately 99 percent of the cross-sectional variation in scale is eliminated. If scale effects explain the anomalous evidence, then it would disappear within these portfolios, but the estimated asymmetric timeliness remains considerable. We conclude that the data do not support the scale-related explanation.4 It thus becomes necessary to look for a better explanation.

Continued in article

Jensen Comment
The good news is that the earlier findings were replicated. This is not common in accountics science research. The bad news is that such replications took 16 years and two years respectively. And the probability that TAR will publish a one or more commentaries on these findings is virtually zero.

How does this differ from real science?
In real science most findings are replicated before or very quickly after publication of scientific findings. And interest is in the reproducible results without also requiring an extension of the research for publication of the replication outcomes.

In accountics science there is little incentive to perform exact replications since top accountics science journals neither demand such replications nor will they publish (even in commentaries) replication outcomes. A necessary condition to publish replication outcomes in accountics science is the extend the research into new frontiers.

How long will it take for somebody to replicate these May 2013 findings of Ball, Kothari, and Nikolaev? If the past is any indicator of the future the BKN findings will never be replicated. If they are replicated it will most likely take years before we receive notice of such replication in an extension of the BKN research published in 2013.

Bob Jensen's threads on replication and commentaries in accountics science ---
http://www.trinity.edu/rjensen/TheoryTAR.htm


Darrell Duffie: Big Risks Remain In the Financial System
A Stanford theoretician of financial risk looks at how to fix the "pipes and valves" of modern finance
Stanford Graduate School of Business, May 2013
Click Here
http://www.gsb.stanford.edu/news/headlines/darrell-duffie-big-risks-remain-financial-system?utm_source=Stanford+Business+Re%3AThink&utm_campaign=edfd4f11fb-Stanford_Business_Re_Think_Issue_Thirteen5_17_2013&utm_medium=email&utm_term=0_0b5214e34b-edfd4f11fb-70265733&ct=t%28Stanford_Business_Re_Think_Issue_Thirteen5_17_2013%29

. . .

In March, Duffie and the Squam Lake Group proposed a dramatic new restriction on executive pay at “systemically important” financial institutions. Duffie argues that top bank executives still have lopsided incentives to take excessive risks. The proposal: Force them to defer 20 percent of their pay for five years, and to forfeit that money entirely if the bank’s capital sinks to unspecified but worrisome levels before the five years is up.

“On most issues,” Duffie said, “the banks would be glad to see me go away.”

Jensen Comment
Squam Lake and its 30 islands is in the Lakes Region of New Hampshire --- http://en.wikipedia.org/wiki/Squam_Lake
It is better known as "Golden Pond" after Jane Fonda, her father (Henry) and Katherine Hepburn appeared in the Academy Award winning movie called "On Golden Pond" that was filmed on Squam Lake. Professor Duffie now has some "golden ideas" for finance reforms.

Bob Jensen's threads on the banking bailout ---
http://www.trinity.edu/rjensen/2008Bailout.htm


Google Glass --- http://en.wikipedia.org/wiki/Google_Glass

"The Porn Industry Has Already Dreamed Up Awesome Ideas For Google Glass," by Dylan Love, Business Insider, May 25, 2013 ---
http://www.businessinsider.com/google-glass-porn-2013-5

Less Awesome Ideas for Google Glass

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

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

 


The Big Four Accounting Firms Are All in the Ten:  Who dares say that accounting is a dull career?
"Fifty Most Popular Employers for Business Students," Bloomberg Businessweek, May 9, 2013 ---
http://images.businessweek.com/slideshows/2013-05-09/fifty-most-popular-employers-for-business-students

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


Congratulations to Tom Selling who will be teaching part-time at SMU ---
http://accountingonion.com/2013/04/grilled-accounting-onions.html

And congratulations to David Albrecht who will be teaching  full time at La Sierra University in California.


"Facebook, One (one sorry) Year Later: What Really Happened in the Biggest IPO Flop Ever," The Atlantic, May 2013 ---
http://www.theatlantic.com/business/archive/2013/05/facebook-one-year-later-what-really-happened-in-the-biggest-ipo-flop-ever/275987/


Why is My Nexus 7 So Slow? 8 Ways to Speed it Up Again --- Click Here
http://www.howtogeek.com/164106/why-is-my-nexus-7-so-slow-8-ways-to-speed-it-up-again/?utm_source=newsletter&utm_medium=email&utm_campaign=260513


"PayPal or Credit Card—Which is Safer?" by Laura Adams, Money Girl, May 14, 2013 ---
http://moneygirl.quickanddirtytips.com/paypal-or-credit-card.aspx

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


In the realm of R&D accounting there's always been a debate about whether R&D expenditures should be totally expensed (as in FAS 2) versus whether only research (R) should be expensed and development D booked as as asset. It would be interesting to see a real world case written up about the following R&D real world project.

"Exxon Takes Algae Fuel Back to the Drawing Board: A $300 million project seems to have failed to produce a cheap way to make fuel from algae," by Kevin Bullis, MIT's Technology Review, May 20, 2013 --- Click Here
http://www.technologyreview.com/view/515041/exxon-takes-algae-fuel-back-to-the-drawing-board/?utm_campaign=newsletters&utm_source=newsletter-daily-all&utm_medium=email&utm_content=20130521


From the CFO.com Morning Ledger on May 24, 2013

The U.S. and China have struck an agreement giving U.S. accounting regulators access to documents from Chinese accounting firms, Michael Rapoport writes in the WSJ. The deal, expected to be announced Friday, could help U.S. regulators investigate the auditors of U.S.-listed Chinese companies that might have been involved in accounting fraud.

The agreement will allow the U.S. Public Company Accounting Oversight Board to see audit records and other documents held by Chinese audit firms. The China Securities Regulatory Commission and China’s Ministry of Finance will help the PCAOB obtain the documents.

The agreement doesn’t address or resolve a similar but separate dispute in which the Securities and Exchange Commission is demanding access to documents from Chinese audit firms, as it, too, probes possible fraud. Nor does the agreement allow the PCAOB into China for inspections of Chinese firms that audit U.S.-traded companies, which the U.S. regulator has pushed for.

 


From the CFO.com Morning Ledger on May 14, 2013

The yen’s recent plunge has sent companies scrambling to find cost-effective hedges to preserve their profits
Dozens of U.S. and European companies have taken multimillion-dollar hits since the yen started its slide back in November, reducing the dollar or euro value of their Japanese earnings,
writes CFOJ’s Emily Chasan in today’s Marketplace section. To protect themselves from sharp currency swings, multinationals can buy options or forward contracts to lock in exchange rates at a given level. But this hedging can be costly, and it doesn’t always pay. “What the currency markets giveth they also taketh away,” says Kenneth Janke Jr., deputy CFO of Aflac.

Corporate bankers say they’ve been inundated with calls from companies asking for help finding new risks they can hedge on favorable terms. The yen’s move “is just waking people up,” says Ed McGann, global head of currency administration at Bank of New York Mellon.

Under accounting rules, companies that hedge a specific risk typically get favorable accounting treatment that lets them avoid a hit to income from the cost of the hedge. But a hedge aimed at offsetting a broader economic or operating risk may not qualify for that treatment, and would therefore count against earnings.

Jensen Comment
Meanwhile the IASB and FASB are rewriting the rules of hedge accounting.


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

Guilty plea in KPMG insider trading case
A California jewelry-store owner agreed to plead guilty to a criminal charge in the insider-trading scandal that brought down a senior partner at KPMG,
the WSJ’s Michael Rapoport reports. Bryan Shaw was charged with one count of conspiracy and has signed an agreement with federal prosecutors indicating he intends to plead guilty. Mr. Shaw admitted to plotting with his friend, former KPMG partner Scott London, to commit securities fraud, the U.S. attorney’s office in Los Angeles said. Mr. Shaw could face up to five years in prison, though he is likely to receive a lesser sentence under federal sentencing guidelines.

Why white collar crime usually pays even when getting caught is 100% certain ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays

This must hurt Francine a bit. She's seemingly gone easy on KPMG (compared to me) over the years relative to her despised Deloitte.
"Another 'Rogue' Audit Partner; Another 'Duped' Audit Firm," by Francine McKenna, Forbes, April 10, 2013 ---
http://www.forbes.com/sites/francinemckenna/2013/04/10/another-rogue-audit-partner-another-duped-audit-firm/

There are things you anticipate, worry about, know will be troublesome once they happen. It’s safe to say global audit firm KPMG wasn’t worrying it would someday hear the leader of its Los Angeles audit practice was passing confidential client information to someone else who then traded on it.

KPMG announced late Monday via press release that the firm had “separated” a senior partner, one with a very visible role, from the firm. The firm had” “been informed” about his “rogue” actions and “regrets” the impact his actions may have had.

I was half-expecting, “He’s not our kind”.

That’s a lot of passive construction. Who informed the firm about the illegal and unethical activity?  The firm clearly did not discover Scott London’s betrayal on its own. If London was not trading on the information himself, the anomalies wouldn’t show up in the information he’s required to provide to the firm to prove his independence from audit clients each year.

Deloitte wasn’t the one who discovered that its Vice Chairman and Chicago charity circuit regular Tom Flanagan was trading on the inside information of several Fortune 500 companies including Berkshire Hathaway. In that case it was FINRA, the securities self-regulatory organization, that saw trading activity by an audit firm partner in a company with M&A activity.

When Deloitte tax partner Arnie McClellan’s wife “eavesdropped” on her husband’s phone calls where he discussed his client’s M&A targets and then called her sister in London, Deloitte didn’t know until London authorities called. McClellan’s wife said her husband was innocent and everyone believed her. She did serve time for initially lying about her own involvement.

It wasn’t Ernst & Young that uncovered tax partner James Gansman passing M&A tips to his lover who, in turn, passed them to hers. Gansman’s “swinging” partner ended up on an SEC watch list and Gansmen went to jail based on her testimony against him. He did not profit from his breach of client confidentiality other than in ways some men might prefer to the discounted watch, dinners, and few thousand dollars Scott London, the KPMG partner we heard about yesterday, says he received.

Surely more information will come out over the next few week, from KPMG, from additional  companies affected and from the media, who will pursue this story like pit bulls. One reporter who emailed me yesterday said these stories of have “legs”. Hubris, and stupidity in unexpected places, are great media fodder.

KPMG said in its press release that the firm resigned as auditor from two of London’s clients, Herbalife and Skechers, although it did not name them. He was the top partner on those audits. The time and money those companies will have to spend to appoint a new auditor, re-audit years of financial statements and fend off media attention will probably be subsidized, one-way or another, by KPMG. In the Flanagan case, Deloitte paid for the necessary independent investigations to support the firm’s claim to clients that it was still independent as an auditor. None of them – Berkshire Hathaway, Walgreens, Sears Holdings among the victims – fired the firm.

The SEC and PCAOB did not fine or sanction Deloitte or Ernst & Young in any of the cases.

But surely Scott London, KPMG’s “rogue”, had access to confidential information about more clients of the firm than just the ones he was directly responsible for. He was the partner in charge of the audit practice for a huge market, Los Angeles. He has the right, and the responsibility, to know about every interesting or problematic thing going on at the audit clients in his practice group.  He may be a “concurring” or quality review partner on more companies’ audits and can “drop by” audit committee and other client meetings on a relationship-building basis. The exposure to KPMG and to the clients of this practice unit, and perhaps others, may be larger than what’s been admitted by the firm so far.

Scott London is making statements to the press. He’s wealthy enough to afford a lawyer and PR – but obviously not wealthy enough to resist the temptation of a “discount” on a watch and a few bucks. (London didn’t even get a watch. He got a discount. Looking for the tippee? Go look for a prominent LA jeweler in financial trouble who’s too cheap to pay well for stealing a man’s career, professional reputation and, possibly, his freedom.)

My sources tell me KPMG is not paying for London’s defense. Deloitte sued Flanagan to assuage its clients. I would expect that’s next. If KPMG’s behavior during the 2005 tax shelter scandal is any indication, Scott London will be completely abandoned, not just fired, as long as he’s not needed to absolve the firm of any guilt or accountability for his actions. KPMG has been “duped”, betrayed by its own, and that’s a tragedy, for sure.

Continued in article

Bob Jensen's threads on the "Two Faces" of KPMG ---
http://www.trinity.edu/rjensen/Fraud001.htm

 

 

April 9, 2013 reply from Dennis Beresford

Bob, Maybe if the KPMG Los Angeles partner ultimately is sentenced to 45 years in prison (such as Attica) it would actually put an end to this kind of "white collar" crime.

Denny

April 10, 2013 reply from Bob Jensen

Hi Denny,

It will never happen. The biggest problem with white collar crime is that it pays even if you know you're going to get caught (at least if you know the rudiments of hiding the loot off shore or with friends and understand time value of money) ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#CrimePays


They say that patriotism is the last refuge
To which a scoundrel clings.
Steal a little and they throw you in jail,
Steal a lot and they make you king.
There's only one step down from here, baby,
It's called the land of permanent bliss. 
What's a sweetheart like you doin' in a dump like this?

Lyrics of a Bob Dylan song forwarded by Amian Gadal [DGADAL@CI.SANTA-BARBARA.CA.US]



The law does not pretend to punish everything that is dishonest. That would seriously interfere with business
.
Clarence Darrow --- Click Here  

 

Why white collar crime pays for Chief Financial Officer: 
Andy Fastow's fine for filing false Enron financial statements:  $30,000,000
Andy Fastow's stock sales benefiting from the false reports:     $33,675,004
Andy Fastow's estimated looting of Enron cash:                         $60,000,000
That averages out to winnings, after his court fines, of $10,612,500 per year for each of the six years he spent in prison.
You can read what others got at http://www.trinity.edu/rjensen/FraudEnron.htm#StockSales 
Nice work if you can get it:  Club Fed's not so bad if you earn $29,075 per day plus all the accrued interest over the past 15 years (includes years where he got away with it).

 

If you aren’t now, you will by the time you finish the new Bebchuk and Fried paper on executive compensation.  They paint a fairly gloomy picture of managers exerting their power to “extract rents and to camouflage the extent of their rent extraction.”  Rather than designed to solve agency cost problems, the paper makes the case that executive pay can by an agency cost in and of itself.  Let’s hope things aren’t this bad. 
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=364220

 

They say that patriotism is the last refuge
To which a scoundrel clings.
Steal a little and they throw you in jail,
Steal a lot and they make you king.
There's only one step down from here, baby,
It's called the land of permanent bliss. 
What's a sweetheart like you doin' in a dump like this?

Lyrics of a Bob Dylan song forwarded by Amian Gadal [DGADAL@CI.SANTA-BARBARA.CA.US]
 

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


KPMG is at it again. In the most recent allegation of violating independence standards of the accounting profession

"Threats to Independence Raise Ethical Questions for the Big-Four CPA Firms," by Steven Mintz, Ethics Sage, May 7, 2013 ---
http://www.ethicssage.com/2013/05/threats-to-independence-raise-ethical-questions-for-the-big-four-cpa-firms.html

KPMG is at it again. In the most recent allegation of violating independence standards of the accounting profession, KPMG’s Columbus, Ohio office was auditing JobsOhio’s books while, at the same time, an out-of-state office of the firm was seeking $1 million in taxpayer money from JobsOhio for an unnamed client. As the state’s lead economic-development agency, JobsOhio is charged with recommending financial incentives for companies seeking to relocate in the state. On November 5, 2012, about the time that the audit was being conducted, KPMG was also listed on a sheet of eight pending grant commitments from the state for fiscal year 2013, one of which was for the unnamed client.

I will return to this case later on, but first a review of the recent insider trading charges against the firm. I have previously written about about insider trading at KPMG. In that case, KPMG resigned two audit accounts and withdrew its blessing on the financial statements of Herbalife for the past three years and of Skechers for the past two. KPMG withdrew its audit opinions, a serious step for any auditor, after concluding it was not independent because of alleged insider trading.

The KPMG insider trading case is a particularly egregious one because it involves an auditor tipping off a friend about stock of audit clients. Scott London, the KPMG auditor, did not trade in the stock himself but he did gain personal wealth (“unjust enrichment”) when his friend, Brian Shaw, used the inside information to trade in stock of Herbalife Ltd. and Skechers USA Inc. Shaw benefitted by $1.27 million on the trades. Shaw paid London $50,000 cash and gave him a Rolex watch.

Looking at the JobsOhio case, as KPMG was auditing JobsOhio's books in the fall of 2012 the firm also was seeking $1 million in taxpayer money from JobsOhio for an unnamed client. JobsOhio, the state's privatized development agency, said that the grant request was handled separately from and without the knowledge of the firm's auditing division.

The ethical problem for KPMG in the JobsOhio case is independence in appearance. This is an important requirement of an independent audit because factual independence is sometimes difficult to determine. Factual independence goes to the mindset of the auditor in approaching an audit with objectivity and professional skepticism. It is difficult to assess so appearances serve as a proxy in that regard.

JobsOhio denies any conflict of interest. Laura Jones, a spokeswoman for JobsOhio, said KPMG LLP's Columbus office conducted the audit, but the grant was sought by an out-of-state office. "The fact that KPMG serves JobsOhio and countless other businesses ... from the same office here in Columbus is not a conflict in our minds," she said, adding that “the state also monitors and ultimately approves taxpayer-funded incentives to companies.”

Most observers would probably conclude that the two offices of KPMG would never collude on their own to achieve some benefit for the firm. However, the more troubling issue is whether JobsOhio might perceive some pressure on them to provide financial incentives to the KPMG audit client perhaps to make it less likely that KPMG would point out problems with the JobsOhio audit, assuming any occur.

The accounting profession has strict independence standards to protect the public interest. Shareholders, creditors, and the beneficiaries of public funds rely on the honesty, trustworthiness, and responsibility of auditors to go the extra mile to ensure that the financial statements of entities that operate in the public interest are based on an independent audit – both in fact and in appearance.

KPMG is not alone in violating the most basic and cherished independence standards. As I have previously blogged, in 2010 Deloitte and Touche was investigated by the SEC for repeated insider trading by Thomas P. Flanagan, a former management advisory partner and a Vice Chairman at Deloitte. Flanagan traded in the securities of multiple Deloitte clients on the basis of inside information that he learned through his duties at the firm. The inside information concerned market moving events such as earnings results, revisions to earnings guidance, sales figures and cost cutting, and an acquisition. Flanagan’s illegal trading resulted in profits of more than $430,000. In the SEC action, Flanagan was sentenced to 21 months in prison after he pleaded guilty to securities fraud.

On January 7, 2013, the SEC announced it is investigating whether Ernst & Young violated independence rules by letting its lobbying unit perform work for several major audit clients. The SEC inquiry began shortly after Reuters reported in March 2012 that Washington Council Ernst & Young, the E&Y unit, was registered as a lobbyist for several corporate audit clients including Amgen, CVS Caremark, and Verizon Communications.

The problem for EY is that U.S. independence rules bar auditors from serving in an "advocacy role" for audit clients. The goal is to allow auditors to maintain some degree of objectivity regarding the companies they audit, based on the idea that auditors are watchdogs for investors and should not be promoting management's interests.

Finally, in December 2012, Thomson Reuters announced it signed a three-year contract with PwC, the company’s auditor, to provide use of the Thomson Reuters ONESOURCE Corporate Tax solution for China. PwC U.K. also uses this Thomson Reuters software for its tax clients. Business alliances between a company and its auditor are prohibited under U.S. and U.K. auditor regulations. Once again an independence violation exists because such arrangements create a “mutuality of interests” as a result of the business relationship between the auditor and audit client.

Continued in article

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

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


"11 Reasons Why Getting An MBA (from a prestigious program)  Is Better Than Getting A CFA," by Linette Lopez, Business Insider, May 24, 2013 ---
http://www.businessinsider.com/getting-an-mba-better-than-getting-a-cfa-2013-5

Jensen Comment
I'm not certain there's a whole lot of value in this apples versus tomatoes comparison. Ms. Lopez makes an underlying assumption that CFAs are primarily backroom analysts. I'm reminded of a neighbor I had in Maine who was a CFA who made a lot of money as the owner of an insurance and investment services company.

She also makes an implicit assumption that the MBA degree is from a prestigious MBA program like an Ivy League MBA degree. Actually, most MBA degrees are from somewhat less prestigious state universities that have much more variability in terms of student networking, ties with powerful alumni, employment opportunities, and faculty consulting at high levels in corporations. A lot more of those MBAs are in unemployment lines or stuck in the same jobs they had before entering an MBA program.

Also complicating the issue is that a lot of CFAs are also MBAs who later elected to specialize for better jobs in the financial services industry.

I also feel that it would be misleading to compare CPA versus CFA careers. The main problem is variability. For example, there's a huge difference between being a Big 10 CPA firm partner versus being a solo practitioner with mostly tax clients in Bangor, Maine. Similarly, there's a world of difference between being a CFA in a large Wall Street bank versus being a solo practitioner selling insurance and financial services in Bangor, Maine.

Annual income can be a poor basis of comparison since some professionals in a small town in the USA make ten times more than their counterparts in big CPA firms and banks. There's a lot of serendipity in life.

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


From Scott Bonacker on May 24, 2013

Saw a couple of interesting items -

 

This one is about 'best practices' in internal emails - actually I think it is not anything new at all, this law firm apparently forgot and got lax.

 

From the story:

........ litigation initiated by one of its former clients who alleged the firm had overcharged on legal fees. When the firm sued the client to recover $675,000 in unpaid accounts, the client counterclaimed for more than $22-million in punitive damages. In the process of pre-trial discovery – where parties are required to exchange relevant documents relating to the case – e-mails written by lawyers at DLA Piper were uncovered that seemed to substantiate the client’s complaint, that made the firm look greedy, ravenous and rapacious, and in the process, did a minor hatchet job on the legal profession.

 

http://www.theglobeandmail.com/report-on-business/small-business/sb-marketing/customer-service/a-few-internal-e-mails-can-do-a-lot-of-damage/article11475408/

(http://goo.gl/KqovQ )

 

The other is about work-life balance -

 

From the story:

 

Constantly checking your work e-mail while out to dinner with your family or that “quick check” of your work messages that ends up taking hours on the weekends are two signs that your work life is overtaking your personal time. Creating separation between work and your personal life and developing good work habits can help you to respond more appropriately to the everyday stresses of your business.

 

http://www.theglobeandmail.com/report-on-business/small-business/sb-growth/day-to-day/three-tips-to-finally-get-your-work-e-mail-under-control/article11675856/

 

(http://goo.gl/RZ2gl )

 

Scott Bonacker CPA –
McCullough and Associates LLC –
Springfield, MO


"Social Media: Ten Things Accountants Should Never Do," by Mark Lee, AccountingWeb, May 23, 2013 --- Click Here
http://www.accountingweb.com/article/social-media-ten-things-accountants-should-never-do/221837?source=technology

Bob Jensen's threads on social media ---
http://www.trinity.edu/rjensen/ListservRoles.htm


"The Fix Was In Crime in College Hoops," FBI, May 20, 2013 ---
http://www.fbi.gov/news/stories/2013/may/crime-in-college-hoops/crime-in-college-hoops

It’s a cautionary tale for college and professional athletes alike.

Following a three-year FBI investigation dubbed Operation Hook Shot, eight people—including former University of San Diego (USD) basketball star Brandon Johnson, the school’s all-time point and assist leader—were convicted and sentenced to federal prison terms for taking part in a sports bribery conspiracy. The eighth and final defendant, illegal bookmaker Richard Francis Garmo, was sentenced last month.

The case began—as most of our sports bribery matters do—as an organized crime investigation. In 2009, we began looking into the activities of a criminal enterprise operating in the San Diego area. Along with selling marijuana, the group was operating an illegal online gambling business. A related criminal activity, Bureau investigators discovered, was a scheme to fix USD men’s basketball games.

Playing a pivotal role in the scheme was Thaddeus Brown, an assistant basketball coach at USD during the 2006-2007 season. Brown had placed bets with the illegal gambling business operated by Garmo and two partners-in-crime. Though no longer with the team, he still had contacts among the USD players. During the 2009-2010 season, he recruited Johnson—USD’s starting point guard—to influence the outcome of basketball games in exchange for money. Brown was paid handsomely for his role in the conspiracy—up to $10,000 per game.

During that season, it’s believed that at least four games were “fixed” with Johnson’s assistance. Perhaps the senior point guard would miss a free throw now and then or draw a technical foul. Or he would just pass up a shot—at one point Johnson was heard on electronic surveillance talking about how he wouldn’t shoot at the end of a particular game because it would have cost him $1,000.

Continued in article

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


Teaching Case on Stock Splits from The Wall Street Journal Accounting Weekly Review on May 17, 2013

Whole Foods Parties Like It's 1999
by: Justin Lahart
May 09, 2013
Click here to view the full article on WSJ.com
 

TOPICS: Earning Announcements, Stockholders' Equity

SUMMARY: "When it reported results late Tuesday [May 7, 2013], Whole Foods Market did something unusual. It announced a 2-for-1 stock split." The article discusses the history and usage of stock splits as well as their ability to "signal [that a company] thinks its future is bright."

CLASSROOM APPLICATION: The article may be used when introducing stock splits and dividends in a financial reporting class.

QUESTIONS: 
1. (Introductory) With what other announcement did Whole Foods Market announce a 2-for-1 stock split?

2. (Advanced) What is a stock split? In your answer, specifically define the impact of a stock split on par value, the total number of shares outstanding, and the account balances related to common stock in the corporate balance sheet.

3. (Introductory) The author cites the average stock price of a company in the S&P 500 as evidence supporting the argument that "plenty of stocks seem ripe for a split." What does this statement mean?

4. (Advanced) Why does the author write that "splits, of course, do nothing to alter the fundamentals of a company"?

5. (Advanced) What signal is sent by a company issuing a stock split? Why might institutional investors prefer share buybacks (treasury stock purchases) and dividend payouts to stock splits?
 

Reviewed By: Judy Beckman, University of Rhode Island

"Whole Foods Parties Like It's 1999," by Justin Lahart, The Wall Street Journal, May 9, 2013 ---
http://online.wsj.com/article/SB10001424127887324059704578471242897872354.html?mod=djem_jiewr_AC_domainid

Up until the dot-com crash, stock splits were a regular feature of the market. Since then, they have fallen into disuse. Just 13 companies in the S&P 500 split their shares last year, down from an average of 65 a year in the 1980s and 1990s. Even during years when the stock market struggled, companies were readier to split shares: In 1994, for example, there were 47 stock splits.

And by the old standards, there are certainly plenty of stocks that seem ripe for a split: The average stock price among companies in the S&P 500 is now about $67, compared with $47 at the end of 1999.

Splits, of course, do nothing to alter the fundamentals of a company. In that regard, they are essentially meaningless, like the Dow Jones Industrial Average hitting 15,000 or, for that matter, birthdays and anniversaries. Yet they can be a way for a company to signal it thinks its future is bright, since it suggests confidence the shares won't fall precipitously from a lower price point.

The thing is, the signal probably works best on individual investors. Institutional investors are more interested in signals that are backed with cash, like share buybacks and dividend increases.

And since individual investors have retreated from direct ownership of stocks over the past decade, the views of institutional investors are more important to companies these days.

But splits might still have some value. Consider: If a company decides to signal its faith in the future through a stock split, and then falters, it merely looks stupid. But if it falters after share buybacks and dividend increases, it not only looks stupid, it has less cash to see its way through the rough patch.

 


Brookings Institution --- http://en.wikipedia.org/wiki/Brookings_Institution "

Jensen Comment
Technically Brookings is bipartisan and has an excellent reputation among liberal and conservative economists, If anything, it probably leans slightly to the left.

Why some senators need some lessons in economics
"Think tank The Brookings Institute laid down each plan one by one. The only one it doesn't take seriously at ALL is Warren's,"  by Linette Lopez, Business Insider, May 20, 2013 ---
http://www.businessinsider.com/brookins-slams-warren-student-loan-plan-2013-5

(Senator) Elizabeth Warren made headlines last week for saying that she believed students should pay the same rate for loans as big Wall Street banks, 0.75%.

The Obama administration extended 3.4% interest rate on subsidized federal student loans last year, but that measure is set to expire in July leaving room for reform. The House Republicans, The President's Office, Democratic Senators Jack Reed (D-RI) and Dick Durbin (D-IL), and Senator Elizabeth Warren.

Think tank The Brookings Institute laid down each plan one by one. The only one it doesn't take seriously at ALL is Warren's.

From Brookings:

Sen. Warren’s proposal should be quickly dismissed as a cheap political gimmick. It proposes only a one-year change to the rate on one kind of federal student loan, confuses market interest rates on long-term loans (such as the 10-year Treasury rate) with the Federal Reserve’s Discount Window (used to make short-term loans to banks), and does not reflect the administrative costs and default risk that increase the costs of the federal student loan program.

Setting aside this one embarrassingly bad proposal, the remaining proposals raise a set of questions that need to be answered in order to select the ideal policy...

Ultimately, Brookings advocates for (shocking) a compromise. The Obama plan allows the rate to move with market conditions (as do the House Republicans). The two plans differ in that Obama does not want the rate to vary over the life of the loan (House Republicans do).

Durbin and Reed's plan looks a lot like the House Republican plan, but puts a cap on interest rates and uses a different benchmark for the rate — the 91-day Treasury rate plus a percentage determined by the Education Secretary to cover administrative costs rather than 10-year Treasury Bonds.

But again — Warren proposal is nowhere.

Jensen Comment
This reminds me of the time two first-year and naive Congressional representatives proposed, in an effort to reduce fuel prices, that the U.S. Government buy the oil refineries from the profit-mongering big oil companies like Exxon, Shell, and BP. What they failed to understand is that the oil companies would like nothing better than to unload their refineries on the U.S. government. Profits are made in the production of oil and in the retailing of oil products. Refineries tend to be high risk in the supply chain and are somewhat losing operations when risks are factored into the equation. I forget the details, but when oil companies proposed supporting their proposal they dropped it like a hot potato.


From the CFO.com Morning Ledger on May 21, 2013

Apple  paid little to no corporate income tax to any national government on tens of billions of dollars in overseas income over the past four years, Senate investigators found. Today’s WSJ reports that the Senate panel has put out a 40-page report and is expected to air its findings at a hearing today.

Tim Cook is expected to testify and propose changes to a tax code that provides American companies strong incentives to keep overseas earnings bottled up at foreign subsidiaries.

The investigation found no evidence that Apple did anything illegal. The panel’s new report focuses on Apple units in Ireland, where Apple has long based its overseas operations. These units are beyond the reach of the IRS. But Irish tax law only considers companies residents of the small European country if they are managed and controlled there, and Apple manages them from the U.S. The result: Apple pays little or no taxes to either country on much of its revenue earned outside the U.S., according to the report.

Although Ireland is often used as a corporate tax haven, ahead of some of the questions it expects on Tuesday, Apple said it has a base of operations there with 4,000 people, reports Emily Chasan in CFOJ. The company said its tax payments account for $1 of every $40 in corporate income tax the U.S. Treasury collects. It also said it doesn’t use “tax gimmicks,” and that its overseas funds are primarily derived from overseas sales.

Sounds Like Something to Be Ordered in a Pub on St. Patrick's Day
"Did Apple Pare Its Tax Bill With a 'Double Irish?' by Carol Matlack, Bloomberg Businessweek, May 22, 2013 ---
http://www.businessweek.com/articles/2013-05-22/did-apple-pare-its-tax-bill-with-a-double-irish

 


From the CFO.com Morning Ledger on May 21, 2013

Shareholders can’t shoot down golden parachutes
Shareholders’ opinion on lucrative severance payments to senior executives doesn’t count for much. Unlike say-on-pay votes, which typically happen annually, advisory votes on golden parachutes aren’t required until just before investors vote on approving a takeover,
 CFOJ’s Vipal Monga reports. That takes pressure off directors to act on the outcome, because they won’t have to face shareholders again if the takeover deal closes. Also, the votes give shareholders little power to change severance packages that already exist. Heinz shareholders voted against multimillion-dollar severance packages last month, but it won’t have any impact when executives leave following the takeover deal with 3G Capital and Berkshire Hathaway, because severance packages were already in place before the deal was in the works.


"Governor Cuomo Seeks to Turn SUNY Campuses (all 64) Into Tax-Free Zones," by Don Troop, Chronicle of Higher Education, May 23, 2013 ---
http://chronicle.com/blogs/bottomline/governor-cuomo-seeks-to-turn-suny-campuses-into-tax-free-zones/

. . .

In a statement released by Governor Cuomo’s office, Nancy L. Zimpher, chancellor of SUNY, said, “The governor has said many times that SUNY is the economic engine for New York, and these new tax-free zones will further our campuses’ ability to innovate, create jobs, and attract new companies through public-private partnerships.”

Under the plan, the companies would pay no sales, property, or business taxes for a decade, and employees would pay no income taxes. The venture seeks to replicate the economic success of SUNY’s College of Nanoscale Science and Engineering, which Mr. Cuomo said had attracted billions of dollars of investment to Albany, N.Y.

The tax-free areas would include all SUNY campuses outside of New York City and north of Westchester County, and up to 200,000 square feet adjoining the campuses, three million square feet for designated private colleges, and 20 state-owned properties.

In making the announcement at the soon-to-be-completed NanoFabX building on the Albany campus, Mr. Cuomo, a Democrat, was joined Sen. Dean G. Skelos, the Senate Republican Conference leader; Sen. Jeffrey A. Klein, the Independent Democratic Conference leader; and Assembly Speaker Sheldon Silver, the Albany Times-Union reported. A press aide to Mr. Cuomo cautioned that the presence of the lawmakers did not mean they were endorsing the plan, although all three men spoke favorably of the prospect of more jobs for New Yorkers.

Richard Overmoyer is executive director of the University Economic Development Association, a national group that encourages university-based economic development. As a past deputy secretary for technology innovation at the Pennsylvania Department of Community and Economic Development, Mr. Overmoyer helped create the Keystone Innovation Zone Tax-Credit Program, which assists start-up companies in the state.

He cautioned that the broadness of Mr. Cuomo’s proposal, as presented, raised many questions about its viability.

“The challenge is how you draw those maps,” Mr. Overmoyer said. In Pennsylvania, “we purposely did it in a way that limited that geographic range to no more than four square miles around the campus.”

“Some of the SUNY campuses are in rural settings,” he said. “Do you really want to encourage development on greenfield sites? That’s not going to help you.”

A bill containing the details of Governor Cuomo’s tax proposal will be introduced during the current legislative session, which is scheduled to end on June 21. Many details remain to be worked out, the governor’s office said.

Jensen Comment
If this is such a good idea why hasn't it already happened in the State of Mississippi?

 

How About $275,000 Per New Job and More Incentives for Each of 30 Future Years?
"Mississippi Sets A Record For Unreported Subsidies (to companies)," by Kenneth Thomas, Business Insider, May 24, 2013 ---
http://www.businessinsider.com/mississippi-sets-a-record-for-unreported-subsidies-2013-5

 


Teaching Case from The Wall Street Journal Accounting Weekly Review on May 3, 2013

The Big Number
by: Emily Chasan
Apr 30, 2013
Click here to view the full article on WSJ.com
 

TOPICS: business combinations

SUMMARY: More than two-thirds of deals to acquire privately held companies resulted in post-closing escrow claims in 2012 according to "a study by advisory firm Shareholder Representative Services.... The claims involved purchase-price adjustments, indemnifications or 'earn outs,' which specify performance targets or milestones an acquired company must meet after closing." INSTRUCTORS: REMOVE THE FOLLOWING STATEMENTS BEFORE DISTRIBUTING TO STUDENTS AS THEY ANSWER QUESTIONS 2, 3 AND 4 IN THE REVIEW. FASB codification section ASC 805-30-25-5 through 25-7 establishes requirements for contingent portions of the fair value of consideration given by an acquirer in a business combination. Paragraph 25-5 states, "The acquirer shall recognize the acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange for the acquire." For the two-thirds of acquisitions of non-public companies discussed in this article, paragraph 25-7 states, "the acquirer shall classify as an asset a right to the return of previously transferred consideration if specified conditions are met." Returns of consideration adjusted after the business combination likely would result in a reduction of Goodwill.

CLASSROOM APPLICATION: The article may be used to introduce issues in contingent payment portions of the purchase price in a business combination. It also helps students to understand that the process of a business combination takes an extended period of time--similar to, but longer than, a real estate transaction--with a purchase-and-sale agreement date followed by a closing date.

QUESTIONS: 
1. (Introductory) According to the article, what happens in two-thirds of business combinations in which the acquired firm is non-public?

2. (Advanced) What is contingent consideration in a business combination? How does a contingent consideration provision protect both the acquirer and an acquired firm?

3. (Introductory) Based on discussion in the article, how long does it take to resolve contingent portions of consideration in business combinations?

4. (Advanced) What does authoritative accounting literature require in accounting for contingent consideration portions of business combinations? Cite specific authoritative guidance in your answer.

5. (Advanced) What asset do you think is most likely adjusted in the two-thirds of business combinations discussed in this article?
 

Reviewed By: Judy Beckman, University of Rhode Island

"The Big Number," by Emily Chasan, The Wall Street Journal, April 30, 2013 ---
http://online.wsj.com/article/SB20001424127887324743704578447253910673688.html?mod=djem_jiewr_AC_domainid

7%

Proportion of deals to acquire privately held companies that resulted in post-closing escrow claims last year

When the acquisition of a privately held company closes, the terms aren't usually final. More than two-thirds of the time, the buyer, generally a large public company, moves to modify the purchase price or claw back funds put in escrow.

While deals between public companies typically are sorted out at closing, acquisitions of private companies generally require a sum of money to be held in escrow for 12 to 18 months after that, so the buyer has time to evaluate any problems that emerge.

A study, by advisory firm Shareholder Representative Services, of 420 mergers and acquisitions of private companies whose escrow periods expired last year found that 67% spawned post-closing claims. The claims involved purchase-price adjustments, indemnifications or "earn outs," which specify performance targets or milestones an acquired company must meet after closing.

"After closing, the buyer has that period to kick the tires and see if everything that was represented is all true," said Paul Koenig, SRS's co-chief executive.

On average, escrow claims took seven months to resolve, but some companies get tied up in litigation for years. Outpatient-services provider Alliance Healthcare Services Inc. AIQ +0.86% said last month that it received a $1.2 million indemnification settlement this year from its 2008 acquisition of Medical Outsourcing Services LLC. After the deal closed, the U.S. government identified compliance issues at the acquired company related to Medicare billing practices, Alliance Healthcare said.

Post-closing claims most commonly stemmed from tax and intellectual-property issues.


Committee of Sponsoring Organizations of the Treadway Commission (COSO) ---
http://en.wikipedia.org/wiki/Committee_of_Sponsoring_Organizations_of_the_Treadway_Commission

 

What's New with COSO?

May 14, 2013

2013 Internal Control-Integrated Framework Released

COSO has issued the 2013 Internal Control–Integrated Framework (Framework). The Framework published in 1992 is recognized as the leading guidance for designing, implementing and conducting internal control and assessing its effectiveness. The 2013 Framework is expected to help organizations design and implement internal control in light of many changes in business and operating environments since the issuance of the original Framework, broaden the application of internal control in addressing operations and reporting objectives, and clarify the requirements for determining what constitutes effective internal control.

COSO has also issued Illustrative Tools for Assessing Effectiveness of a System of Internal Control and the Internal Control over External Financial Reporting (ICEFR): A Compendium of Approaches and Examples. The Illustrative Tools are expected to assist users when assessing whether a system of internal control meets the requirements set forth in the updated Framework. The ICEFR Compendium is particularly relevant to those who prepare financial statements for external purposes based upon requirements set forth in the updated Framework.

Read Press Release
Download Executive Summary
Read FAQs
Download PowerPoint Slides
Purchase Framework and Tools


May 22, 2013 question from Glen Gray

Bob,

I’m going to tap your knowledge again.

I’m wondering whatever happen to expert systems at the accounting firms. They invested lots of money in expert systems in the 1980s and early 1990, but it appears that they have completely disappeared. In your treads do you have any articles (academic or professional) that specifically discuss this disappearance? Sadly, based on my search, accounting-related expert system articles disappeared before the actual expert systems disappeared.

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

http://www.csun.edu/~vcact00f

 

May 22, 2013 reply from Bob Jensen

It would be better if you contact Miklos with your question. Miklos was more of an expert on "expert systems" of large CPA firms ---
Click Here
http://raw.rutgers.edu/MiklosVasarhelyi/Resume Articles/CHAPTERS IN BOOKS/C10. expert systems app in act.pdf 

 

I suspect that the comparative advantage of expert systems declined in the 21st Century as better and broader knowledge bases evolved after the roaring 1990s.
"Accounting Firms That Use Expert Systems," by Casey Reader, eHow Contributor ---
http://www.ehow.com/info_8736025_accounting-firms-use-expert-systems.html 

. . .

Inferences

To provide the most relevant information to users, an expert system will often deploy a complex set of inference rules. For instance, the program may receive a question about income tax law and then be able to correctly glean that certain information about housing law might also be relevant. Much of the work of programming expert systems involves developing new inference rules for new contexts. Often programs will need to be updated for new rules.

 

Disadvantages

Though expert systems have been effective in certain disciplines, such as accounting, they have some limitations that have kept them from more widespread use. Expert systems are generally only effective within very narrow ranges of knowledge. The ability to infer what knowledge will be relevant to any specific problem can be difficult for a computer to understand outside of a specialized range. For this reason, only specialized disciplines tend to use them.

 

Read more: Accounting Firms That Use Expert Systems | eHow http://www.ehow.com/info_8736025_accounting-firms-use-expert-systems.html#ixzz2U3EtmYfP

 

Note the references listed at the end of the above article.

 

Jensen Comment
I also suspect that expert systems are somewhat a victim of SOX that provided more profits from detail testing in auditing while putting up barriers to auditing analytical reviews, consulting conflicts, and expert systems. For example, four of the Big Five firms separated themselves from their consulting divisions where expert systems were conceived and developed. And Andersen imploded shortly after Andersen Consulting broke away.

I don't think expert systems necessarily died, but they fell short of their 1990 promises as both the auditing profession and the former consulting divisions of Big Five firms changed.

Expert systems and analytical review in general at one time were the great hopes of replacing labor on audits. But the enormous auditing scandals that were faulted, in large measure, for the failures of such labor saving innovations did a lot of damage to the hopes for such systems. For a summary of the hopes that failed to materialize see
http://www.thefreelibrary.com/The+future+of+expert+systems.-a016086624

 


"Governments using accrual accounting set to soar ," by Nick Mann, Public Finance International, May 14, 2013 ---
http://www.publicfinanceinternational.org/news/2013/05/governments-using-accrual-accounting-set-to-soar/

Jensen Comment
But still less than half


The question for cost accountants is whether some robot costs should be charged to direct labor rather than manufacturing overhead. For example, suppose that a leased robot has an on-the-job clock with rental fees being paid by the hour. Can a case be made that these rental fees by the hour should be charged to direct labor?

"It’s Time to Talk about the Burgeoning Robot Middle Class:  How will a mass influx of robots affect human employment?" by Illah Nourbakhsh, MIT's Technology Review, May 14, 2013 --- Click Here
 http://www.technologyreview.com/view/514861/its-time-to-talk-about-the-burgeoning-robot-middle-class/?utm_campaign=newsletters&utm_source=newsletter-daily-all&utm_medium=email&utm_content=20130515

Jensen Comment
Note that robots can do more than physical things in factories. Robots can become teachers, doctors, surgeons, auditors, accountants, soldiers, sailors, pilots, truck drivers, musicians, etc. If we can figure out how to program them to cheat in terms of billions of dollars they can even be elected to office.

The key to robotics in the service sector is to make them interactive in terms of letting them do what they do best in interaction with humans doing what they do best. Surgery is a good example. Although there is a miniscule margin of error, robotic surgeons can perform delicate surgeries in interaction with human surgeons who might be located thousands of miles away. These robots actually make decisions and are not just hand extensions of the surgeon.

I've always admired drivers of 18-wheel trucks who can back those big rigs into tight alleys. The day is probably already here when a robot can back a big rig into tight places better than our top truck drivers.

For years robots have been landing airplanes, and the day may come when robots are better pilots than our top pilots. The automatic pilots are making decisions and are not just hand extensions of the pilots who are there mostly to override the robot when something malfunctions. Years ago I was on an American Airlines flight years ago when the pilot announced that the touch down had been a bit rough because the automatic pilot landed the aircraft. I'm sure robotic landings have smoothed out since then.

The question for cost accountants is whether some robot costs should be charged to direct labor rather than manufacturing overhead. For example, suppose that a leased robot has an on-the-job clock with rental fees being paid by the hour. Can a case be made that these rental fees by the hour should be charged to direct labor?

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


"HTML5 Moodle Mobile App Comes to Android, iOS," by David Nagel, T.H.E. Journal, May 9, 2013 ---
http://thejournal.com/articles/2013/05/09/html5-moodle-mobile-apps-comes-to-android-ios.aspx

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


Question
Why do banks hate the new loan loss (bad debt estimation) model proposed by the FASB in place of the prior fair value estimation model?

"U.S. banks push back on change in loan loss accounting," by Dena Aubin, Fox Business, May 13, 2013 ---
http://www.foxbusiness.com/news/2013/05/13/us-banks-push-back-on-change-in-loan-loss-accounting/ 

More than a dozen of the biggest U.S. banks have questioned a proposed accounting change meant to boost reserves for risky loans, saying the results would be vastly different from those of a similar rule being developed by global standard-setters.

A key reform arising out of the 2007-08 global financial crisis, the proposal would require banks to look ahead and reserve for expected losses on the day a loan is made.

Currently, banks do not have to reserve for risky loans until there are signs of a loss.

Reserves were criticized as being "too little, too late" during the global crisis, when major banks were buffeted by defaults on loans and other debt. Many had to be bailed out because they had not set aside enough for losses.

Numerous banking regulators have called for more timely reserves, though critics have also warned that proposed accounting changes would make quarterly earnings more volatile as banks adjust their expectations for losses.

In a letter to accounting rule-makers, banks suggested that trying to predict losses too far ahead would be unreliable.

Banks signing the letter included Bank of America Corp, Citigroup Inc, JPMorgan Chase & Co and Morgan Stanley. Spokesmen for the banks either declined to comment or did not respond to requests for comment.

The letter, dated May 10, was addressed to the Connecticut-based Financial Accounting Standards Board, which sets U.S. accounting standards, and the London-based International Accounting Standards Board, which sets international rules.

FASB is seeking comment on its proposal through May 31, and its details may change. Analysts said it would likely not be effective before 2015. A separate rule on loan losses was proposed by the IASB in March.

50 PCT JUMP IN RESERVES POSSIBLE

The letter intensified pressure on the two boards to align their rules. U.S. companies use FASB's generally accepted accounting principles, or GAAP. Much of the rest of the world uses IASB's international financial reporting standards (IFRS).

The two boards have been working for over a decade to merge their standards. Financial accounting has been a key focus since the global crisis, but the boards parted ways on loan loss accounting last year.

"Relative to the IASB's proposal, the FASB's proposal would generally require entities to recognize allowances for credit losses sooner and in larger amounts," said Bruce Pounder, director of professional programs at Loscalzo Associates, a Shrewsbury, New Jersey-based accounting education company.

The balance sheets of U.S. banks could look significantly worse than that of banks using international standards, even in identical economic conditions, he said.

Continued in article

Will bad loans look worse under U.S. GAAP versus IFRS?
How Bad is a Bad Bank Loan:  Rule Split to Put U.S. Banks at a Loss

From the CFO Morning Ledger on February 28, 2013

How bad is a bad bank loan?
Accounting regulators in the U.S. and Europe disagree on the standards for how banks book loan losses, and their rift could lead to tens of billions of dollars being carved off U.S. lenders’ current profits, writes the WSJ’s Michael Rapaport. The FASB and the IASB have separate proposals in the works that would require banks to record losses on soured loans earlier than they do now. But the U.S. proposal goes a step further and would force American banks to accelerate even more losses more quickly than foreign banks would. If U.S. and overseas banks end up using different models for booking losses, that could create an apples-to-oranges situation that would make it more difficult for investors to tell how they stack up against one another
.

"Rule Split to Put U.S. Banks at a Loss," by Michael Rapoport, The Wall Street Journal, February 27, 2013 --- Click Here
http://professional.wsj.com/article/SB10001424127887323293704578330490452665994.html?mod=ITP_moneyandinvesting_0&mg=reno64-wsj

How bad is a bad bank loan? Accounting regulators in the U.S. and Europe disagree, and their rift could lead to tens of billions of dollars being carved off U.S. lenders' current profits.

American and global rule makers have separate proposals in the works that would require banks to record losses on soured loans earlier than they do now. The plans aim to give investors a more accurate picture of banks' health, after many critics felt banks, both in the U.S. and abroad, took losses too slowly during the financial crisis.

But the U.S. proposal goes a step further: In a split with their overseas counterparts, U.S. rule makers would force American banks to accelerate even more losses more quickly than foreign banks would.

That could severely crimp current results for U.S. banks, some observers believe—an example of how a host of regulatory actions on both sides of the Atlantic may cause disparities. It also could hurt how investors perceive the health and performance of U.S. banks versus their competitors.

"If overseas banks don't have to record losses as early as U.S. banks, I think that puts [the U.S. banks] at a disadvantage," said Patrick Dolan, a finance and securitization attorney with Dechert LLP.

The gap between the two proposals is "a big difference," said Donna Fisher, a senior vice president at the American Bankers Association. Banks "all agreed globally that we want one standard" for booking losses, she said.

If U.S. and overseas banks end up using different models for booking losses, that could create an apples-to-oranges situation that would make it more difficult for investors to tell how they stack up against one another.

"They will be harder to compare than they are at present," said Peter Elwin, head of European pensions, valuation and accounting research for J.P. Morgan JPM +3.41% Cazenove, part of J.P. Morgan Chase & Co.

The changes aren't imminent. The plans from both the U.S.'s Financial Accounting Standards Board and International Accounting Standards Board, its London-based global counterpart, are still in the early stages: The IASB proposal hasn't even been formally issued yet, and both boards will listen to public comment on their plans before making a final decision. No changes are expected to take effect before 2015.

But FASB has suggested that some large U.S. banks might have to increase bad-loan reserves by 50% in some areas of their business. U.S. industry-wide reserves were $162 billion at the end of 2012, according to the Federal Deposit Insurance Corp. Currently, banks wait to record loan losses until there is evidence that losses have actually occurred.

During the financial crisis, net loan charge-offs booked by U.S. banks didn't peak until late 2009, according to FDIC data, more than a year after the heart of the crisis.

That left banks carrying huge piles of bad loans even after it was apparent they were souring in droves, making the banks appear healthier to investors than they really were and delaying the banks' reckoning with the crisis's impact.

Banks charged off $189 billion in bad loans in 2009 and $187 billion in 2010, according to the FDIC—much of which arguably should have been charged off earlier. (Charge-offs were $100 billion in 2008 and only $44 billion in 2007.)

Both FASB and IASB now want to change that system, so that projections of future losses would be the standard for booking loan losses. That is expected to speed up recognition of bad loans.

Until last summer, the two panels also had agreed on the details of how and when to book the losses: Largely, only those losses based on events expected over the following 12 months would be booked upfront. But FASB pulled away from that method, saying that it had heard concerns from some banks, investors and regulators that it was too complex.

Now, the FASB proposal, issued in December, calls for all losses banks expect over the life of a loan to be booked upfront. If that expectation changes, so will the recorded amount of losses.

Continued in article

Bob Jensen's threads on fair value accounting and bad debts ---
http://www.trinity.edu/rjensen/Theory02.htm#FairValueFails

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


List of AACSB Universities With Accounting Accreditation (in addition to business school accreditation) ---
https://www.aacsb.net/eweb/DynamicPage.aspx?Site=AACSB&WebKey=4BA8CA9A-7CE1-4E7A-9863-2F3D02F27D23

"AACSB approves revised accounting school accreditation standards," by Chris Baysden, Journal of Accountancy, May 14, 2013 ---
http://www.journalofaccountancy.com/News/20137919.htm?goback=.gde_4977040_member_244826335
Thank you Dennis Huber for the heads up.

Jensen Comment
Standards for such things as "creative curriculums and new program concepts" are still vague. Most of the programs accredited to date are traditional, and there is not one for-profit accredited university or one program that is all or mainly online. It's still not possible to my knowledge to attain accounting accreditation without first attaining AACSB business school accreditation. This is a major constraint on innovation since business school deans that are the AACSB accreditation gate keepers tend to block non-traditional programs such as for-profit university programs and distance education programs. However, some AACSB accredited universities have limited distance education alternatives for courses and degrees, but these were generally allowed only when the a university previously had such accreditation for its onsite programs.

Are there any examples of "creative creative curriculum and new program concepts?" worthy of mention in accounting programs having AACSB accounting accreditation. The University of Connecticut has AACSB accounting accreditation and offers an online distance education degree. However, the University of Maryland having AACSB accreditation put its online accounting degree program off to the University College that does not have AACSB accreditation.

It still seems to me that in North America the AACSB only talks the talk with respect to ""creative curriculums and new program concepts." Only in Europe has there been AACSB walking the walk in its desperate effort to go global. I would even go so far as to conjecture that the AACSB has accredited some programs in Europe that would not make it in North America, including universities with some questionable executive doctoral programs.


What going "Dutch" means in terms of defined-benefit pensions"
If only the old folks could survive on tulips

"More Defined Benefit Pension Plans Going Bankrupt," by Mike Shedlock, Townhall, May 28, 2013 --- Click Here
http://finance.townhall.com/columnists/mikeshedlock/2013/05/28/more-defined-benefit-pension-plans-going-bankrupt-n1607352?utm_source=thdaily&utm_medium=email&utm_campaign=nl

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

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


"Accounting Fraud Targeted With Crisis-Related Enforcement Ebbing, SEC Is Turning Back to Main Street," by Jean Eaglesham, The Wall Street Journal, May 27, 2013 ---

U.S. securities regulators are turning back toward Main Street, renewing their focus on accounting fraud and other financial-disclosure failings.

Such cases were long a staple of the Securities and Exchange Commission's enforcement efforts, leading to more than 25% of civil-enforcement actions filed by the agency in its 2003 to 2005 financial years. The financial crisis shifted attention and money elsewhere. In the year ended last September, accounting fraud and financial-disclosure problems made up just 11% of SEC enforcement actions.

But as the volume of crisis-related cases ebbs, top SEC officials are expected to announce soon a broad shuffling of resources in the agency's enforcement division that will include an increased focus on accounting fraud, according to people close to the agency.

The decision to hunt for wrongdoing by Main Street, as well as Wall Street, puts America's corporations in the SEC's cross hairs.

The move is led by SEC Chairman Mary Jo White and co-enforcement chiefs George Canellos and Andrew Ceresney, said the people close to the agency. It isn't clear how much money or manpower will be devoted to the effort, though the SEC already is developing a computer program to sift language in financial reports for clues that executives might be misstating results, agency officials say.

Mr. Ceresney, a former federal prosecutor who joined the SEC in April, and Mr. Canellos have told employees there are no plans to get rid of five specialized enforcement units started in 2009 that are devoted to market abuse, asset management, foreign corrupt practices, municipal securities and structured products. People close to the SEC expect changes to some of the units, though, which they say could give the agency more leeway to make accounting fraud a top priority.

"We have to be more proactive in looking for it," Scott Friestad, a senior SEC enforcement official, told a legal conference last month. "There's a feeling internally that the issue hasn't gone away."

During and after the financial crisis, SEC enforcement officials devoted much of their energy to reining in alleged crisis-related malfeasance, such as misleading investors about the risks of subprime loans or mortgage bonds. Few crisis-era enforcement cases remain.

The falloff in accounting-fraud crackdowns by the SEC also may reflect improved financial reporting by companies because of Sarbanes-Oxley rules that took effect in 2002 after the Enron Corp. and WorldCom Inc. scandals.

An initial step in the SEC's new effort is software that analyzes the "management's discussion and analysis" section of annual reports where executives detail a company's performance and prospects.

Officials say certain word choices appear to reveal warning signs of earnings manipulation, and tests to determine if the analysis would have detected previous accounting frauds "look very promising," said Harvey Westbrook, head of the SEC's office of quantitative research.

Companies that bend or break accounting rules tend to play a "word shell game," said Craig Lewis, the SEC's chief economist and head of the division developing the model. Such companies try to "deflect attention from a core problem by talking a lot more about a benign" issue than their competitors, while "underreporting important risks."

If the word-analysis program works, officials say it will be added to a new "Accounting Quality Model" that SEC enforcement staff started using recently. The model trawls data from nearly 9,000 publicly traded companies. A similar computer-powered search for unusual performance patterns at hedge funds has led to seven enforcement actions in recent years.

Success won't be easy, partly because suspicious language or numbers in securities filings aren't necessarily illegal. Some companies and their lawyers are expected to respond to the crackdown by trying to outsmart the agency's computers.

"As soon as the SEC suggests it's going to look at this in terms of the numbers of words, lawyers will be more loquacious," said John Coffee, a law professor at Columbia University.

The fraud-detection software looks for big differences between net income and actual cash outflows available to investors, according to officials. It then looks for other warning signs, such as declining market share or weak profitability compared with rivals.

The system also looks for companies with an unusually high number of off-balance sheet transactions. Enron, Adelphia Communications Corp. and other large accounting frauds involved the use of such transactions to hide debt and inflate earnings.

Another sign of possible trouble: auditor changes. About 9% of companies that file financial reports with the SEC had their auditor leave last year, according to research firm Audit Analytics. Of the 866 companies that lost their auditor, 66 had two auditors depart, while two companies went through three auditors.

Sounding an alarm at the SEC "doesn't necessarily mean the company's done anything wrong," Mr. Lewis said. But his aim is that something "kicked out of our model as being unusual" is "much more likely to be associated with a fraud" than having a benign explanation.

Jacob Frenkel, a former SEC enforcement lawyer now at law firm Shulman, Rogers, Gandal, Pordy & Ecker PA, said computer power might help the agency refocus attention on financial-reporting issues that were "the bread and butter of the agency's enforcement program" for decades.

Continued in article

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


"Feds shut down 'financial hub of the cyber-crime world'," by Bob Sullivan, NBC News, May 28, 2013 ---
http://redtape.nbcnews.com/_news/2013/05/28/18560809-feds-shut-down-financial-hub-of-the-cyber-crime-world?lite
Thank you Dennis Huber for the heads up.

Liberty Reserve was the financial glue that held together a massive worldwide network of cybercriminals, but the network that enabled $6 billion to change hands has been ripped apart, U.S. prosecutors said Tuesday, leaving thousands of criminals wondering where the money is.

One of the world’s most widely used digital currencies, Liberty Reserve was used as a secret money system for credit card thieves, identity thieves, Ponzi scheme peddlers, hackers for hire, child pornographers, even drug dealer websites, federal officials claim in an indictment unsealed Tuesday in Manhattan federal court. The virtual money system allowed perhaps a million criminals to anonymously move money around the world.

The scope of the crime is "staggering," federal officials allege in the indictment: Liberty Reserve had a million users and serviced 55 million transactions since 2006. Some are calling this the largest money laundering prosecution in history.

"(Liberty Reserve is) a criminal business venture...designed to help criminals conduct illegal transactions and launder the proceeds," the unusually colorful indictment says. "(It was) a financial hub of the cyber-crime world."

 

Continued in article

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


Question
How would you account for warranty obligations of Tesla electric automobiles?

"Tesla's Earnings Quality Is Sketchy, But Its Stock Keeps Soaring," by Herb Greenberg, Business Insider, May 16, 2013 ---
http://www.businessinsider.com/teslas-stocks-keep-soaring-2013-5

If profits matter going forward, so does earnings quality. And according to Gradient Analytics, the earnings quality gets a grade of 'F."

What stands out the most?

"So many things," says Gradient research director Donn Vickrey. "By declaring themselves profitable, I said there is just no way. How can this be at this point in the cycle? It has to be purely a paper profit and at that some elements of the paper may be lower quality than usual."

Paper or not, Vickrey believes whatever Tesla's profitability, it isn't sustainable.

Rather than go through all of his points, let's focus on just one: warranty accruals. This is the amount the company puts aside for expected warranty expenses — a non-cash charge that hits earnings as a cost of goods sold. The lower the provision, the less of a hit to earnings.

It's highly subjective, and Tesla current reserves at a rate, relative to sales, in-line with Ford and General Motors. But its warranty is longer than mainstream auto companies and "its product is based on new technology with unproven reliability," according to Gradient's report on Tesla." Of particular concern: The firm's eight-year, 100,000 mile battery warranty could prove to be extremely costly."

But what if the company is so new it simply doesn't know — so uses existing auto companies as a benchmark?

Under accounting rules, Vickrey says, if you don't know what they'll be "they should be higher, not lower."

Continued in article

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

 


From the TaxProf Blog on May 16, 2013 --- http://taxprof.typepad.com/
For a change, the liberals and conservatives are equally upset over this IRS scandal

The Deepening IRS Scandal

From the TaxProf Blog on May 29, 2013 --- http://taxprof.typepad.com/
For a change, the liberals and conservatives are equally upset over this IRS scandal

The IRS Scandal, Day #20

IRS Logo 2

 

"Americans Deserve the IRS," by Walter E. Williams, Townhall, May 29, 2013 --- Click Here
http://townhall.com/columnists/walterewilliams/2013/05/29/inority-view-n1607099?utm_source=thdaily&utm_medium=email&utm_campaign=nl

From The Wall Street Journal Accounting Weekly Review on May 17. 2013

Wider Problems Found at IRS
by: John McKinnon and Siobhan Hughes
May 13, 2013
Click here to view the full article on WSJ.com
 

TOPICS: IRS, Taxation, Treasury Department

SUMMARY: The IRS has apologized for inappropriately targeting specific political groups' applications for tax-exempt status as 501(c)(4) organizations. The apology came just prior to a report being issued by the Treasury Department's inspector general for tax administration, which finds that lower level IRS employees targeted certain political terms in deciding on which applications to scrutinize for potential violation of the 501(c) tax exempt status. As reported in the related article, "A congressional aide familiar with the findings of the inspector general's report said it concludes that tea-party groups were delayed in the application process, and were asked unnecessary questions." The Treasury Department audit was initiated after "the controversy arose in early 2012, when reports began to surface that newly formed tea-party and other conservative groups that had applied for tax-exempt status were receiving letters from the IRS asking for disclosure of their donors and other information that typically isn't requested of groups making such applications." Many find the apology too late and are calling for resignations since "IRS officials, in congressional testimony soon after [the reports surfaced], denied targeting of tea party groups had occurred."

CLASSROOM APPLICATION: The article is useful to discuss the role of the IRS; its potential for overstepping bounds; and the controls needed to ensure such inappropriate behavior in government does not run rampant, including an audit function within our U.S. system of checks and balances. The article can also be used for a similar discussion when covering accounting for not-for-profit organizations or in an auditing, ethics, or other professional-practice oriented course.

QUESTIONS: 
1. (Introductory) What organization has issued a report on the Internal Revenue Service (IRS)? What is the organization's responsibility within the U.S. government in general and for the IRS?

2. (Introductory) According to the main and related articles, what are the findings of the report on the IRS's actions in relation to certain not-for-profit organizations?

3. (Advanced) What is the possbile concern about organizations with politically oriented names and the potential for violation of requirements for 501(c)(4) status?

4. (Advanced) What are the "wider problems" driving the title of this article?

5. (Introductory) Click on the related article and its video of one of this article's authors, John McKinnon. When did the IRS decide to apologize for its actions in targeting certain groups?

6. (Advanced) What is the source of the complaint that the IRS leaders lied about the targeting of specific political groups for scrutiny?
 

Reviewed By: Judy Beckman, University of Rhode Island
 

RELATED ARTICLES: 
IRS Apologizes for Scrutiny of Conservative Groups
by John McKinnon and Corey Boles
May 11, 2013
Page: A1

"Wider Problems Found at IRS," by John McKinnon and Siobhan Hughes, The Wall Street Journal, May 13, 2013 ---
http://online.wsj.com/article/SB10001424127887324715704578478851998004528.html?mod=djem_jiewr_AC_domainid

The Internal Revenue Service's scrutiny of conservative groups went beyond those with "tea party" or "patriot" in their names—as the agency admitted Friday—to also include ones worried about government spending, debt or taxes, and even ones that lobbied to "make America a better place to live," according to new details of a government probe.

The investigation also revealed that a high-ranking IRS official knew as early as mid-2011 that conservative groups were being inappropriately targeted—nearly a year before then-IRS Commissioner Douglas Shulman told a congressional committee the agency wasn't targeting conservative groups.

Enlarge Image image image Associated Press

Tax-exempt groups organized under section 501(c)(4) of the Internal Revenue Code are allowed to engage in some political activity, but the primary focus of their efforts must remain promoting social welfare. Previously

IRS Apologizes for Scrutiny of Conservative Groups IRS Apologizes for Improper Scrutiny of GOP Groups

The new disclosures are likely to inflame a widening controversy over IRS handling of dozens of applications by tea-party, patriot and other conservative groups for tax-exempt status.

The details emerged from disclosures to congressional investigators by the Treasury Inspector General for Tax Administration. The findings, which were reviewed by The Wall Street Journal, don't make clear who came up with the idea to give extra scrutiny to the conservative groups.

The Internal Revenue Service inappropriately flagged conservative political groups for additional reviews during the 2012 election to see if they were violating their tax exempt status. John McKinnon reports on the News Hub.

The inspector general's office has been conducting an audit of the IRS's handling of the applications process and is expected to release a report this week. The audit follows complaints last year by numerous tea-party and other conservative groups that they had been singled out and subjected to excessive and inappropriate questioning. Many groups say they were asked for lists of their donors and other sensitive information.

On Sunday, a government official said the report will note that IRS officials told investigators that no one outside the IRS was involved in developing the criteria the agency now acknowledges were flawed.

On Friday, Lois Lerner, head of the IRS tax-exempt-organizations division, said the agency was "apologetic" for what she termed "absolutely inappropriate" actions by lower-level workers. She said those workers had selected some conservative groups for extra scrutiny to determine whether their applications should be approved. She said they had picked groups for extra scrutiny according to whether they had "tea party" or "patriot" in their names, among other criteria.

s. Lerner came to the IRS in 2001 from the Federal Election Commission, and assumed her current position in 2006. IRS officials said Sunday that Ms. Lerner wasn't available for comment, and she didn't respond to an emailed request.

GOP lawmakers stepped up their criticism on Sunday. "The bottom line is [IRS officials] used key words to go after conservatives," Rep. Darrell Issa (R., Calif.), said Sunday on NBC's "Meet the Press." "There has to be accountability for the people who did it. And, quite frankly…there's got to be accountability for people who were telling lies about it being done."

Some Democrats also voiced criticism. "I'm concerned about that," said Sen. Dianne Feinstein (D., Calif.), also on NBC. "Somebody made the decision that they would give extra scrutiny to this particular group. And I think we have to understand why."

The IRS said over the weekend it is in the process of independently confirming the dates mentioned on the timeline of events contained in the inspector general report, "but we believe the [inspector general's] timeline is correct." The IRS said the report supports its view that its missteps weren't politically motivated and were limited to lower-level workers.

The IRS also said the report reflects that "IRS senior leadership was not aware of this level of specific details" at the time of a March 2012 hearing where Mr. Shulman denied any targeting of conservative groups. Mr. Shulman, who no longer works for the IRS, declined to comment.

The new details suggest that agency workers were examining statements in applications for tax-exempt status to determine whether groups had political leanings.

Tax-exempt social-welfare groups organized under section 501(c)(4) of the Internal Revenue Code are allowed to engage in some political activity, but the primary focus of their efforts must remain promoting social welfare. That social-welfare activity can include lobbying and advocating for issues and legislation, but not outright political-campaign activity. But some of the rules leave room for IRS officials to make judgment calls and probe individual groups for further information.

Organizing as such a group is desirable, not just because such entities typically don't have to pay taxes, but also because they generally don't have to identify their donors.

IRS officials said last week that the focused review of conservative groups was initiated by lower-level civil servants in the IRS Cincinnati office, not by political appointees in Washington, and that it wasn't politically motivated. They say it stemmed from a misguided effort to centralize review of a growing number of applications for tax-exempt 501(c)(4) status.

But questions continued to swirl about the failure of IRS officials to disclose the problems until the inspector general's report was about to become public.

The timeline contained in the draft report indicates that IRS scrutiny of tea-party and other conservative groups began as early as 2010 and came to the attention of Ms. Lerner, the head of the tax-exempt-organizations division, at least by the following year.

The report's timeline indicates that the criteria were changed to be more neutral in July 2011 after Ms. Lerner "raised concerns." The criteria for heightened scrutiny continued to evolve over the next year or so, even as complaints from tea-party groups—and questions from GOP lawmakers—mounted over IRS inquiries to various groups about their activities.

Letters from Ms. Lerner in April and May 2012 responding to questions by Republican lawmakers made no mention of the problems that had surfaced in the IRS unit.

According to the draft report, on April 24 and 25 of last year, officials in Ms. Lerner's office were reviewing "troubling questions" that had been asked of organizations, including "the names of donors."

Ms. Lerner's April 26 letter to Mr. Issa, the chairman of the House Oversight and Government Reform Committee, said that "there are instances where donor information may be needed…such as when the application presents possible issues of…private benefit."

The report indicates that in 2010 and 2011, some IRS workers weren't just singling out groups because their names contained certain words, as IRS officials suggested on Friday, but appeared to be probing for indications of political interests or leanings.

Continued in article

WASHINGTON (AP) — The Internal Revenue Service inappropriately flagged conservative political groups for additional reviews during the 2012 election to see if they were violating their tax-exempt status, a top IRS official said Friday.

Organizations were singled out because they included the words "tea party" or "patriot" in their applications for tax-exempt status, said Lois Lerner, who heads the IRS division that oversees tax-exempt groups.

In some cases, groups were asked for their list of donors, which violates IRS policy in most cases, she said.

"That was wrong. That was absolutely incorrect, it was insensitive and it was inappropriate. That's not how we go about selecting cases for further review," Lerner said at a conference sponsored by the American Bar Association.

"The IRS would like to apologize for that," she added.

Continued at
http://twittweb.com/taxes+pay+civilized+soc-32550060

 


Apart from the most recent IRS scandal currently in the news, the GAO found over 60 internal control deficiencies in the IRS
"Improvements Are Needed to Enhance the Internal Revenue Service’s Internal Controls," by Steve n T . Miller,  Former Acting Commissioner of Internal Revenue, May 13, 2013 ---
http://www.gao.gov/assets/660/654563.pdf


"Wal-Mart and Violations of the Foreign Corrupt Practices Act," by Accounting Professor Steven Mintz, Ethics Sage, May 21, 2013 ---
http://www.ethicssage.com/2013/05/wal-mart-and-violations-of-the-foreign-corrupt-practices-act.html

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


Business Acquisitions and Derivatives
"Puts, calls or forward contracts can be complex," Ernst & Young Technical Line 2013-10, May 15, 2013 --- Click Here
http://www.ey.com/Publication/vwLUAssetsAL/TechnicalLine_BB2538_ComplexDealStructures_Part2_15May2013/$FILE/TechnicalLine_BB2538_ComplexDealStructures_Part2_15May2013.pdf

What you need to know

• Today’s buyers and sellers of businesses are coming up with innovative deal structures that include call or put options or forward contracts indexed to the portion of the business not acquired .

• The accounting for these options and forward contracts over noncontrolling interest s can be complex and often will affect future earnings, earnings per share and other operating metrics.

• Companies should carefully consider the potential consequences before entering into deals that include the us e of call or put options and forward contracts .

Overview
While the volume of merger and acquisition (M&A) activity has declined slightly in recent years , we are seeing an increase in the complexity of deal structures, particularly those using contingent consideration or call or put options or forward contracts (referred to in this publication as equity contracts) that allow the buyer and seller to share the economic risks of an acquired business for a period of time .

The accounting for acquisitions using these features can be complex and often will affect future earnings. Before consummating these transactions, companies should full y understand the accounting implications and effects on future earnings, earnings per share (EPS) and other financial metrics.

This publication — the second in a series — addresses the accounting for equity contracts entered into between a buyer ( i.e., the new parent that acquires a controlling interest in a business ) and noncontrolling interest (NCI) holders in a business combination . In December 2012 , we issued a companion publication , Complex deal structures can affect future earnings and other metrics , which focused on accounting and valuation considerations for contingent consideration issued in a business combination. No. 20 1 3 - 10 15 May 201 3 Technical Line

In this issue:

Overview
Use of call options, put options or forward contracts
Initial recognition of NCI in a business combination
Roadmap for initial classification of equity con tracts over NCI 
Evaluating whether an equity contract is embedded or freestanding
Embedded call or put options
Embedded forward contracts and certain combinations of embedded options
Redeemable NCI
Freestanding equity contracts
Effect of equity contracts on NCI on EPS
Examples of common transactions

Jensen Comment
One huge difference between USA GAAP and IFRS is that international accounting standards now ignore embedded derivatives which, in my viewpoint, greatly weakens IFRS.

One big difference between options (puts and calls) versus futures contracts is that options losses are limited (bounded)  to the premiums paid up front for options contracts. Futures contracts are free initially but can expose parties to unbounded risks unless hedged in some way. Another big difference is that futures contracts are cleared daily for cash whereas options subsequent cash flows for options only when they are settled. American options can be net settled on any date before maturity in terms on current spot prices less strike prices.. European options can be net settled only on maturity dates at strike prices. Asian options are settled on the basis of averaging of former spot prices and strike prices.

Bob Jensen's threads on accounting for derivative financial instruments ---
http://www.trinity.edu/rjensen/caseans/000index.htm


 

Earnings Misstatements, Restatements and Corporate Governance
Working Paper 07-01, 2007
http://www.scu.edu/business/faculty/research/2006-07-papers/upload/wp07-01-kim-y-earnings-misstate.pdf
 
Sandeep Nabar
Spears School of Business
Oklahoma State University
nabar@okstate.edu
 
Yongtae Kim
Leavy School of Business
Santa Clara University
500 El Camino Real
Santa Clara, CA 95053 
y1kim@scu.edu
 
William G. Heninger
Marriott School of Management
Brigham Young University
heninger@byu.edu 

Abstract
We investigate the corporate governance characteristics of firm s that restate previously-reported accounting data. Unlike other stud ies that focus on either the misstatement or the restatement only, we examine changes in the governance characteristics of restating firms from the initial misstatement to the restatement. While the other studies are concerned with the causes of financial misreporting, we endeavor to obtain insight s into the changes that lead to the detection and correction of such misreporting. We find that prior to the misstatement, misstating firms are more likely to have CEOs who sit on nominating committees, less independent boards of directors, and less independent audit committees, relative to control firms. Our results indicate that pre-misstatement agency conflicts are not resolved prior to restatements. Boards and audit committees of restating firms continue to be re latively less independent at the time of the restatement. We also find that restating firms are more likely to experience CFO turnover than control firms. Based on the results, we conclude that the restatements, which constitute an admission and correction of accounting irregulari ties, are not attribut able to governance improvements in firms.

. . .

When a company restates its financial statements it is admitting to a material error or irregularity in previously issued financial statements. In 2004, 414 public companies restated their financial statements due to accounting errors This represents a 28% increase over 2003 restatements and, except for a 2% decrease in 2 003, it also represents the e continuation of an increasing trend in the number of restated financial statements by an average of 16% since 2000. In addition, 15% of the companies s restating their financial statements in 2004 had restated their financial statements at least one other time times since 1997. However, even more troubling is the finding that nearly 40% of the 2004 restatements re ported errors in at least three prior annual reports (Huron Consulting Group, 2005). These multi-year restatements point to recurring accounting errors. Recurring errors and repeated restatements suggest that, in many cases, it is difficult to resolve agency conflicts that lead to misreporting of financial statements.

. . .

Our results also suggest that restating firms are more likely to be audited by Big-6 auditors than are control firms. This result calls into question the belief that audit quality is always positively related to audit firm size (e.g., Palmrose 1988), and is consistent with regulators’ concerns (Roman 2002) that conflicts of interest ma y often impair the independence of large audit firms. Finally our examination of how firms change over the misstatement- restatement period indicates that restating firms ar e more apt to change their CFOs than are the control firms. While this result is consiste nt with new-CFO diligence, we cannot exclude the possibility that accounting problems cause the old-CFO departures. The latter explanation, nevertheless, underscores the impor tant role that corporate gove rnance plays in the financial reporting process.

Jensen Comment
It's important to remember that correlation is not necessarily causation. My wife's superstar spine surgeon in Boston has a somewhat higher record of surgical "errors" because he's willing to take on many referrals that other spine surgeons will not touch due to high risks such as older patients that are lousy candidates for 15-hour surgeries and otherwise high risk delicate surgeries that can lead to complications or death.

This guy is very, very good and has a lot of guts.

In a somewhat similar manner the "Big 6" audit firms take on clients that smaller audit firms will not or cannot touch. The medical analogy only goes so far. I don't think it's so much "guts" as it is having the capability to do complicated audits. The "Big 6" may be the only auditor firms with needed experts in specialized global operations, derivative financial instruments experts, etc. where audit mistakes have a higher probability of happening in spite of having the needed experts around the world.

The "Big 6" are also sought out by some clients because they have the deepest pockets when the audits get screwed up as when KPMG performed a horrid audit of Fannie Mae that required Deloitte to make over a million correcting journal entries.


Jensen Comment
KMPG was fired from what was arguably its largest client in history. Fannie Mae under a bonus-seeking CEO perpetrated one of the largest earnings management frauds in history ---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation

"Fannie, KPMG Settle Class-Action Suit," by Michael Rapoport and Nick Timiraos, The Wall Street Journal, May 7, 2013 ---
http://online.wsj.com/article/SB10001424127887324326504578469591902348434.html?mod=WSJ_Markets_LEFTTopStories

Fannie Mae FNMA +9.76% and its former auditor KPMG LLP agreed Tuesday to pay $153 million to settle a long-running class-action lawsuit in which Ohio public pension funds and other shareholders accused the company of issuing false and misleading financial reports in the early 2000s.

The settlement was reached through mediation, according to documents filed in federal court in Washington, and is subject to court approval. Fannie and KPMG will each pay half of the $153 million.

"We are satisfied with the outcome and pleased to put the matter behind us," said Bradley Lerman, general counsel at Fannie Mae.

Seth Oster, a KPMG spokesman, said that it was in the firm's best interest to "avoid the significant additional costs and the distraction and inherent uncertainty of protracted litigation." A person familiar with the situation said KPMG has already accounted for the settlement.

The litigation began in 2004 after federal regulators accused Fannie of violating accounting rules, partly in a bid to boost executives' bonuses, and ordered the company to restate four years' worth of earnings. The regulators said Fannie had incorrectly applied the rules relating to derivatives contracts to allow it to spread out losses over a long period of time instead of recognizing them upfront.

The class-action suit had also named Franklin Raines, Fannie's former chief executive, as a defendant, but last year U.S. District Judge Richard Leon dismissed the suit against Mr. Raines and two other senior executives. The judge said the plaintiffs hadn't produced any direct evidence showing that executives intended to deceive investors or even that executives knew their statements were false.

The Ohio Public Employees Retirement System and the State Teachers Retirement System of Ohio were the lead plaintiffs in the lawsuit. Ohio Attorney General Mike DeWine, who announced the settlement, said in a statement that he was "pleased to see this litigation finally resolved" and that it "brings closure to this matter."

The settlement "represents a reasonable agreement to end this long-standing dispute," said Alfred Pollard, general counsel for the Federal Housing Finance Agency, which regulates Fannie.

Fannie Mae sued KPMG in 2006 alleging negligence and breach of contract. The two sides reached a settlement in 2010; details of that settlement weren't disclosed.

Fannie and its smaller sibling, Freddie Mac, FMCC +9.05% have spent tens of millions of dollars beating back securities class-action lawsuits on behalf of former executives as a result of the accounting scandals, even after the companies were seized by the U.S. government through a legal process known as conservatorship in 2008.

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.

 

**********************************

:"Sometimes the Wrong 'Notion':   Lender Fannie Mae Used A Too-Simple Standard For Its Complex Portfolio," by Michael MacKenzie, The Wall Street Journal, October 5, 2004, Page C3 

Lender Fannie Mae Used A Too-Simple Standard For Its Complex Portfolio

What exactly did Fannie Mae do wrong?

Much has been made of the accounting improprieties alleged by Fannie's regulator, the Office of Federal Housing Enterprise Oversight.

Some investors may even be aware the matter centers on the mortgage giant's $1 trillion "notional" portfolio of derivatives -- notional being the Wall Street way of saying that that is how much those options and other derivatives are worth on paper.

But understanding exactly what is supposed to be wrong with Fannie's handling of these instruments takes some doing. Herewith, an effort to touch on what's what -- a notion of the problems with that notional amount, if you will.

Ofheo alleges that, in order to keep its earnings steady, Fannie used the wrong accounting standards for these derivatives, classifying them under complex (to put it mildly) requirements laid out by the Financial Accounting Standards Board's rule 133, or FAS 133.

For most companies using derivatives, FAS 133 has clear advantages, helping to smooth out reported income. However, accounting experts say FAS 133 works best for companies that follow relatively simple hedging programs, whereas Fannie Mae's huge cash needs and giant portfolio requires constant fine-tuning as market rates change.

A Fannie spokesman last week declined to comment on the issue of hedge accounting for derivatives, but Fannie Mae has maintained that it uses derivatives to manage its balance sheet of debt and mortgage assets and doesn't take outright speculative positions. It also uses swaps -- derivatives that generally are agreements to exchange fixed- and floating-rate payments -- to protect its mortgage assets against large swings in rates.

Under FAS 133, if a swap is being used to hedge risk against another item on the balance sheet, special hedge accounting is applied to any gains and losses that result from the use of the swap. Within the application of this accounting there are two separate classifications: fair-value hedges and cash-flow hedges.

Fannie's fair-value hedges generally aim to get fixed-rate payments by agreeing to pay a counterparty floating interest rates, the idea being to offset the risk of homeowners refinancing their mortgages for lower rates. Any gain or loss, along with that of the asset or liability being hedged, is supposed to go straight into earnings as income. In other words, if the swap loses money but is being applied against a mortgage that has risen in value, the gain and loss cancel each other out, which actually smoothes the company's income.

Cash-flow hedges, on the other hand, generally involve Fannie entering an agreement to pay fixed rates in order to get floating-rates. The profit or loss on these hedges don't immediately flow to earnings. Instead, they go into the balance sheet under a line called accumulated other comprehensive income, or AOCI, and are allocated into earnings over time, a process known as amortization.

Ofheo claims that instead of terminating swaps and amortizing gains and losses over the life of the original asset or liability that the swap was used to hedge, Fannie Mae had been entering swap transactions that offset each other and keeping both the swaps under the hedge classifications. That was a no-go, the regulator says.

"The major risk facing Fannie is that by tainting a certain portion of the portfolio with redesignations and improper documentation, it may well lose hedge accounting for the whole derivatives portfolio," said Gerald Lucas, a bond strategist at Banc of America Securities in New York.

The bottom line is that both the FASB and the IASB must someday soon take another look at how the real world hedges portfolios rather than individual securities.  The problem is complex, but the problem has come to roost in Fannie Mae's $1 trillion in hedging contracts.  How the SEC acts may well override the FASB.  How the SEC acts may be a vindication or a damnation for Fannie Mae and Fannie's auditor KPMG who let Fannie violate the rules of IAS 133.

 

Video on the efforts of some members of Congress seeking to cover up accounting fraud at Fannie Mae ---
http://www.youtube.com/watch?v=1RZVw3no2A4

 

May 31, 2011 message from Roger Collins

Of possible interest...

http://www.nytimes.com/2011/05/29/books/review/book-review-reckless-endangerment-by-gretchen-morgenson-and-joshua-rosner.html?ref=books

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

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

continued in article...

Roger

Bob Jensen's threads on earnings management fraud at Fanny Mae ---
http://www.trinity.edu/rjensen/Theory02.htm#Manipulation


Tom Selling takes on what he claims is a "self-serving" Ernst & Young
"Do Survey Results Mean that External Audits Don’t Protect Against Earnings Manipulation? (What a Surprise!)," by Tom Selling, The Accounting Onion, May 10, 2013 --- Click Here
http://accountingonion.com/2013/05/do-survey-results-mean-that-external-audits-dont-protect-against-earnings-manipulation-what-a-surprise.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+typepad%2Ftheaccountingonion+%28The+Accounting+Onion%29

Jensen Comment
This time I think Tom is on to something. It would be great if E&Y would reply to his blog post, but I doubt that this is going to happen. The usual reply is that external auditors are not paid to detect fraud unless the fraud is material to the audited financial statement outcomes. It would seem that the survey results in this instance would mostly affect financial statements in great gobs.

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

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

Also See
"
New Report on Financial Reporting Fraud Released:  Role of External Auditor Examined," Center for Audit Quality, May 9, 2013 ---
http://www.thecaq.org/newsroom/release_05092013.htm


2012 Internet Crime Report
IC3 via FBI, May 14, 2013
http://www.fbi.gov/news/stories/2013/may/internet-crime-in-2012/internet-crime-in-2012

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


The 3 Secrets Of Highly Successful Graduates (Slide Show)
"Amazing Career Advice For College Grads From LinkedIn's Billionaire Founder," by  Nicholas Carlson, Business Insider, May 12, 2013 ---
http://www.businessinsider.com/amazing-career-advice-for-college-grads-from-linkedins-billionaire-founder-2013-5 

Jensen Comment
I'm not sure I agree with all of this. If you search long enough and hard enough almost everything appears somewhere in the library and/or in Web documents. The problem is sorting out the wheat from the chaff beforehand in the context of your particular talent, skills, determination, family circumstances, living environment, health, opportunities, and constraints.

Millionaires and billionaires, like Reid Hoffman, often feel they have the answers to success when in fact much of their success is a matter of luck along the serendipitous road in life. I grant them the fact that sometimes you help to make your own luck, but by it's very definition taking "risks" with careers means that there will be many losers as long as a few winners along that serendipitous road.

Also most people really do not have the talent for and drive to becoming successful entrepreneurs. Advising most graduates to become entrepreneurs may be setting them on a road to failure.

To illustrate my point, I think that many accounting graduates are better off to become lifelong employees as public accountants, internal auditors, governmental accountants, FBI agents, etc. Most of them are likely to fall on very hard times if they quit their jobs and leverage up to create a startup company.

Hopefully, some of them will take the plunge and form a new venture in a quest for the American Dream. But this is not good advice for the majority of those graduates looking down the road at their lifelong careers. Tell most of those graduates that they may find great careers as public accountants, internal auditors, governmental accountants, FBI agents, professors, etc.  At the same time tell them to keep their eyes open to opportunities and to be willing, if they have the inspiration to do so, to take the plunge. But also tell them not to become victims of get-rich-quick frauds.

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


"Southern Illinois University to Offer Online Accounting Degree," by Gail Perry, AccountingWeb, May 6, 2013 ---
http://www.accountingweb.com/article/southern-illinois-university-offer-online-accounting-degree/221747?source=education

A new program at Southern Illinois University (SIU) in Carbondale, IL allows off-campus students to complete an accounting degree completely online. SIU is the only Association to Advance Collegiate Schools of Business (AACSB) International-accredited public institution in Illinois to offer the online undergraduate accounting degree, according to College of Business officials. Earning the top-tier AACSB accreditation places SIU's in the top one percent of the nation's accounting programs.

Beginning in the fall of 2013, students can complete the requirements for a Bachelor of Science degree in accounting exclusively with online classes. The online program is open to off-campus students who have completed the initial core coursework typically covered during the first two years of college.

Jill Gebke, assistant dean for the College of Business, explained the reasoning behind the new program. "We identified a large transfer population, All of the community colleges are at least an hour away. They told us there's a demand for the accounting program. This was the most convenient way to serve the community college students."

"The program innovation happening right now in the College of Business is very exciting. Our online accounting degree completion option is just another example of that innovation and our continuing growth. This degree allows students the flexibility to blend their studies with work and family commitments and it is equal in quality, value, and accreditation with our on-campus program," said Dennis Cradit, dean of the College of Business.

"What we have learned from our online MBA and our online undergraduate business administration degrees, we have used in designing this online accounting degree. Our number one priority is to provide an exceptional learning experience and this program is a clear reflection of our commitment to that goal," Cradit added.

Typically, the new online accounting degree completion program will take about 24 months to finish over a six-semester time span. However, it is possible to complete the program in a minimum of 18 months.

The online accounting program incorporates approximately 60 hours of coursework covering core areas of the business curriculum. The program is divided into 10 "course pairings," with each including two 3-credit-hour courses.  Each course runs eight weeks, allowing students to focus on two classes at a time while still completing four courses each semester.

The same faculty members teach both the online and on-campus classes. However, the online option allows students the opportunity to complete their bachelor's degree through a nationally ranked, accredited institution from anywhere in the world and at their convenience, according to Jill Gebke, assistant dean for the College of Business. And while the face-to-face classroom setting is ideal for learning, Gebke told AccountingWEB that there are many students whose circumstances prevent them from attending on-campus. 

Continued in article

"'U.S. News' Sizes Up Online-Degree Programs, Without Specifying Which Is No. 1," by Nick DeSantis, Chronicle of Higher Education, January 10, 2012 ---
http://chronicle.com/article/US-News-Sizes-Up/130274/?sid=wc&utm_source=wc&utm_medium=en

Some, but not all, all of the online degree programs offer business and accounting degrees.

Bob Jensen's threads about online education alternatives ---
http://www.trinity.edu/rjensen/CrossBorder.htm#Education


"An Analysis of Alleged Auditor Deficiencies in SEC Fraud Investigations: 1998–2010"
Mark S. Beasley North Carolina State University
Joseph V. Carcello University of Tennessee Dana R. Hermanson Kennesaw State University
Terry L. Neal University of Tennessee
Center for Audit Quality, May 2013
http://www.thecaq.org/resources/pdfs/CAQ_deficienciesMay2013.pdf

EXECUTIVE SUMMARY
This study examines U.S. Securities and Exchange Commission (SEC) sanctions against auditors over the period 1998–2010 that are related to instances of alleged fraudulent financial reporting by U.S. publicly traded companies. During that time period, there were 87 separate instances where the SEC imposed such sanctions, and this report summarizes our analysis of alleged auditor deficiencies noted by the SEC in these 87 cases.

In considering the results contained in this report, it is important to appreciate that SEC allegations of fraudulent financial reporting are rare, with 347 cases examined by the SEC from 1998–2007 out of thousands of U.S. public companies. 1 Despite the small number of fraud-related SEC enforcement actions, we believe that analysis of these 87 cases involving auditor sanctions by the SEC provides important insights for auditors and others concerned with improving audit quality, especially in the context of detecting material financial statement misstatements due to fraud. Thus, we highlight key findings related to the audits underlying these 87 cases.

The primary results of our analysis are as follows:

• From 1998–2010, we identified 87 instances of SEC investigations of fraudulent financial reporting leading to sanctions against auditors. Based on companies with available information for these 87 SEC investigations, the associated registrant companies were primarily small (median revenues and assets under $40 million) and concentrated in four key industries (over 40 percent of the sample is in financial services / insurance, general manufacturing, telecommunications, or consumer goods manufacturing).

• Based on available information for these 87 SEC investigations involving auditors, 58 percent of the audit reports issued for the last fraudulently reported financial statements included an unqualified opinion with no additional report modifications.  The other 42 percent of the companies received unqualified audit opinions on the last fraudulently reported financial statements, but those reports included explanatory paragraphs that addressed other issues noted by the auditor, such as highlighting changes in accounting principle or going concern issues.

 • For purposes of our study, we categorized the Big Six/Big Four international firms and the next tier of global network or national firms as “national firms.” 2 Here is a summary of the 87 instances we examined:

-Total instances of SEC investigations examined in this study 87

-SEC sanctions involving audits performed by non-national firms 46

-SEC sanctions involving audits performed by national firms 35

-Bogus audits 3 where auditor did not perform procedures 6

Of the 35 national firm cases, nine involved audits performed by Arthur Andersen. There were six instances where the auditor prepared the financial statements or did not perform any meaningful level of audit procedures. We refer to these six instances as “bogus audits

An Analysis of Alleged Auditor Deficiencies in SEC Fraud Investigations: 1998–2010 3

• In Accounting and Auditing Enforcement Releases (AAERs) involving sanctions against auditors, the SEC typically alleges that the auditor either (a) violated the anti-fraud statutes (e.g., by participating in the fraud) or (b) performed a negligent audit that allowed the fraud to occur (without the auditor actively participating in the fraud). Among the 81 cases examined (excluding the six bogus audits noted above), the SEC charged the auditor for violating the anti-fraud statutes in 24 cases. The remaining 57 cases were limited to allegations of deficient audits unrelated to anti-fraud statutes. • Among these 81 cases, the SEC issued sanctions against individual auditors in 80 cases and sanctions against the audit firm in 27 instances (26 cases involved sanctions against both individual auditors and the audit firm, with the SEC sanctioning only the audit firm in one case).

• The top five areas cited by the SEC in these 81 cases involved the following:

1. Failure to gather sufficient competent audit evidence (73 percent of the cases)
2. Failure to exercise due professional care (67 percent)
3. Insufficient level of professional skepticism (60 percent)
4. Failure to obtain adequate evidence related to management representations (54 percent)
5. Failure to express an appropriate audit opinion (47 percent)

• Most of the 81 cases involved multiple alleged deficiencies. For example, 58 of the cases cited more than one of the top three deficiencies, and 42 cases cited the top three deficiencies.

• The most common deficiencies were quite similar for national firms and non-national firms. The top four issues are consistent across these two groups (with a slightly different ranking), and 11 of the top 14 deficiencies appear in both the national firm and non-national firm lists. Based on findings contained in this report, we explore implications for the audit process centered around four key themes. To that end, we explore challenges associated with each of the four themes found in the analysis:

1. Failure to Exercise Due Professional Care: Some of the deficiencies cited suggest a failure on the part of the auditor to discharge responsibilities with competence and diligence to the best of the auditor’s ability, including the performance of procedures generally expected to be performed in an audit. This suggests that there may be opportunities for additional training and education on the fundamentals of the audit process. Also, there may be opportunities for additional analysis to better understand root causes that led to failures in the execution of those fundamentals in a particular audit engagement, so as to strengthen the competence and diligence of the performance of the audit.

2. Insufficient Levels of Professional Skepticism: Similarly, some of the cases examined highlight challenges in maintaining appropriate levels of professional skepticism that affect the auditor’s mindset. Interestingly, the concept of professional skepticism has been embedded in auditing standards for decades; however, in some cases auditors may have struggled in maintaining an appropriate mindset throughout the various stages of the audit process. This challenge has implications for training and helps to motivate analyses such as the present study to understand root causes of failures in applying professional skepticism consistently. Additional research is needed to determine if these challenges may be exacerbated by differences in cultural norms that will be increasingly realized as the audit process continues to be affected by globalization or as new generations of audit professionals emerge who may apply professional skepticism differently than today’s audit professionals.

3. Inadequate Identification and Assessment of Risks: The findings noted in this report also have implications regarding the risk assessment process, given that all cases examined in the study involved undetected instances of fraudulent financial reporting. While auditing standards have been risk-based for a number of years, more recent developments in the risk management arena, 5 including the emerging discipline of enterprise risk management, Beasley, Carcello , Hermanson, and Neal. 2013. are revealing a number of complexities associated with any risk identification and risk assessment task. Any improvement in risk assessment skills that can be identified will help enhance audit quality and improve the recognition of fraud risk. The audit profession, including undergraduate and graduate accounting programs, may want to leverage insights that are emerging in other risk management disciplines to better train and educate audit professionals in risk identification and risk assessment tasks.

4. Failure to Respond to Identified Risks with Appropriate Audit Responses to Gather Sufficient Competent Audit Evidence: In some cases, the auditor failed to adjust audit procedures to gather sufficient competent evidence in light of risks identified and documented by the audit team. While this type of deficiency may be the result of the first three concerns noted above, it may also be triggered by failure to adequately link audit procedures to underlying risks. Because prior research has shown that this type of linkage can be a difficult task, perhaps greater emphasis on quality control review of these linkages may be beneficial, or new tools and techniques may be needed to facilitate this difficult linkage task. Training and education on the use of those tools may be warranted as well. The next section discusses the research approach, and Section 3 presents the results of our analysis. Section 4 develops the implications of the analysis, and Section 5 profiles the research team. The Appendix presents the detailed findings underlying the tables presented in the monograph.

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


Best Undergraduate Business Schools in International Business ---
http://www.businessweek.com/reports/business-schools/best-undergraduate-business-schools-2013#r=lr-sr


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

The Road to Convergence: Update for Audit Committees

Revenue recognition, financial instruments and lease accounting are among the areas the FASB and IASB are addressing in their collaboration on key accounting standards. When finalized, these new standards have the potential to dramatically change the way companies account for many of their most common transactions. Learn about recent standard-setting developments and questions audit committees should consider in preparing for changes.

For details see
http://deloitte.wsj.com/cfo/2013/05/07/the-road-to-convergence-update-for-audit-committees/


FASB, IASB release 2013 converged financial-reporting standard for leases
"IASB chair: Lease changes unpopular, but necessary," by Ken Tysiac, Journal of Accountancy, May 18, 2013 ---
http://www.journalofaccountancy.com/News/20138001.htm

"FASB lease proposal moves forward (4-3 vote) despite dissenting views,"  by Ken Tysiac, Journal of Accountancy, April 10, 2013 ---
http://www.journalofaccountancy.com/News/20137752.htm

FASB decided Wednesday to move forward with a re-proposal on financial reporting for leases that will be converged with that of the International Accounting Standards Board (IASB).

FASB Chairman Leslie Seidman cast the deciding vote in a 4–3 decision. Board members Tom Linsmeier, Marc Siegel, and R. Harold Schroeder dissented.

The lease proposal, which is scheduled to be released for public comment by FASB in May, would put all leases on the balance sheet. It would require a dual expense-recognition approach for lessees (excluding short-term leases), depending on whether significant consumption occurs during the lease period.

So in general, equipment and vehicle leases that tend to depreciate significantly during the life of a lease would be accounted for differently from property leases, in which the asset usually does not depreciate and sometimes increases in value over the lease period.

In some cases, the dividing line between the two types of leases can be murky. And the very idea of having two models for accounting for leases is troubling for some because it can create complexity for users.

“Many people think that there should be one model here,” Seidman said. “That is not universal. But they do not agree about which model. So we’ve done our best to try and articulate a distinction that reflects what some perceive as the economics of the difference between what I’ll call ‘rentals’ and what I’ll call ‘finance-type leases.’ ”

During Wednesday’s meeting, FASB’s staff asked board members to address the effects the proposal would have on financial reporting complexity. Linsmeier said the proposal introduces significant complexity for users because it divulges lease information in multiple places in the financial statements without bringing it all together in one footnote.

“If [users] are trying to bring all that information that’s spread throughout the financial statements together to understand what the rights and obligations are under a lease, and what the related income statement and cash flows effects are, we did not provide them sufficient information to do so,” Linsmeier said.

The leases project has been watched carefully by various constituents because of its breadth, as many organizations are parties to lease contracts. Because of the extent to which leases are used, arriving at a converged standard could bring significant global comparability to financial statements.

The IASB plans to release its exposure draft by June 30.

“We have worked tirelessly with the IASB on this proposal, and we are going out with a converged proposal, which I think is a significant accomplishment,” Seidman said. “I would like to try to end up with a converged improvement on the accounting for leases, and so on that basis, I’d like to move forward with this exposure draft.”

From CFO.com Morning Ledger on May 3, 2013

Lease-accounting proposal still seen costing companies
Despite significant changes, companies and investors expect that a coming proposal aimed at overhauling lease-accounting rules will be more costly in some areas than the current standard,
Emily Chasan writes. The FASB and IASB are preparing to shortly release a new lease-accounting proposal for public comment, FASB Chairman Leslie Seidman said at a Baruch College accounting conference in New York on Thursday. “It’s appropriate at this point to re-expose that revised set of conclusions,” Ms. Seidman said. Both versions of the proposal contemplate bringing trillions of dollars of leasing obligations onto corporate balance sheets, but the new proposal allows companies to record lease expenses in two ways, among other changes. Some investors worry that the boards have made so many compromises that the new rule won’t give them a clear picture of corporate leasing obligations. “Ultimately, what’s going to end up back on the balance sheet as a result of applying the standard really isn’t going to satisfy too many users of financial statements,” Mark LaMonte, managing director at Moody’s.

From the CFO.com Morning Ledger on May 16, 2013

The FASB and IASB just rolled out a revised proposal to overhaul lease-accounting rules—a move that could effectively boost U.S. companies’ reported debt by hundreds of billions of dollars, the WSJ’s Michael Rapoport reports. If adopted, the new proposal would require companies to carry all but the shortest leases on real estate, construction equipment and other items on their balance sheets as obligations akin to debt. The current rules allow companies to keep many leases off their books, drawing criticism from regulators that firms sometimes structure the terms of their leases to keep them off the balance sheet.

The change could have a big effect on a wide range of companies, from retailers and restaurant chains, which lease real estate at hundreds or thousands of locations, to airlines and package-delivery companies, which finance aircraft through leases.

The proposal also would change how some companies reflect the costs from leases in calculating their earnings, Rapoport notes. It would set up a two-track system in which the costs of leasing real estate would be recognized evenly over the term of the lease, while the costs of leasing other items would be more front-loaded—higher in the early years of a lease, lower in the later years. We’ll have more updates on the new proposal at CFOJ throughout the day, so stay tuned.

 

Jensen Question
So how do lessees minimize the balance sheet impact of booking operating leases such as a sandwich shop in a Galleria Mall?
I would consider just shortening the operating lease period to a year or less in the case where the former operating lease had a longer term. The FASB has never really seriously taken up the issue of anticipated lease renewals of "operating leases."  Of course shortening a lease could alter the rental prices, especially if the lessor is taking on more risk of non-renewal.

Of course the sandwich shop will now have to post the contracted liabilities for monthly rent for 12 months or less, but the shortened contract gets the shop out of having to post 60 months of future rent obligation if the 60 months lease is no longer contracted with the Mall. Both the Galleria and the sandwich shop of course expect to renew the lease annually.

One problem with putting lease renewal debt or assets on the balance sheet is deciding when the anybody's-guess number of renewals should be terminated. For example, neither the Galleria or the sandwich shop has any idea of how many times the lease will be renewed. The number or future renewals is subject to all sorts of unknowable events of the future.

A huge difference between renting space in a Galleria Mall versus renting a jumbo jet is that the Galleria normally does not provide options to actually own leased apace in such a mall that was not intended to be a condo mall.

FASB, IASB release 2013 converged financial-reporting standard for leases
"IASB chair: Lease changes unpopular, but necessary," by Ken Tysiac, Journal of Accountancy, May 18, 2013 ---
http://www.journalofaccountancy.com/News/20138001.htm

Bob Jensen's threads on lease accounting are at
http://www.cs.trinity.edu/~rjensen/temp/LeaseAccounting.htm 


"FASB to Ease in New Revenue Recognition Standards," by Michael Cohn, AccountingToday, May 2, 2013 --- Click Here
http://www.accountingtoday.com/news/FASB-Ease-Revenue-Recognition-Standards-66581-1.html?CMP=OTC-RSS&utm_source=twitterfeed&utm_medium=twitter

Jensen Comment
This is an "easing" that extends the transition period as requested by the SEC.

. . .

Beswick (from the SEC) cautioned that the new principles-based standards will require careful monitoring, as they dispense with many of the complex rules and anti-abuse provisions of the earlier standards.

“When you put a new standard in place and you’re talking about the top line, there are obviously going to be implementation issues,” he said. “Leslie has talked about this, that there is going to be an implementation group to try to deal with those issues, and I think we can probably see some of them right now. When you’re going away from some of the more proscriptive guidance to more subjective, there’s going to have to be a discussion of people accepting different views and subjectivity. We’re supportive of where they are right now, and of the implementation process.”

Beswick is pleased that FASB will have a long transition period so they can work through some of the abuse prevention issues. “In this time period, we want to see how people are going to start thinking about some of these transactions, and if we need to beef stuff up through the implementation group to narrow potential abuse preventions, we’ll do that,” he said. “Ultimately if we need to leave it in place, we’ll leave it in place. It is what it is.”

Continued in article

Bob Jensen's threads on revenue recognition gimmicks and controversies ---
http://www.trinity.edu/rjensen/ecommerce/eitf01.htm  


From CFO.com Morning Ledger on May 15, 2013

We’re seeing some worrying economic data out of Europe this morning: France fell into recession in the first quarter, while Germany just barely eked out growth with a 0.1% rise in Q1 GDP. Germany had a surprisingly weak start to the year, depressed by cold winter weather as well as sagging exports and slack investment, the country’s statistics office said. Economists had been forecasting 0.3% growth, the WSJ notes. GDP fell 0.2% for the euro zone as a whole—the bloc’s sixth consecutive quarterly contraction.

The difference between Europe’s two largest economies looks narrow over the first three months of the year but European officials think France will continue to lag behind, “threatening the cohesion of the twin policy motor that has traditionally driven the European project,” Reuters says.

In contrast to Europe’s woes, the CBO offered a nugget of upbeat news on the U.S. economy—the deficit is shrinking much faster than expected. The CBO said the federal deficit is expected to shrink to $642 billion in the fiscal year ending Sept. 30, narrowing from the agency’s $845 billion forecast of three months ago and sharply lower than last year’s $1.087 trillion shortfall, the WSJ’s Damian Paletta reports. The drastic shift is thanks to higher-than-expected individual and corporate tax payments, due in part to growth and higher rates that kicked in at the beginning of the year, and large dividend payments that Fannie Mae and Freddie Mac plan to make to the government this year.

 


Question
Aside from curriculum content, what is the leading difference between MBA degrees and Law degrees?

Answer
It used to be that law schools require one more year (two semesters) of additional courses. Most MBA programs require two years or the equivalent of two years of business studies. Although some MBA programs are designed for less than two years of study, those shortcut versions generally require prerequisite business and economics courses before matriculating. Until now, law schools tended not to have short cut versions allowing students to graduate in less than three years.

"THE TWO - YEAR LAW DEGREE : UNDESIRABLE BUT PERHAPS UNAVOIDABLE," by Stephen Gellers, N.Y.U. Journal of Legislation and Public Policy Quorum, April 3, 2013 ---
http://nyujlpp.org/wp-content/uploads/2013/03/Quorum-2013-Gillers-Law-School1.pdf


Bloomberg Terminal --- http://en.wikipedia.org/wiki/Bloomberg_Terminal

"BLOOMBERG CEO: It Was A Mistake To Let Our Journalists Have Access To Clients' Bloomberg Terminal Data." by  Julia La Roche, Business Insider,  May 10, 2013 ---
http://www.businessinsider.com/bloomberg-statement-on-terminal-story-2013-5

Wall Street has been buzzing about a bombshell New York Post story revealing that some Bloomberg News reporters were using private client information from Bloomberg Terminals to spy on Goldman Sachs employees.

This was discovered after an unidentified Bloomberg reporter pointed out that a Goldman partner had not logged into his terminal and asked if he was still employed by the firm, the report said.

After Goldman complained, Bloomberg suspended access to this terminal customer data to its reporters.  

Business Insider also learned that Bloomberg News reporters used private information from JPMorgan Bloomberg Terminal users for some of their coverage of the JPMorgan "London Whale" trade, according to sources.

Bloomberg LP's CEO and president Daniel Doctoroff has recognized this was a mistake.  He also tapped Steve Ross to the new post of Client Data Compliance Officer. 

He sent the following email to employees: 

Since our founding more than 30 years ago, the proper safeguarding of customer data has been a central tenet of Bloomberg’s culture.

A Bloomberg client recently raised a concern that Bloomberg News reporters had access to limited customer relationship management data through their use of the Bloomberg terminal. Although we have long made limited customer relationship data available to our journalists, we realize this was a mistake.

Having recognized this mistake, we took immediate action. Last month we changed our policy so that all reporters only have access to the same customer relationship data available to our clients. Additionally, we decided to further centralize our data security efforts by appointing Steve Ross, one of our most senior executives, to the new position of Client Data Compliance Officer. Steve is responsible for reviewing and, if necessary, enhancing protocols which among other things will continue to ensure that our news operations never have access to confidential customer data.

To be clear, the limited customer relationship data previously available to our reporters never included access to our trading, portfolio, monitor, blotter or other related systems or our clients' messages. Moreover, reporters could not see news stories that clients read, or the securities they viewed. Bloomberg has very strict data security policies in place, in addition to significant and rigorous training, processes and protocols. Upon hiring, all Bloomberg employees enter into confidentiality provisions, including Bloomberg News.

Client trust is our highest priority and the cornerstone of our business, and we are deeply committed to ensuring the complete integrity and confidentiality of our clients' data in all situations and at all times.

Dan

Jensen Comment
Among other things this real-time database of market transactions allows users (e.g., CPA firms) to derive the yield curves needed for valuation of derivative financial instruments ---
http://www.trinity.edu/rjensen/acct5341/speakers/133swapvalue.htm

Many university libraries, including the campus library at Trinity University, have Bloomberg terminals for students and faculty.


Do you believe this?  I don't believe this was an accounting mistake at all.
It seems like more of a case of hidden reserves.

"$42.6 million hidden in city fund through accounting error:  The money was found in a Transportation Department special fund, making officials wonder whether other misplaced money can be found," by Laura J. Nelson, Los Angeles Times, May 8, 2013 ---
http://www.latimes.com/news/local/la-me-misplaced-money-20130510,0,4280581.story

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


"The Pentagon Is Wasting Billions Of Dollars Because It Can't Audit Its Own Contracts," by David Francis (The Fiscal Times), Business Insider, May 22, 2013 ---
http://www.businessinsider.com/pentagon-wastes-billions-it-cant-audit-2013-5

"Improvements Are Needed to Enhance the Internal Revenue Service’s Internal Controls," by Steve n T . Miller,  Acting Commissioner of Internal Revenue, May 13, 2013 ---
http://www.gao.gov/assets/660/654563.pdf

Jensen Comment
The GAO declared that it's impossible to audit the Pentagon and the IRS. Both departments rely a lot on the Fifth Amendment.

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


Question
Is this a benefit or a kiss of death?

Cleveland Kidnapping Hero Charles Ramsey Is Getting Free Burgers For Life  (From a Bunch of Pennsylvania Restaurants) ---
http://www.businessinsider.com/charles-ramsey-gets-burgers-for-life-2013-5


Question
For financial reporting purposes when does a subsidiary become "insignificant"?

Hint
A bookkeeper's embezzlement is insignificant if it only amounts to $1,000 from a "few" accounts. But what happens when "a few" stands for 400 such accounts?

From the CFO.com Morning Ledger on May 23, 2013

Following the Senate’s findings that Apple has not paid taxes on tens of billion dollars of its business based in Ireland, a WSJ review has found that some of the biggest U.S. companies have quietly removed hundreds of offshore subsidiaries from their publicly disclosed financial filings over the past several years. Companies say they are taking advantage of SEC rules that demand disclosure only when subsidiary operations are “significant.”

Oracle, for instance, disclosed more than 400 subsidiaries in its 2010 annual report. By 2012 the list had been whittled to eight—five of which were located in Ireland. Similar decreases in the number of disclosed subsidiaries were found in filings by Google, FedEx, Raytheon and Microsoft.

But the subsidiaries should matter to investors. “Companies are required to identify their subsidiaries so investors can make informed judgments about a company’s operations and financial condition,” said SEC spokesman John Nester. He added that companies may omit subsidiaries for lack of significance.

 

 


"Financial Instruments Accounting Changes Seen Entangling Non-Financial Firms," by Emily Chason, The Wall Street Journal, May 7, 2013 --- Click Here
http://blogs.wsj.com/riskandcompliance/2013/05/07/financial-instruments-accounting-changes-seen-entangling-non-financial-firms/?KEYWORDS=Financial+Instruments

Accounting rule makers expect forthcoming changes to financial instrument accounting rules will have the biggest impact on financial firms, but non-financial companies also hope their disclosures won’t become more complex after the planned overhaul. The U.S. Financial Accounting Standards Board and London-based International Accounting Standards Board are both working on proposals that would push companies to make more timely adjustments for expected losses on financial assets, such as loans or trade receivables.

The current accounting for such instruments came under fire during the financial crisis after investors complained that banks had been too slow to take write-downs on assets, such as securitized mortgage loans, even though they fully expected to incur losses.

The proposed rules have built in some practical elements for non-financial companies that make it easier to evaluate smaller pools of assets. Still, those firms are still worried that their staff would have to do more work to keep monitoring changes in the market value of financial instruments, executives said at a conference last week.

Financial firms are expected to face the biggest changes from the new rules but “they also have the skill set to deal with it,” Katherine Gill-Charest, controller at media company Viacom Inc. said at a Baruch College accounting conference last week, noting that banks already do these analyses in their business and can easily translate them for accounting purposes, she said. But for non-financial companies that deal in “plain vanilla” securities it may be more difficult to make those calls, especially since any write-downs on those assets will immediately affect a company’s profit and loss statement under the proposed rules, Ms. Gill-Charest said.

“That puts more pressure on the process that may already exist,” she said.

FASB Chairman Leslie Seidman said on the panel that accounting rule makers don’t expect companies to have a crystal ball to estimate future losses, but want to allow them to use all of their historical experience to disclose estimable losses more quickly.

Some executives are hoping that the process will get simpler for non-financial companies, especially those with large cash holdings, who have to disclose a lot of detail about financial instruments already.

“I’m hopeful about this,” Robert Laux, senior director of financial accounting and reporting at Microsoft Inc. , said at the conference. “The amount devoted to financial instruments in Microsoft’s footnotes is shockingly a lot.”

For companies like Microsoft, they are often required to make complex disclosures in this area even though these assets are not part of their main business. Financial instruments disclosures at the software company, which has about $80 billion in investable financial assets, take up about 50% of its financial statement footnotes, Mr. Laux said.  “If you looked at our footnotes you’d think Microsoft is a financial institution,” he said. One of the problems, he said, is trying to get the ability to reduce disclosures on financial instruments if the information is deemed material in a prior year, but may no longer be material in the current year.

The FASB is accepting comments this month on its proposal to and says it will also evaluate comments on a similar project by the International Accounting Standards Board.

At Long Last
The FASB Proposes Taking Some Unrealized Fair Value Changes Out of Earnings and Relegate them to OCI

From a Deloitte "Heads Up" on April 19, 2013
http://deloitte.wsj.com/cfo/2013/04/19/recognition-and-measurement-of-financial-instruments-fasb-amendments-to-proposed-asu/

. . .

Under the proposed ASU, the unconditional fair value option for financial assets and financial liabilities in ASC 825³ would be replaced with a conditional fair value option that would be available when:

—Financial assets are held and managed in a hold-and-sell business model (i.e., otherwise accounted for at fair value through other comprehensive income).

—An entity manages the net exposure for a group of financial assets and financial liabilities on a fair value basis and provides net exposure information to its management.

—A hybrid financial liability contains an embedded derivative that significantly modifies its cash flows as long as it is clear (with little or no analysis) that separation of the embedded derivative is not precluded.

However, the ED notes that for financial assets and financial liabilities outside the scope of the proposed ASU such as the following, a fair value option would no longer be available:

a. Guarantees and other contingencies accounted for in accordance with [ASC] 460, Guarantees, or contingencies accounted for under [ASC] 450, Contingencies, that will not be within the scope of the forthcoming proposed [ASU] on insurance contracts. The effective date and transition provisions to eliminate the fair value optionfor these items would be consistent with the guidance in the proposed [ASU] on financial instruments.[⁵]

b. Rights and obligations under an insurance contract and obligations under a warranty that currently are accounted for under [ASC] 944, Financial Services—Insurance, or would be accounted for in accordance with the forthcoming proposed [ASU] on insurance contracts. . . .

c. Rights under a warranty that would be accounted for in accordance with the guidance in the fourthcoming [ASU] on revenue recognition. . . .

d. Written loan commitments accounted for in accordance with the proposed [ASU] on financial instruments. . . .

e. Firm commitments that otherwise would not be recognized at inception and that involve only financial instruments. . . . The effective date and transition provisions for these items would be consistent with the guidance in the proposed [ASU] on financial instruments.[⁶]

Entities would cease using the fair value option under ASC 825 for each of these instruments in accordance with the effective date and transition method for each related project. For example, public entities would no longer be able to apply the fair value option under ASC 825 to rights under a warranty accounted for in accordance with the forthcoming final standard on revenue recognition for fiscal and interim periods that begin on or after January 1, 2017.⁷ The revenue standard will permit entities to apply the new guidance retrospectively or by using a cumulative-effect approach.⁸ The FASB has not decided what the effective dates will be for its forthcoming standard on insurance contracts or for the proposed ASU.

Editor’s Note: Replacing the unconditional fair value option with one that can be applied only in limited circumstances reduces the number of accounting choices for similar instruments and is expected to improve comparability. Improving comparability is one of the stated objectives in the proposed ASU. The ED does not propose eliminating the fair value option under ASC 860-10-35 for servicing assets and servicing liabilities.

Jensen Comment
Guess we know how intermediate textbook authors will be spending their summer breaks, especially those end-of-chapter materials and test banks.

Of course certain types of hedges (cash flow hedges and FX hedges) under FAS 133 recorded fair value changes to OCI to the extent that the hedges were effective. Fair value hedges did do not use OCI.

Soon you won't have to be hedging to get OCI relief for unrealized fair value changes in general.

Does this seem, at least in a way, how the FASB has come full circle from FAS 115?

Bob Jensen's threads on the controversies of fair value accounting ---
http://www.trinity.edu/rjensen/theory02.htm#FairValue


From the CFO.com Morning Ledger on May 13, 2013

Shift to valuations, estimates challenges auditors
Corporate auditors must increasingly adjust their approach to handle corporate financial statements that are now dominated by estimates and valuations of assets, PCAOB member Jay Hanson said. In a speech posted to the PCAOB website, Mr. Hanson said estimates and measurements are one of the most frequently identified trouble spots by the U.S. auditor watchdog, as managers and accountants have to spend more time focusing on the fair value of financial instruments, goodwill impairments and intangible assets in the new economy,
Emily Chasan notes. “Thirty years ago, financial statements were dominated by tangible assets and historical cost accounting,” Mr. Hanson said. “Today, after rapid advances in technology, the development of innovative business models and the mind-numbing complexity of many investments, the balance sheets of an increasing number of companies are dominated by valuation estimates.”

Bob Jensen's threads on the controversies of fair value accounting ---
http://www.trinity.edu/rjensen/theory02.htm#FairValue


Overview Of The New 3.8% Investment Income Tax, Part 3: Gains From The Sale Of Property
[Forbes, Part 1, Part 2.] Part 3]

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


"Preserving the American Dream," Center for Innovation, Stanford University Graduate School of Business, April 26, 2013 ---
http://csi.gsb.stanford.edu/preserving-american-dream

Bob Jensen's Threads on the American Dream ---
http://www.cs.trinity.edu/~rjensen/temp/SunsetHillHouse/SunsetHillHouse.htm


"Warren Buffett Investing Quotes" by Barry Ritholtz, May 5, 2013
http://www.ritholtz.com/blog/2013/05/warren-buffett-investing-quotes/

Given that its the Berkshire annual meeting this weekend, now is as good a time to roll out these quotes from Warren himself:

 

“To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses
-How to Value a Business, and How to Think About Market Prices.”
Source: Chairman’s Letter, 1996

 

“The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.”
Source: Businessweek, 1999

 

“None of this means, however, that a business or stock is an intelligent purchase simply because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy. What’s required is thinking rather than polling. Unfortunately, Bertrand Russell’s observation about life in general applies with unusual force in the financial world: “Most men would rather die than think. Many do.”
Source: Chairman’s Letter, 1990

 

“Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
Source: The New York Times, October 16, 2008

 

“The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities ¾ that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future ¾ will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.”
Source: Letter to shareholders, 2000

 

“You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”
Source: Warren Buffet Speaks, via msnbc.msn

Fundamentals Approach to Valuing a Business

In the great book Dear Mr. Buffett, Janet Tavakoli shows how Warren Buffet learned value (fundamentals) investing while taking Benjamin Graham's value investing course while earning a masters degree in economics from Columbia University. Buffet also worked for Professor Graham.

The following book supposedly takes the Graham approach to a new level (although I've not yet read the book). Certainly the book will be controversial among the efficient markets proponents like Professors Fama and French.

Purportedly a Great, Great Book on Value Investing
From Simoleon Sense, November 16, 2009 --- http://www.simoleonsense.com/

OMG Did I Die & Go to heaven?
Just Read, Applied Value Investing, My Favorite Book of the Past 5 Years!!
Listen To This Interview!

I have a confession, I might have read the best value investing book published in the past 5 years!

The book is called Applied Value Investing By Joseph Calandro Jr. In the book Mr. Calandro applies the tenets of value investing via (real) case studies. Buffett, was once asked how he would teach a class on security analysis, he replied, “case studies”.  Unlike other books which are theoretical this book provides you with the actual steps for valuing businesses.

Without a doubt, this book ranks amongst the best value investing books (with SA, Margin of Safety, Buffett’s letters to corporate America, and Greenwald’s book) & you dont have to take my word for it. Seth Klarman, Mario Gabelli and many top investors have given the book a plug!

Here is an interview with the author of the book, Applied Value Investing ( I recommend listening to this). Who knows perhaps yours truly will interview him soon.

Miguel

P.S.

A fellow blogger and friend will soon post a review of this book (hint: Street Capitalist!).

Video:  Warren Buffett's Secrets To Success --- http://www.businessinsider.com/business-news/nov-24-alice1-2009-11

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

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


Question
If your compensation is tied to e.p.s. performance, what may be your best strategy?

Answer
Shrink the denominator.

From the CFO.com Morning Ledger on May 6, 2013

Stock buybacks appear to be making an impact on executive pay. As companies ramp up repurchases, compensation targets tied to per-share earnings are helping boost compensation, the WSJ’s Scott Thurm and Serena Ng report. The link worries some investors and compensation advisers because the figure is too easy to manipulate. “If you’re a CFO or a top executive, you can determine if the EPS goes up or not based on a stock buyback,” says Robin Ferracone, CEO of pay consultant Farient Advisors.

S&P 500 companies spent nearly $408 billion on share buybacks last year. Their net income grew 5% on average from 2011, but per-share earnings rose 6.1%—meaning buybacks contributed nearly a fifth of the growth in per-share earnings. Safeway CEO Steven Burd received a $2.3 million stock award this past March in part because he oversaw a 61% jump in the company’s per-share profit last year. What made the difference was $1.2 billion in stock buybacks mostly financed with borrowed money, though the company said the buybacks “had no impact on Mr. Burd’s 2012 compensation.”

Researchers say companies that tie executive pay to per-share earnings are more likely to buy back stock. In a recent paper, Baruch College accounting professor Carol Marquardt found that companies that use accelerated share repurchases are more likely to reward executives for boosting per-share earnings. The overall trend highlights the complexity of paying for performance, Thurm and Ng write. “Goals can be set too low, and numerical targets often involve relatively subjective judgments about what should be counted.” And the targets can encourage short-term moves that may not pay off in the long run.

 


Why aren't the fair value advocates raising more fuss?

On April 30, 2013, the FASB issued a proposal that would indefinitely defer for nonpublic employee benefit plans certain quantitative fair value disclosures for investments in their plan sponsors' nonpublic entity equity securities. Comments on the FASB's exposure draft are due May 31, 2013.
Ernst & Young reaction --- Click Here
http://www.pwc.com/us/en/cfodirect/publications/in-brief/2013-23-fasb-proposes-to-defer-quantitative-disclosures-for-nonpublic-employee-benefit-plans.jhtml?display=/us/en/cfodirect/publications/in-brief&j=122192&e=rjensen@trinity.edu&l=353859_HTML&u=6425889&mid=7002454&jb=0


WRESTLING WITH REFORM: FINANCIAL SCANDALS AND THE LEGISLATION THEY INSPIRED ---
http://www.sechistorical.org/
Thank you Jim McKinney for the heads up.

Bob Jensen's Fraud Updates ---