New Bookmarks
Year 2014 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 
Tidbits Directory --- 

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

Bob Jensen's Threads ---

574 Shields Against Validity Challenges in Plato's Cave ---



Choose a Date Below for Additions to the Bookmarks File

June 30

May 31

April 30


June 30, 2014

Bob Jensen's New Bookmarks June 1-30, 2014, 2014
Bob Jensen at Trinity University 

For earlier editions of Fraud Updates go to
For earlier editions of Tidbits go to
For earlier editions of New Bookmarks go to 

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

Bob Jensen's Blogs ---
Current and past editions of my newsletter called New Bookmarks ---
Current and past editions of my newsletter called Tidbits ---
Current and past editions of my newsletter called Fraud Updates ---


Bob Jensen's Pictures and Stories


All my online pictures ---

David Johnstone asked me to write a paper on the following:
"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics Science"
Bob Jensen
February 19, 2014
SSRN Download: 


FASB Accounting Standards Updates ---

Hasselback Accounting Faculty Directory ---

Blast from the Past With Hal and Rosie Wyman ---

Bob Jensen's threads on business, finance, and accounting glossaries --- 

2012 AAA Meeting Plenary Speakers and Response Panel Videos ---
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 ---

"CONVERSATION WITH DENNIS BERESFORD," by Joe Hoyle, Teaching Blog, March 26, 2013 ---

"CONVERSATION WITH BOB JENSEN," by Joe Hoyle, Teaching Blog, October 8, 2013 ---

List of FASB Pronouncements ---

2013 IFRS Blue Book (Not Free) ---

Links to IFRS Resources (including IFRS Cases) for Educators ---

Find comparison facts on most any Website ---
For example, enter "" without the http:\\

Find Accounting Software (commercial site) ---

Galt Travel Reviews and Guides ---

Quandl:  over 8 million demographic, economic, and financial datasets from 100s of global sources ---

David Giles Econometrics Beat Blog ---

Common Accountics Science and Econometric Science Statistical Mistakes ---

Citations: Two Selected Papers About Academic Accounting Research Subtopics (Topical Areas) and Research Methodologies 

Alliance for Financial Inclusion (financial literacy initiative funded by Bill and Melinda Gates) ---
Also see Bob Jensen's related helpers at

Find Real Estate for Sale ---

Here's a crib note sheet for your next economics examination ---

How to Mislead With Statistics
"How Well Do Teen Test Scores Predict Adult Income?" by Phillip Cohen, Sociological Images, May 13, 2014 ---

Jensen Comment
This is a good lesson in regression from sophomores to Ph.D. seminars ---

This is an illustration of the enormity of the problem of missing variables in regression. Sadly in accountics research missing variables are the rule rather than the exception.

"Lessons Not Learned:  Why is There Still a Crisis-Level Shortage of Accounting Ph.D.s?" by R. David Plumlee and Philip M. J. Reckers, Accounting Horizons, June 2014, Vol. 28, No. 2, pp. 313-330. (not free)


In 2005, an ad hoc committee appointed by the American Accounting Association (AAA) documented a crisis-level shortage of accounting Ph.D.s and recommended significant structural changes to doctoral programs (Kachelmeier, Madeo, Plumlee, Pratt, and Krull 2005). However, subsequent studies show that the shortage continues and the cumulative costs grow (e.g., Fogarty and Holder 2012; Brink, Glasscock, and Wier 2012). The Association to Advance Collegiate Schools of Business (AACSB) recently called for renewed attention to the problem (AACSB 2013b). We contribute to the literature by providing updated information regarding responses by doctoral programs and, from the eyes of potential candidates, of continuing impediments to solving the doctoral shortage. In this paper, we present information gathered through surveys of program administrators and master's and Accounting Doctoral Scholars Program (ADS) students. We explore (1) the cumulative impact of the Ph.D. shortage as of 2013, including its impact on accounting faculty composition, across different types of institutions, (2) negative student perceptions of Ph.D. programs and academic accounting careers, which discourage applicants from pursuing Ph.D. programs, and (3) impediments facing institutions in expanding doctoral programs.

Keywords:  faculty shortage, recruiting, accounting Ph.D

Received: December 2013; Accepted: December 2013 ;Published Online: January 2014

R. David Plumlee is a Professor at The University of Utah, and Philip M. J. Reckers is a Professor at Arizona State University. Corresponding author: R. David Plumlee. Email:



Despite recognition of a critical shortage in accounting Ph.D.s and recommendations for structural changes to doctoral programs (Kachelmeier et al. 2005), there is evidence that the shortage continues (e.g., Fogarty and Holder 2012; Brink et al. 2012). The objective of this commentary is to provide contemporaneous information from administrators of doctoral programs, and the perceptions of potential candidates on the major impediments to addressing the doctoral shortage.

We were mindful in the design of our study that, potentially, two factors contribute to the current dilemma:

Insufficient numbers of qualified individuals are applying for admission to doctoral programs, and The capacity of doctoral programs has declined; thus, even if sufficient numbers of qualified individuals are applying, schools are failing to admit enough candidates to address the shortage.

In this paper, we present information gathered through surveys of program administrators and master's and Accounting Doctoral Scholars Program (ADS) students. We explore (1) the cumulative impact of the Ph.D. shortage as of 2013, including its impact on accounting faculty composition, across different types of institutions, (2) negative student perceptions of Ph.D. programs and academic accounting careers, which discourage applicants from pursuing Ph.D. programs, and (3) impediments to growth in doctoral programs faced by institutions. While many authors (e.g., Gary, Dennison, and Bouillon 2011; Fogarty and Holder 2012) have examined various causal elements for the shortage over the years, our purpose is to provide a more comprehensive and up-to-date picture of the environment.

Prior research and commentary have addressed many of the unintended negative consequences associated with the accounting doctoral shortage. Exacerbating the problem is the growing demand for collegiate accounting education. Leslie (2008) and Baysden (2013) report a surge in undergraduate and graduate accounting enrollments in recent years In 2011–2012, undergraduate accounting enrollments exceeded 240,000 students (up another 6 percent from the 2009–2010 figures), with 61,334 B.S. accounting degrees conferred and 20,843 master's accounting degrees conferred—both record highs.

Some prior initiatives regarding the shortage of Ph.D.-qualified accounting faculty have failed to sustain. The 2005 ad hoc AAA committee recommended greater financial support for doctoral students. The profession responded. The ADS program was kicked off in 2008 with funding by CPA firms and state societies; it provided four years of financial support each year for 30 doctoral students specializing in auditing or tax. Unfortunately, the ADS program has expired, and its success is hard to evaluate. Despite the initiative, Fogarty and Holder (2012, 374) conclude that “(e)xtrapolating from the current population of doctoral programs fails to support the prospects for a recovery over the near future.”

Alternative means of supplying accounting faculty have also been suggested. For example, Trapnell, Mero, Williams, and Krull (2009) propose structural changes to reduce the time frame for the degree to four years. Additionally, they suggest an executive-type program where students do not leave their employment to pursue a Ph.D. In this model, students would draw on their experience, supplemented by coursework in research methods, to develop a research project. Few schools have responded and adopted this model, and acceptance of their graduates has yet to be tested. Another proposed alternative is to take advantage of international accounting doctoral scholars willing to relocate to the United States, who would participate in a ten-week postdoctoral program and thereby become eligible to serve as accounting faculty in the United States (HassabElnaby, Dobrzykowski, and Tran 2012). Our survey addresses whether schools have actually substantially changed their doctoral programs along these lines or the composition of their student bodies.

In the remainder of this paper, we report on surveys conducted to address these and other relevant issues. First, we focus on costs of the shortage and, specifically, the changes in hiring that have been made, in part because of the Ph.D. shortage. Then we spotlight structural changes in accounting Ph.D. programs. Finally, we consider what might be discouraging more student applications; to address these issues, we surveyed 388 M.Acc. students from various programs across the country, requesting their perceptions of accounting Ph.D. programs and the academic accounting profession. We also surveyed 84 current Ph.D. students in the ADS program to compare the perceptions of a group who have chosen to get a Ph.D. with those of potential applicants. In the final section, we discuss our findings and offer recommendations for recruiting qualified students to accounting Ph.D. programs.


Changes in Faculty Composition

Since the AAA ad hoc committee's report on the accounting Ph.D. shortage in 2005, studies have documented various aspects of the shortage, using data sources such as Hasselback's Accounting Directory (Brink et al. 2012; Fogarty and Holder 2012), surveys of accounting faculty (Hunt, Eaton, and Reinstein 2009), and surveys of accounting Ph.D. students (Deloitte 2007), but none have asked accounting program administrators directly about the impact of the shortage on their programs. To examine how accounting departments have responded to the Ph.D. shortage, we surveyed 754 accounting program administrators listed in the Hasselback directory and received 204 completed responses (a 27 percent response rate). The schools in the sample included 73 percent that had separate AACSB accounting accreditation. Of responding schools, 69 percent graduated fewer than 100 undergraduate accounting majors each year, and 69 percent of schools with Master's of Accounting programs graduated 50 or fewer each year. When asked about their teaching mission, 20 percent responded that they had only an undergraduate accounting program, 61 percent had both accounting undergraduate and master's programs, and the remaining 19 percent had a Ph.D. program in accounting, in addition to bachelor's and master's programs.

. . .



Over 70 percent of responding accounting program administrators believe that their programs have been harmed by the accounting Ph.D. shortage. While the impact of broader economic factors is undeniable, the shortage is certainly contributing to larger class sizes, reduced elective offerings, and a significant change in the composition of accounting faculties. Nearly every category of school reports an increasing number of classes taught by clinical faculty, lecturers, and part-time instructors. It is also clear from our data that accounting Ph.D. programs have not been responsive to the calls of the AAA (Kachelmeier et al. 2005), AACSB (2013b), and others for significant structural change.

Whether the change in faculty composition is seen as a serious problem depends on one's perspective regarding the learning goals and objectives of collegiate accounting education. Some opine (e.g., AACSB 2003, 2013b) that less exposure of accounting students to doctorally qualified faculty will result in reduced attention to the economic and social roles of accounting in society, and less exposure to the rigorous forms of inquiry and analysis associated with the scientific method (and its attendant skepticism). On the other hand, the shortage is less troubling if the role of accounting faculty is perceived to be primarily to instruct and train students in technical accounting, auditing, and tax topics, and thereby instill those skills demanded to enter the accounting profession. There is a continuing controversy about when and where students are best “educated,” in the classroom or on the job, with clearly different traditions in different parts of the world.

There is also the issue of the value of accounting research, as well as the quantity of research needed. A root issue is the value one places on the role of accounting faculty in contributing to questions fundamental to accounting as a discipline. Advocates for a greater research role might ask questions such as, “Would the propriety of fair value as a measure of asset values or the option value of stock as a measure of compensation be as thoroughly embedded in the accounting discipline today without the contribution of rigorously trained accounting scholars?” The relative contribution of scholars both in the classroom, as well as through their contribution to fundamental knowledge and timely analyses of societal issues of importance, is a value of doctoral education that must be recognized and appreciated. Certainly, the AACSB (2013b) Report of the International Doctoral Education Task Force: The Promise of Business Doctoral Education foresees a much-expanded role for doctorally qualified faculty.

That AACSB (2013b) report also argues the time is now for business schools to embrace innovation, experimentation, and opportunity, and come to grips with economic realities by exploring innovations in doctoral education to enhance values and constrain costs to the individual and the institution. While M.Acc. students represent a large potential population of Ph.D. students, converting that opportunity into reality has been and will continue to be a challenge. Dogmatic intransience to change has not served our community well, any more than it has served politicians in Washington well. Honest, serious discourse is crucial if a way forward is to emerge. Financial constraints, including the length of programs, must not only be acknowledged, they must be solved. Our data are clear. Current accounting Ph.D. program models are not attractive to domestic doctoral program candidates.

The authors' personal beliefs represent two voices out of many. We do not purport to have the solutions. Certainly, we believe that a critical mass of accounting scholars is necessary for accounting to continue to serve its crucial role in society. Nonetheless, we are concerned that little appears to be happening to address our current dilemma. We are certainly mindful of the recommendations made nine years ago by the AAA's ad hoc committee (Kachelmeier et al. 2005), but that is nearly a decade past. Sustainable solutions have yet to manifest, and few signs of active commitment to find solutions appear on the horizon. Can we continue to wait on individual schools to change, or must a major collective initiative be forthcoming? Foremost, our results suggest that active recruiting of potential accounting Ph.D. students is critical, but unlikely to be successful without significant institutional changes.

Our survey of M.Acc. students also finds that there is a significant knowledge gap. Overcoming this knowledge gap requires a collective effort. This may be within the purview of the AAA or the AACSB or both. And this initiative, in our judgment, needs to rise above the level of a one-year plan.

The group of M.Acc. students who expressed the highest likelihood of applying to Ph.D. programs is those who see value in and express an affinity for teaching and research. In professions such as engineering and medicine, the leap from the academic content found in master's programs and those found in doctoral programs is not huge. However, in accounting, the disparity between the content of master's programs and Ph.D. programs is enormous. As a result, Master's of Accounting students are not acquainted with accounting research. Can this condition be remediated? How do we go about this? While cost constraints are important to everyone, it is well known that accounting academics are not motivated solely by money matters. Arguably, one way is to incorporate academic research that addresses issues of professional and/or societal importance into master's, if not undergraduate, courses. This is something individual accounting academics can do. This end might also be achieved through focused undergraduate honors theses, or by embedding distinct research courses into master's programs. While incentives for schools to adopt these strategies and Ph.D. programs to accept the academic credit do not appear to exist at present, such an approach might serve to reduce the length of Ph.D. programs.

The ad hoc committee of 2005 also urged leaders of accounting programs to consider “Ph.D. tracks” in their master's programs. These tracks should not be thought of narrowly. Courses in the track could be fashioned to allow students to get a head start on a Ph.D. program by including foundational topics such as economics, mathematics, or statistical methods.2 Accounting programs without a Ph.D. program might develop some sort of articulation agreement, where certain courses in their “Ph.D. track” would count toward the Ph.D. at the doctoral granting school. Our M.Acc. survey finds that even those inclined to apply to an accounting Ph.D. program see five years or more in a Ph.D. program as too much to sacrifice for an academic career. Any method of shortening the process without diluting the quality would be a welcome innovation.

A prior positive teaching experience also appears to be related to pursuit of an academic career. We cannot definitively resolve, based on our findings, whether those interested in Ph.D. programs seek teaching opportunities or whether teaching sparks interest in Ph.D. programs. Nonetheless, opportunities exist for more accounting students to teach in some manner, or tutor. Whatever the venue, teaching opportunities for students could be the catalyst for pursuit of an academic accounting career.

In summary, the shortage of accounting Ph.D. graduates continues, with several clearly identifiable negative consequences. Many recommendations have been forthcoming in the past with the goal of remediating the problem, but few recommendations have been adopted. Champions of sustained new initiatives have not stepped forward, with the exception of the ADS program, and the output of Ph.D. programs continues to be inadequate.

M.Acc. students offer a large potential recruiting pool, and a significant number of master's students show early interest in academic careers. Unfortunately, a host of impediments thwart our progress toward a robust Ph.D. pool. We identify and discuss the major impediments. We observe that significant M.Acc. student recruitment efforts are needed, where there are virtually none today. We suggest that waiting for this problem to solve itself is folly; that well-considered, significant, and sustained initiatives are required; and that there exists an opportunity for the AAA, and its sections, to take the lead. Individual accounting departments and schools can also make a difference. Waiting for others to solve the problem has not led to a solution to date. Continuing on our same path and expecting different outcomes is likely unrealistic.


Jensen Comment
This is an important update to an ever-increasing problem in our Academy. It surveys students, doctoral program coordinators, and accounting department heads with outcomes that provide some detailed insights into large and small issues.

One enormous issue is the decline in capacity for admission of applicants into accounitng doctoral programs in North America. That is best reflected in the well-known table generated by Jim Hasselback each year for many years showing the number of graduating doctoral students in each doctoral program over time ---
At the moment the table shown in the above link only goes back to 1995. However, I've saved copies of this table from earlier years Consider the University of Illinois for example. Between 1939 and 1995 the University of Illinois graduated an average of six accounting PhDs per year. The data are skewed. There were only a few graduates in the early years of the program whereas during the1960-1980 period Illinois was graduating 10-20 accounting PhDs per year.

Between 1996 and 2013 Illinois only graduated an average of two accounitng PhDs per year. Similar outcomes happened in the other accounting doctoral mills of Texas and Arkansas where there were similarly severe declines in the number of annual graduates since 1995. There have been some new doctoral programs such as the newer program at the University of Texas in San Antonio, but the numbers graduated each year from those programs are small.

My poi9nt is that the decline in output in the larger mills since 1995 has not been offset by increased output in other programs. Hence in North America  we see a decline in the annual output from nearly 300 accounting PhD graduates per year to 140.4 per yer between 1996 and2013.

Plumly and Reckers avoided some of the most controversial questions in their surveys. Before 1985 accounting doctoral programs admitted accountants without mathematical and statistical backgrounds and permitted accounting dissertations without equations such as accounting history disserations without equations. Now having equations in dissertations is required even in accounting history dissertations.

In virtually all accounting doctoral programs in North America, new doctoral students cannot matriculate without meeting advanced mathematics and statistics prerequisites. Most of the accounting courses have been taken out of the curricula and are replaced by econometrics and psychometrics courses. The programs are essentially sophisticated programs on how to mine data.

Most accounting faculty in an accounting program do not have the quantitative skill sets to teach in the accounting doctoral programs or if they have some quantitative skills they do not want to teach ecnonometrics and psychometrics and data mining course or supervise accountics science dissertations.. This is a major reason why the the number of doctoral students that can be handled in most accounting doctoral programs have declined so dramatically.

Also accountants who have been practicing accounting for 5-10 years wound prefer accounting doctoral programs rather than accountics science doctoral programs. One reason the number of foreign students has been increasing in North American Accounting Doctoral Programs is that students are admitted on the basis of their mathematics and statistics skills rather than accounting knowledge (and even interest in accounting).

This is why so many of the graduates from our accounting doctoral programs in the 21st Century are not prepared to teach accounting courses in the undergraduate and masters programs. All they can teach are the doctoral program courses. The teaching of accounting is being shifted to adjunct professors who are better prepared to teach accounting, auditing, and taxation.

Plumlee and Reckers indirectly recognize this problem and suggest that there be more curriculum tracks in accounting doctoral programs. The Pathways Commission is even more blunt. It recommends that doctoral programs allow doctoral dissertations without equations --- like in the good old days when we had more accounting doctoral program graduates.

A huge limitation of the Plumlee and Reckers paper above is that it ignores the Pathways Commission recommendations.

The (Pathways Commission) report includes seven recommendations. Three are shown below:

  • Integrate accounting research, education and practice for students, practitioners and educators by bringing professionally oriented faculty more fully into education programs.

  • Promote accessibility of doctoral education by allowing for flexible content and structure in doctoral programs and developing multiple pathways for degrees. The current path to an accounting Ph.D. includes lengthy, full-time residential programs and research training that is for the most part confined to quantitative rather than qualitative methods. More flexible programs -- that might be part-time, focus on applied research and emphasize training in teaching methods and curriculum development -- would appeal to graduate students with professional experience and candidates with families, according to the report.

  • Increase recognition and support for high-quality teaching and connect faculty review, promotion and tenure processes with teaching quality so that teaching is respected as a critical component in achieving each institution's mission. According to the report, accounting programs must balance recognition for work and accomplishments -- fed by increasing competition among institutions and programs -- along with recognition for teaching excellence.


The Sad State of Accountancy Doctoral Programs in North America ---

Surprisingly Routledge (publisher of expensive, often low-volume specialty academic books) is making 6,000 titles free in electronic format ---
Some of the books that are now available for free are not so old. My guess is that these were mostly poor sellers --- which does not mean they were bad books. In some cases it means that they were too narrow and specialized to have much demand at all.

Scholars taking advantage of these free downloads are most likely to be history buffs.

The available free books in accounting and finance are at

"Why Paying Off a Mortgage Early Isn't Always The Right Move," by Len Penzo. Business Insider, June 26, 2014 --- 

Jensen Comment
When I retired in 2006 I could have paid cash for our retirement cottage and acreage in the White Mountains of New Hampshire. Instead I took out a jumbo mortgage. I could have paid it off anytime since then, but instead I refinanced twice to get a lower interest rate and will be nearly 100 years of age when the mortgage is paid off. I might refinance again and again and again when interest rates decline even if each refinancing adds more years to the maturity date.

Every homeowner faces unique circumstances such that I do not want you to think that my situation applies to any other home owner. For me in retirement I need the tax shelter of mortgage interest payments more than ever. It makes more sense for me to keep a large balance in a Vanguard tax-exempt mutual fund (where there's value risk that does not concern me but maybe would concern you) that is highly liquid --- I can write checks on it anytime I want make an immediate withdrawal from the fund. I like this liquidity that I would not get in a fully paid-off home.

The tax-exempt mutual fund is my version of nursing home insurance for myself and my wife should, God forbid, one or both of us have to go to a nursing home. Medicare does not pay nursing home costs such that all USA retirees need savings for nursing home care. Nursing home insurance is, in my viewpoint, a lousy and costly alternative.

Some retired home owners may prefer to pay off their mortgages. When they are short of cash, such as when nursing home care is needed, they can then get a reverse mortgage. However, I view reverse mortgages like I view nursing home insurance --- both are too costly for my circumstances. But then my circumstances are not like any other home owners' circumstances.

Please do not rely upon what I think is best for me without getting outside advice from a better expert than me.

The above discussion applies only to when and if to pay off a home mortgage.
The rent versus buy decision is an entirely different matter. Generally renting is better when you want to keep your short-term options open about where to live. Much depends upon the the real estate market. In the USA most real estate is harder to sell in the 21st Century than in the roaring 1990s. There are vast differences in the real estate market. Today I would rather be selling an Iowa farm than a California farm or a New Hampshire home.

If I sold our New Hampshire property (or most any other northern New England property) today I would lose quite a lot of money. But I hope to live here and owe on my mortgage until the day I die.

Graphic from the New York Times via Barry Ritholtz:  Change in private manufacturing jobs, by county in the USA
This graphic shows why there is such a lousy future in manufacturing jobs. There are many causes, especially the slow economic recovery and reduced government spending for such  things as military equipment, but the increasing displacements are causes by robotics and automation that increasingly replace manufacturing workers in ways that were not imagined 20 ago. Will the last person leaving an automated factory turn out the lithts ---

Accounting Hall of Fame ---

Abe Briloff: Accounting Hall of Fame or Infame? ---

Abe died in 2013 at the age of 96
"Abe Briloff, an Accountant Who Saw Through the Games," by Floyd Norris, The New York Times, December 19, 2013 ---

The long overdue induction of Abe Briloff into the Accounting Hall of Fame will take place in August 2014.

My former doctoral student Bill Kinney did not have to wait so long. He will also be inducted in August 2014.

An announcement of their recent inductions is not yet posted on the Accounting Hall of Fame Website.

Let's Call it the 186 Club of Tax Avoiders
A new law allows Americans to pay minimal or no taxes if they live on the island for at least 186 days a year, and unlike with a move to Singapore or Bermuda, Americans don't have to turn in their passports.--- 

Patent Troll (nobody hates them more than me) ---

For Whom the Bell Trolls

"The Supreme Court Kills Abstract Software Patents: Who Wins And Who Loses," by Dan Rowinski,  ReadWriteWeb, June 19, 2014 ---

The U.S. Supreme Court struck a blow at software patents, but many feel the court did not go far enough.

Somewhat related:
Bob Jensen's threads on the dreaded DMCA ---

Beginning to Shine a Light on the Opaque Derivatives Market: Defining Dealers and Major Participants in the Cross-Border Context
DEC Commissioner Luis A. Aguilar
Junr 25, 2014
Thank you Neal Hannon for the Heads Up

Tax Question About Motor Homes
The Village of Sugar Hill supposedly does not tax any "home" resting on wheels? There are no houseboats in this land-locked village.
Suppose two grandparents own a very modest log cabin that is taxed on a valuation of $40,000. Behind their home sits a $250,000 motor home in which two grandchildren and a son live in the winter months. The children attend local schools and use the address of their grandparents.
Should this family get away with contributing almost nothing to the local village or school district?

On a separate issue, vacation homes anchored to the ground are valued and taxed even if they are only used in the summer months when children do not attend local schools.

Three tax scenarios for vacation homes ---

"The Effect of Fair Value versus Historical Cost Reporting Model on Analyst Forecast Accuracy," by Lihong Liang and Edward J. Riedl,  The Accounting Review,: May 2014, Vol. 89, No. 3, pp. 1151-1177 ---  (Not Free)


This paper examines how the reporting model for a firm's operating assets affects analyst forecast accuracy. We contrast U.K. and U.S. investment property firms having real estate as their primary operating asset, exploiting that U.K. (U.S.) firms report these assets at fair value (historical cost). We assess the accuracy of a balance-sheet-based forecast (net asset value, or NAV) and an income-statement-based forecast (earnings per share, or EPS). We predict and find higher NAV forecast accuracy for U.K. relative to U.S. firms, consistent with the fair value reporting model revealing private information that is incorporated into analysts' balance sheet forecasts. We find this difference is attenuated when the fair value and historical cost models are more likely to converge: during recessionary periods.

Finally, we predict and find lower EPS forecast accuracy for U.K. firms when reporting under the full fair value model of IFRS, in which unrealized fair value gains and losses are included in net income. This is consistent with the full fair value model increasing the difficulty of forecasting net income through the inclusion of non-serially correlated elements such as these gains/losses. Information content analyses provide further support for these inferences. Overall, the results indicate that the fair value reporting model enhances analysts' ability to forecast the balance sheet, but the full fair value model reduces their ability to forecast net income.

Keywords:  fair value, historical cost, analyst forecast accuracy, net asset value, real estate

Received: September 2011; Accepted: December 2013 ;Published Online: December 2013



This paper examines the effect of the reporting model on the accuracy of analyst outputs. Specifically, we investigate whether the model—fair value or historical cost—used to report firms' primary operating assets of real estate differentially affects the accuracy of two analyst forecasts: a balance-sheet-based forecast (net asset value, or “NAV”), and an income-statement-based forecast (earnings-per-share, or “EPS”).1 Accordingly, this paper combines the literatures on fair value reporting for nonfinancial assets (e.g., Easton, Eddey, and Harris 1993) and analyst forecast accuracy (e.g., Lang and Lundholm 1996) to examine how the reporting model affects the precision of different types of analyst outputs.

We choose as our setting publicly traded investment property firms domiciled either in the U.K. or U.S. during the period 2002–2010. Investment property firms invest in real estate assets for rental income and/or capital appreciation. The choice of this setting is advantageous for several reasons. First, this industry is among the few in which fair value reporting can be observed for the firm's primary operating assets. Although other industries, such as banking and insurance, have significant exposure to fair value reporting, these settings are more complex as the within-firm accounting treatment across their operating assets varies significantly, and they are subject to substantial regulation.2 Second, our focus on the U.K. and U.S. exploits the primary reporting difference for this industry across these two countries. Specifically, U.K. investment property firms recognize property assets at fair value on the balance sheet under both U.K. domestic accounting standards as well as more recently adopted International Financial Reporting Standards (IFRS). Unrealized fair value changes are reported in a revaluation reserve under U.K. standards, but reported in net income under IFRS. In contrast, U.S. investment property firms report property assets at historical cost as mandated under U.S. standards; further, industry practice is that these firms rarely voluntarily disclose property fair values. Third, despite the latter reporting difference, the real estate industry in both countries is highly developed, with both having a substantial number of publicly traded real estate firms, relatively liquid property markets, and a large number of analysts following these firms.

To assess analyst forecast accuracy, we choose two forecast types, a balance-sheet-based forecast (NAV) and an income-statement-based forecast (EPS). NAV forecasts are commonly applied in the investment property industry, and are primary inputs into analyst's target price estimates. They are calculated by taking the estimated fair value of the firm's assets, which are primarily the real estate properties, and subtracting the estimated fair value of the firm's liabilities, primarily debt. As such, NAV provides an estimate of the value of the firm's net assets in place. Second, we examine the accuracy of EPS forecasts, which represent analysts' estimates of the firm's ability to generate income. We note that this industry is among the few for which both balance sheet and income statement forecasts are commonly observable.

We hypothesize three primary effects. First, we predict higher accuracy of NAV forecasts for firms providing investment property fair values. That is, we expect that the reporting of these fair values, as done by U.K. firms, reveals private information regarding the underlying asset values. Analysts incorporate this information into their forecasts, leading to greater forecast accuracy. Second, we predict that this relatively greater NAV accuracy for firms providing fair values will be attenuated during circumstances in which the fair value and historical cost reporting models are likely to converge. To proxy for such a setting, we use the financial crisis, during which real estate assets in both the U.K. and U.S. declined substantially. Third, we predict that full fair value reporting required under IFRS will reduce the accuracy of analysts' EPS forecasts, owing to increased difficulty of forecasting net income when it includes non-serially correlated items such as unrealized fair value gains and losses.

Empirical results confirm all three predictions. We find that NAV forecasts for U.K. firms are more accurate relative to those for U.S. firms. Further, we find that this greater accuracy is attenuated during the financial crisis of 2007–2008, consistent with convergence of the fair value and historical cost reporting models during this period. Finally, we document greater EPS forecast accuracy for U.S. firms relative to U.K. firms when the latter report under IFRS. To mitigate concerns that our analyses may reflect differences across the U.K. and U.S. settings that are unrelated to our predicted financial reporting effects, our primary analyses use a difference-in-differences design. Our findings also are robust to estimating a fully interacted model to control for different effects across the U.K. and U.S. samples; using alternative measures of the dependent variables to assess the use of market value to benchmark NAV forecast accuracy due to the latter's lack of reported actual amounts; and conducting subsample analysis. Finally, corroborating evidence reveals greater information content for U.K. relative to U.S. NAV forecasts, with this difference reduced during the financial crisis. Despite the higher EPS forecast error, however, U.K. EPS forecasts have greater information content under IFRS.

These findings make three contributions. First, we link the fair value literature, which provides evidence of the decision relevance of reported fair values (e.g., Barth 1994), to that on analyst forecast accuracy (e.g., Clement 1999) by documenting that fair values of key operating assets can enhance the accuracy of analysts' balance-sheet-based forecasts. However, our evidence further suggests that the benefits to fair value reporting may primarily occur during expansionary economic periods, where the fair value and historical cost reporting models are most likely to diverge. In addition, our evidence suggests that full fair value reporting in which unrealized gains and losses are incorporated into income can impede income statement forecast accuracy. Second, our analyses of NAV forecasts are new because analysts' balance sheet forecasting activities are rarely studied in the prior literature. Finally, our evidence is likely of interest to U.S. and international standard-setters in their ongoing deliberations regarding the extent in which to incorporate fair value into reporting standards.

Section II provides the background, prior literature, and hypothesis development. Section III presents the research design. Section IV reviews the sample and primary empirical results. Section V presents sensitivity analyses, and Section VI concludes.


Background \
This paper analyzes U.K. and U.S. publicly traded investment property firms over 2002–2010, which have as their primary operating structure tangible assets consisting of real estate investments. These firms invest in real estate to obtain rental income and/or for capital appreciation. We exploit a key difference across the two groups of firms: U.K. firms report these real estate assets at fair value, while U.S. firms report them at historical cost.

The reporting of investment properties for U.K.-domiciled firms within our sample period falls under two regimes: U.K. domestic standards from 2002–2004; and International Financial Reporting Standards (IFRS) from 2005–2010. Both require that U.K. firms report investment properties on the balance sheet at fair value. The relevant U.K. domestic standard, Accounting for Investment Properties, Statement of Standard Accounting Practice No. 19 (SSAP 19; Accounting Standards Committee [ASC] 1994), requires investment property to be reported on the balance sheet at “open market value” at fiscal year-end. This is very similar to “fair value” as defined by the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB).3 Unrealized fair value gains/losses are reported in a revaluation reserve, and thus do not pass through net income.

Continued in article

Bob Jensen's threads on fair value accounting ---

"Replication Crisis in Psychology Research Turns Ugly and Odd," by Tom Bartlett, Chronicle of Higher Education, June 23, 2014 ---

In a blog post published last week, Timothy D. Wilson, a professor of psychology at the University of Virginia and the author of Redirect: The Surprising New Science of Psychological Change, declared that "the field has become preoccupied with prevention and error detection—negative psychology—at the expense of exploration and discovery."

The evidence that psychology is beset with false positives is weak, according to Mr. Wilson, and he pointed instead to the danger of inept replications that serve only to damage "the reputation of the original researcher and the progression of science." While he called for finding common ground, Mr. Wilson pretty firmly sided with those who fear that psychology’s growing replication movement, which aims to challenge what some critics see as a tsunami of suspicious science, is more destructive than corrective.

Continued in article

Jensen Comment
Accounting researchers probably like Timothy Wilson's paper since replication in accounting research is the rare exception rather than the rule. Academic accounting research journals like TAR will not publish replications or even commentaries about published articles that are supposed to be accepted as truth because two or three referees let the article be published ---

The social sciences, accounting, finance, and business research in general should be no different than the physical sciences where nothing is true until replicated except in the case where analytics where the assumptions rather than the derivations are less controversial than the assumptions underlying the derivations.

In terms of social science empirical research I think that the social scientists should be faced with the same replication hurdles as the physical sciences ---

Social science findings are often less stable than physical science discoveries.
For example, when an astronomer makes a discovery about the magnetic field of a star the star does not change its magnetic field just because of the discovery. When a psychologist makes a discovery about the eating habits of a person that person may change behavior because of the discovery. Such is stationarity problem of the social sciences, accounting, finance, and business research.

But this does not justify not publishing results of replications and commentaries about published articles. If we are seeking truth replication is essential.

For example on the AECM listserv I called attention to the following discovery in an emprical accounting research study:

"Finally, we predict and find lower EPS forecast accuracy for U.K. firms when reporting under the full fair value model of IFRS, in which unrealized fair value gains and losses are included in net income."

"The Effect of Fair Value versus Historical Cost Reporting Model on Analyst Forecast Accuracy," by Lihong Liang and Edward J. Riedl,  The Accounting Review (TAR),: May 2014, Vol. 89, No. 3, pp. 1151-1177 ---  (Not Free)

TAR readers will have to accept the above finding as truth since TAR will not encourage or publish a replication study of that finding or even publish a commentary about that finding. This is wrong in our Academy.

"How journals like Nature, Cell and Science are damaging science:  The incentives offered by top journals distort science, just as big bonuses distort banking," Randy Schekman, The Guardian, December 19, 2013 ---

A paper can become highly cited because it is good science – or because it is eye-catching, provocative or wrong. Luxury-journal editors know this, so they accept papers that will make waves because they explore sexy subjects or make challenging claims. This influences the science that scientists do. It builds bubbles in fashionable fields where researchers can make the bold claims these journals want, while discouraging other important work, such as replication studies.

"How journals like Nature, Cell and Science are damaging science:  The incentives offered by top journals distort science, just as big bonuses distort banking," Randy Schekman, The Guardian, December 9, 2013 ---

I am a scientist. Mine is a professional world that achieves great things for humanity. But it is disfigured by inappropriate incentives. The prevailing structures of personal reputation and career advancement mean the biggest rewards often follow the flashiest work, not the best. Those of us who follow these incentives are being entirely rational – I have followed them myself – but we do not always best serve our profession's interests, let alone those of humanity and society.

e all know what distorting incentives have done to finance and banking. The incentives my colleagues face are not huge bonuses, but the professional rewards that accompany publication in prestigious journals – chiefly Nature, Cell and Science.

These luxury journals are supposed to be the epitome of quality, publishing only the best research. Because funding and appointment panels often use place of publication as a proxy for quality of science, appearing in these titles often leads to grants and professorships. But the big journals' reputations are only partly warranted. While they publish many outstanding papers, they do not publish only outstanding papers. Neither are they the only publishers of outstanding research.

These journals aggressively curate their brands, in ways more conducive to selling subscriptions than to stimulating the most important research. Like fashion designers who create limited-edition handbags or suits, they know scarcity stokes demand, so they artificially restrict the number of papers they accept. The exclusive brands are then marketed with a gimmick called "impact factor" – a score for each journal, measuring the number of times its papers are cited by subsequent research. Better papers, the theory goes, are cited more often, so better journals boast higher scores. Yet it is a deeply flawed measure, pursuing which has become an end in itself – and is as damaging to science as the bonus culture is to banking.

It is common, and encouraged by many journals, for research to be judged by the impact factor of the journal that publishes it. But as a journal's score is an average, it says little about the quality of any individual piece of research. What is more, citation is sometimes, but not always, linked to quality. A paper can become highly cited because it is good science – or because it is eye-catching, provocative or wrong. Luxury-journal editors know this, so they accept papers that will make waves because they explore sexy subjects or make challenging claims. This influences the science that scientists do. It builds bubbles in fashionable fields where researchers can make the bold claims these journals want, while discouraging other important work, such as replication studies.

In extreme cases, the lure of the luxury journal can encourage the cutting of corners, and contribute to the escalating number of papers that are retracted as flawed or fraudulent. Science alone has recently retracted high-profile papers reporting cloned human embryos, links between littering and violence, and the genetic profiles of centenarians. Perhaps worse, it has not retracted claims that a microbe is able to use arsenic in its DNA instead of phosphorus, despite overwhelming scientific criticism.

There is a better way, through the new breed of open-access journals that are free for anybody to read, and have no expensive subscriptions to promote. Born on the web, they can accept all papers that meet quality standards, with no artificial caps. Many are edited by working scientists, who can assess the worth of papers without regard for citations. As I know from my editorship of eLife, an open access journal funded by the Wellcome Trust, the Howard Hughes Medical Institute and the Max Planck Society, they are publishing world-class science every week.

Funders and universities, too, have a role to play. They must tell the committees that decide on grants and positions not to judge papers by where they are published. It is the quality of the science, not the journal's brand, that matters. Most importantly of all, we scientists need to take action. Like many successful researchers, I have published in the big brands, including the papers that won me the Nobel prize for medicine, which I will be honoured to collect tomorrow.. But no longer. I have now committed my lab to avoiding luxury journals, and I encourage others to do likewise.

Continued in article

Bob Jensen's threads on how prestigious journals in academic accounting research have badly damaged academic accounting research, especially in the accountics science takeover of doctoral programs where dissertation research no longer is accepted unless it features equations ---

Lack or Replication in Accountics Science:
574 Shields Against Validity Challenges in Plato's Cave ---

The New GASB Standard Will Bring Light to the Dark Corners of Underfunded Government Pension Funds

Accounting Change Will Expose ...


By Michael Hicks, includes “This week marked the full implementation of two new Government Accounting Standards Board rules affecting the reporting of pension liabilities. These rules -- known in the bland vernacular of accountancy as Statements 67 and 68 -- require state and municipal governments to report their pensions in ways more like that of private-sector pensions. … One result of this is that governments with very high levels of unfunded liabilities will see their bond ratings drop to levels that will make borrowing impossible. In some places, like Indianapolis or Columbus, Ohio, may have to increase their pension contributions and perhaps make modest changes to retirement plans, such as adding a year or two of work for younger workers. Places like Chicago or Charleston, West Virginia, will be effectively unable to borrow in traditional bond markets.  Pension funds in Chicago alone are underfunded by almost $15 billion. Under the new GASB rules Chicago's liability could swell to almost $60 billion or roughly $21,750 per resident. Retiree health care liabilities add another $3.6 billion or $1,324 per resident, so that each Chicago household will need to cough up $61,000 to fully fund their promises to city employees. The promise will be broken. …

Bob Jensen's threads on pension liabilities and post-employment benefits ---

Bob Jensen's threads on the sad state of governmental accounting ---


May 2014 Book Reviews (edited by Steve Zeff) ---

Jensen Comment
Routledge books are relatively expensive. I always found the trick is to ask your campus librarian to purchase them for the library. Demand for them on campus is relatively light such that you can read the library's copies to your hearts content.

Where are the shortages of PhDs in academe more severe than the shortage of accounting PhDs?

"Believe It or Not, in Some Fields Colleges Can’t Find Anybody to Hire," by Sara Jerde, Chronicle of Higher Education, June 18, 2014 ---

Jensen Comment
The above article neglected the shortage of accounting PhDs where only about 130 are graduated in North America each year. They are typically the highest paid new assistant professors. Demand exceeds supply by over ten to one.

The shortage of accounting professors and professors in accounting and some other business disciplines is so great that the AACSB accrediting agency commenced a "Bridge Program" to bridge holders of PhDs in other disciplines like history and engineering to bridge into accounting, finance, and other business programs. The bridge program is less successful in accounting because the are so many required prerequisite accounting courses.

The French Economy Goes From Bad to Worse Under High Taxation
"It's Bad In France," by Joe Weisenthal, Business Insider, June 25, 2014 ---
Note the tables and charts

Meanwhile Spain Lowers Taxes on Individuals and Business Firms

What happened to the Keynesians in Spain?

They're probably not Laffering ---

"Spain Unveils Sweeping Cuts on Income, Corporate Taxes Budget Minister Says Cuts Will Stimulate Investment, Jobs and Competitiveness," by David Roma, The Wall Street Journal, June 20, 2014 ---

MADRID—Spanish leaders who broke their no-new-taxes pledge after taking office 2½ years ago announced sweeping tax cuts on Friday, saying it was time to compensate a recession-battered populace for its sacrifices and boost a nascent recovery.

Budget Minister Cristóbal Montoro, announcing the government's main economic initiative of the year, said the planned reductions of income and corporate taxes will stimulate investment, creating jobs and making Spanish companies more competitive abroad.

They will also put more money in the pockets of consumers as the ruling, conservative Popular Party moves toward elections, which are expected as early as the end of next year.

Spain's corporate tax rate would drop from 30% to 25% by 2016. People earning more than €300,000 ($408,000) a year would see their personal income-tax rate fall from 52%, one of the highest in Europe, to 45% in 2016.

Those earning less than €12,450 a year would pay 19% in 2016, compared with 24.75% now.

Some individuals in the middle—those earning between €100,000 and €150,000 a year—would see their tax bills go up, Mr. Montoro said, because the number of tax brackets is being reduced. But overall, he said, income-tax rates will drop by 12.5% over the next two years.

Officials say the economy is growing fast enough that tax revenue will continue to rise even as tax rates fall. The International Monetary Fund said last month that Spain's economy, which emerged from recession last summer and is forecast to grow 1.2% this year, had "turned the corner" and has room to cut corporate taxes.

Some independent economists questioned that assumption. They said the government had failed for years to meet its annual revenue projections and now risks a decline in tax revenue and a reversal of three years of advances in trimming the budget deficit.

"It's not clear to me why they hiked taxes soon after taking office, if their argument is now that the way to increase revenue is tax cuts," said José Carlos Díez, a Madrid-based economist.

Prime Minister Mariano Rajoy inherited a severe economic crisis when he assumed office in December 2011. Within months, he raised income and sales taxes, saying they were needed to narrow the budget deficit.

He apologized for breaking a campaign pledge and said some of the tax increases were temporary.

Mr. Montoro said it was now possible to reverse course because Spain's modest growth is increasing tax revenue. He said tax receipts in the first five months of the year were 5% higher than the same period of 2013. He said Spain's tax revenue is about 38% of gross domestic product, one of the lowest in the euro zone, but growing.

The cuts announced Friday would by 2016 bring income-tax rates back to their pre-2012 levels for high-income earners and lower them slightly for low-income earners. Sales taxes wouldn't come down. The plan is subject to modification but is assured of passage because Mr. Rajoy's party controls parliament.

What is the optimal game theory strategy for the USA and Germany this week in the World's Cup?

Ignore any laws, penalties, costly bad publicity, and ethics standards regarding fixing of outcomes. Also ignore the real difficulties of trying to fix outcomes  when multiple players are involved --- fixing a soccer match is much more complicated than fixing a prize fight or a tennis match.

"According To Game Theory, Germany And The US Should Collude To Get A Draw In Their Next World Cup Match," by Andy Kiersz, Business Insider, June 23, 2014 ---


. . .

This situation is actually an example of a classic problem in game theory: the stag hunt. The problem, originally formulated by Jean-Jacques Rousseau, involves two hunters who can choose between hunting stags or hunting rabbits. If the hunters team up, they can take down a stag, and eat like kings. If only one hunter tries to hunt a stag, and the other just goes for rabbits, the stag hunter is out of luck and goes home hungry, and the rabbit hunter gets a rabbit. If both hunters go for rabbits, they both get rabbits.

The issue is similar to whether or not the U.S. and Germany should play to win or just run ninety minutes of passing drills. While it would be better for both overall to cooperate, it's safer for a team or hunter to defect. Both hunters going for a stag will get more meat, but a hunter going for rabbits is guaranteed to get a rabbit.

It's helpful to put this situation into numerical terms. If both teams collude and don't try to win on Thursday, let's say each get 3 utility points, representing a safe path to the next round. If one team is not trying, and the other team defects and plays to win, the defecting team gets 2 points, and the now-betrayed cooperating team gets 0 points, representing the advantage the defecting team gets over the surprised cooperating team. If both teams defect and play to win, each gets 1 point, representing a normal soccer game.

Continued in article

Read more:


Activity Based (ABC) Costing ---

Jensen Comment
Even though ABC Costing did not live up to its hype in terms of ongoing usage by business firms, it is not yet dead!

"Better Accounting Transforms Health Care Delivery. Accounting Horizons," by Robert S. Kaplan and Mary L. Witkowski, Accounting Horizons, June 2014, Vol. 28, No. 2, pp. 365-383 --- (Not Free)


The paper describes the theory and preliminary results for an action research program that explores the implications from better measurements of health care outcomes and costs. After summarizing Porter's outcome taxonomy (Porter 2010), we illustrate how to use process mapping and time-driven activity-based costing to measure the costs of treating patients over a complete cycle of care for a specific medical condition. With valid outcome and cost information, managers and clinicians can standardize clinical and administrative processes, eliminate non-value added and redundant steps, improve resource utilization, and redesign care so that appropriate medical resources perform each process step. These actions enable costs to be reduced while maintaining or improving medical outcomes. Better measurements also allow payers to offer bundled payments, based on the costs of using efficient processes and contingent on achieving superior outcomes. The end result will be a more effective and more productive health care sector. The paper concludes with suggestions for accounting research opportunities in the sector.

Keywords:  cost management, health care, measurement, activity-based costing

Received: October 2013; Accepted: October 2013 ;Published Online: June 2014

Robert S. Kaplan is Senior Fellow and Professor Emeritus at Harvard University; Mary L. Witkowski is a Fellow and an MD candidate at Harvard University. Corresponding author: Robert S. Kaplan. Email:

This research has been motivated and greatly enriched by collaborative work with our Harvard Business School colleague, Professor Michael E. Porter. His health care value framework provided the context for understanding how improved accounting can contribute to better delivery of health care.


Health care spending in the U.S. has increased from 7.2 percent of Gross Domestic Product in 1970, to 9.2 percent in 1980, 13.8 percent in 2000, and 17.9 percent in 2011 (Centers for Medicare & Medicaid Services [CMS] 2013). At the same time, U.S. citizens have higher morbidity and mortality rates than citizens in countries that spend much less on their health care system (Nolte and McKee 2012). Much of the higher U.S. spending is caused by a fee-for-service reimbursement system that compensates providers for the volume of procedures they perform and not for the outcomes they deliver. Another cause is the extensive fragmentation of health care delivery and reimbursement (Reinhardt, Hussey, and Anderson 2004) in which patients are treated in diverse organizational units including independent physician practices, primary care clinics, hospitals, and rehabilitation and chronic care centers. These clinical organizational units are structured by medical and surgical specialty, not by a patient's medical conditions. As a result, patient treatment and its reimbursement are dispersed across multiple functional units, with each unit doing only one component of a patient's total care for a specific medical condition.

Few incentives currently exist for treating a patient's complete medical situation, or for performing a more active role in preventive behavior and wellness. The 2011 Affordable Care Act improves residents' access to the U.S. health care system, but it includes only modest attempts to reform the system itself (Wilensky 2012). Increasing access to a poorly organized and inefficient system will likely eventually lead to government-imposed spending and price cuts, followed by lower quality of care, longer waits for patients, and the financial distress and exit of providers.

Other countries, while spending a smaller percentage of their GDP on health care, are also experiencing cost increases comparable to those in the U.S. (Organisation for Economic Co-operation and Development [OECD] 2011). No country has yet to solve the fundamental problem of how to reimburse providers for providing health care to their populations. The U.S. fee-for-service model clearly does not work, but the capitated payments and global reimbursement mechanisms used in other countries lead to rationing of care and queues (Lee, Beales, Kinross, Burns, and Darzi 2013; Wilcox et al. 2007).

Many of these problems are the result of a huge measurement gap: only a very few providers today—physicians, clinics, and hospitals—have valid measures of the outcomes they achieve or the costs they incur to treat individual patients for specific medical conditions. The lack of valid outcome information is partly a consequence of the fragmented way in which health care is delivered, with each provider entity responsible for only a component of the patient's complete care experience. But health care is a more complex setting for measuring outcomes than are manufacturing and most other service industries, which may explain why providers default to input and process metrics rather than patients' outcome metrics.

The lack of valid cost measures in health care provider organizations might require accounting historians to explain. Hospitals have evolved an idiosyncratic system that assigns expenses to procedures and patients based on charges and allocation ratios known as Relative Value Units (RVUs) and not on the actual costs they incur to treat patients. Separately, physician's specialty societies determine, and periodically revise, RVUs for their procedures, which then get embedded into the list prices established through Medicare's Resource-Based Relative Value Scale (RBRVS) (Hsiao, Braun, Dunn, and Becker 1988a; Hsiao, Yntema, Braun, Dunn, and Spencer 1988b; Marciarille and DeLong 2011). Physician practices then measure the cost of their procedures by calculating a ratio of their practice costs to these list prices (ratio of costs-to-charges or RCC method). Health care administrators, seemingly unaware of the huge distortions and cross-subsidies embedded in their faulty cost systems, are in the situation described by former U.S. Defense Secretary Donald Rumsfeld as, “they know not what they do not know.”

To summarize, few health care providers in the U.S. and rest of world have valid measures, by medical condition, on patient outcomes and costs. If you believe that “you can't manage what you don't measure,” then the current ineffectiveness and inefficiency of health care systems should not be a surprise. The best providers, lacking adequate data, have few ways to signal their superior capabilities to attract higher volumes at prices greater than their costs. Conversely, ineffective and inefficient providers remain in the system, delivering inadequate care at high societal cost, and depriving effective and efficient providers from delivering higher value to a larger population of patients (Birkmeyer et al. 2002; Birkmeyer et al. 2003). A poor industry structure with a dearth of measurements is a rich environment for accounting scholarship to play an important role through research and education on better ways to measure costs and outcomes.

In the remainder of the paper, we describe the framework and preliminary results from an action research program conducted at multiple pilot sites in the U.S. and Europe. The program's goal is to explore how to remedy the severe measurement gaps in health care. We conclude by suggesting opportunities for accounting research in the sector.


The over-arching goal for any health care system should be to increase the value delivered to patients (Porter and Teisberg 2006; Porter and Lee 2013). At present, however, many goals are advocated for health care delivery including quality, access, safety, and cost reduction. While each of these is individually desirable, none is comprehensive enough to serve as a unifying framework for health care delivery. Porter's framework (Porter and Teisberg 2006) defines value by two parameters: patient outcomes and cost. Value increases when outcomes improve with no increase in costs, or costs are reduced while delivering the same or better outcomes. Currently, however, health care systems have diverse incentives among their various participants. A provider's performance is measured with input and process metrics, such as certification of personnel and facilities, efficiency, access, quality, safety, and compliance. While these metrics are useful for internal cost and operational control, they are not sufficient to motivate health care providers to deliver more value—better outcomes and lower costs—to end-use customers.

. . .


The introduction of cost and outcome measures into health care delivery has just started, so the opportunities for research are immense. Every reader of this article is within walking, cycling, or a short driving distance to a potential field site and source of data. Developing, introducing, and implementing new measurements in this industry will require answering numerous technical questions—both conceptual and empirical—that can be informed by careful research. Our initial projects have focused on clinical departments delivering care to patients. Additional opportunities are to investigate cost assignments for important ancillary care departments such as radiology, laboratory, pharmacy, and central sterilization, as well as administrative support departments such as billing, laundry, housekeeping, and dietary. Researchers can explore the costs associated with medical mistakes, no-shows, administrative paperwork, inadequate documentation, processes that protect against malpractice claims, and end-of-life care.

Beyond accounting and measurement issues, field studies of the leadership and change management issues from introducing new outcome and cost measurements would be fascinating. We know from past experience that introducing new measurement systems triggers individual and organizational resistance (Argyris and Kaplan 1994). Researchers should be able to study how health care leaders solve the behavioral issues arising from introducing change and modifying power relationships within health care providers. Behavioral researchers can also explore the informational processing issues when clinicians and administrators use multi-dimensional outcome and cost data to optimize medical processes.

We have described how outcome and cost measurement allows for a new reimbursement mechanism to be introduced. What are the incentive and informational issues associated with changing the basis for reimbursement from fee-for-service, capitation, and global budgeting to bundled payments? Accounting scholars can participate in bundled payment experiments to study the tensions and conflicts as various players in the health care system attempt to work together to increase the value they deliver to patients, rather than to optimize within their own specialty and discipline. The complexity of interactions calls out for analytic research to sort out the informational and incentive issues among the various players in the system including patients, multiple providers, suppliers, and payers. Accounting historians can shed light on how health care systems, around the world, adopted reimbursement systems that are not aligned to deliver the best value to the end use customer, the patient. They can also explore how such a huge industry developed with so little calculation and reporting of outcomes and costs.

The rationale for the Affordable Care Act in the U.S. is that costs will go down if more residents are insured and seek primary care rather than get treated, as charitable cases, when they show up in hospital emergency rooms. Is this true? How much additional resources do hospitals deploy to treat such patients and how many resources will no longer be needed when more patients are insured and seek care from primary care clinicians?

Accounting scholars can participate in field experiments to document the value changes, both costs and outcomes, from introducing a new pharmaceutical or medical device into the treatment protocol for a medical condition. They can participate in field studies that document how innovative provider organizations restructure themselves to deliver the right care, at the right place, with the right mix of clinical and administrative personnel, and with high capacity utilization, to improve the value they deliver. Expertise in auditing of “soft” measures can be productively applied to the measurement and verification of the outcome measures that will be developed for each medical condition, and upon which future reimbursement and reorganization of the treatments will be based.

In these ways, accounting scholars and educators can help to influence the future of one of the largest and most important sectors of society. The challenges are huge, but we already possess the tools that can be deployed to address the issues.

Bob Jensen's threads on cost and managerial accounting ---

"Which Scientists Will Get Academic Jobs?" Inside Higher Ed, June 5, 2014 --- 

An article in the journal Current Biology argues that it isn't a mystery which science Ph.D.s will land academic jobs. The paper argues that academic positions are determined by just a few factors: the number of publications, the "impact factor" of the journals in which those papers are published, and the number of papers that receive more citations than would be expected for the journals in which the work appears.

Read more:
Inside Higher Ed

"Business Wisdom from the Commencement Speakers of 2014," by Walter Frick, Harvard Business Review Blog, June 12, 2014 --- Click Here

Jensen Comment
I can't say I agree with all this well-intended advice. For example, even though life is full of serendipity, I think we should spend a great deal of time making plans that will have to be revised later on.

And like Milton Friedman, I think the purpose of business is to make a profit while obeying the law and codes of ethics. Business is not government and should not be making social choices best left to government. Of course businesses must respect the changing times in terms of human rights because in the long-term not doing so may bring down profits or even lead to business failure.

Some added quotations that I like that were not from the Commencement Speakers of 2014
We must be willing to get rid of the life we've planned, so as to have the life that is waiting for us.

Joseph Campbell

If everyone is thinking alike, then somebody isn't thinking.
George S. Patton

It's better to walk alone than in a crowd going in the wrong direction.
Diane Grant

"Frequentist vs. Bayesian Analysis," by David Giles, Econometrics Beat, June 6, 2014 ---

"Statisticians should readily use both Bayesian and frequentist ideas."

So begins a 2004 paper by Bayari and Berger, "The Interplay of Bayesian and Frequentist Analysis", Statistical Science, 19(1), 58-80.

Let's re-phrase that opening sentence: "Econometricians should readily use both Bayesian and frequentist ideas."

Before turning to economics, my undergraduate training was in statistics and pure mathematics. My statistical training (in the 1960's) came from professors who were staunchly Bayesian - at a time when it was definitely "them and us". With few exceptions, the attitude was that "if you're not with us, then you're against us". And this was true on both sides of the Frequentist-Bayesian divide.

Hardly a healthy situation - but we've seen similar philosophical divisions throughout the history of economics, and in pretty much every other discipline at some point.

After a very orthodox training in econometrics (based largely on the texts of Johnston, and Malinvaud) I ended up doing my Ph.D. dissertation on some problems in Bayesian econometrics - supervised by a wonderful man who probably didn't have a Bayesian bone in his body. My first J. Econometrics paper looked at some of the sampling properties of certain Bayes estimators. How non-Bayesian can you get?

So, I've always told students that they need to be flexible in their econometric thinking, and they need to be prepared to use both frequentist and Bayesian tools. Time has proved me right, I believe. Modern econometric practice takes advantage of a healthy mix of ideas and techniques drawn from both tool boxes.

Yes, this has been made possible by the considerable advances that we have seen in computing methods and power in recent decades. But it's also reflected something of a shift in the mind-set of statisticians and econometricians alike.

Here's the concluding section of the Bayari and Berger paper, in its entirety (pp.77-78):
"It seems quite clear that both Bayesian and frequentist philosophy are here to stay, and that we should not expect either to disappear in the future. This is not to say that all Bayesian or all frequentist methodology is fine and will survive. To the contrary, there are many areas of frequentist methodology that should be replaced by (existing) Bayesian methodology that provides superior answers, and the verdict is still out on those Bayesian methodologies that have been exposed as having potentially serious frequentist problems. 
Philosophical unification of the Bayesian and frequentist positions is not likely, nor desirable, since each illuminates a different aspect of statistical inference. We can hope, however, that we will eventually have a general methodological unification, with both Bayesian and frequentists agreeing on a body of standard statistical procedures for general use"
I hope that student followers of this blog will take the time to read the Bayari and Berger paper, and to learn more about Bayesian methods.

Statistical Science Reading List for June 2014 Compiled by David Giles in Canada ---

Put away that novel! Here's some really fun June reading:

My favorite critique of statistical inference:
The Cult of Statistical Significance: How Standard Error Costs Us Jobs, Justice, and Lives ---

"Challenges to advising clients in late-life marriages:  Late-life marriages are complicated for a variety of reasons. Here’s what planners need to know," by Patricia M. Annin, AICPA (CPA Insider), June 3, 2014 --- .

Who would have guessed that insider trading is commonplace?

"Study Asserts Startling Numbers of Insider Trading Rogues," by Andrew Ross Sorkin, The New York Times, June  16, 2014 ---

There is often a tip.

Before many big mergers and acquisitions, word leaks out to select investors who seek to covertly trade on the information. Stocks and options move in unusual ways that aren’t immediately clear. Then news of the deals crosses the ticker, surprising everyone except for those already in the know. Sometimes the investor is found out and is prosecuted, sometimes not.

That’s what everyone suspects, though until now the evidence has been largely anecdotal.

Now, a groundbreaking new study  finally puts what we’ve instinctively thought into hard numbers — and the truth is worse than we imagined.

A quarter of all public company deals may involve some kind of insider trading, according to the study by two professors at the Stern School of Business at New York University and one professor from McGill University. The study, perhaps the most detailed and exhaustive of its kind, examined hundreds of transactions from 1996 through the end of 2012.

The professors examined stock option movements — when an investor buys an option to acquire a stock in the future at a set price — as a way of determining whether unusual activity took place in the 30 days before a deal’s announcement.

The results are persuasive and disturbing, suggesting that law enforcement is woefully behind — or perhaps is so overwhelmed that it simply looks for the most egregious examples of insider trading, or for prominent targets who can attract headlines.

The professors are so confident in their findings of pervasive insider trading that they determined statistically that the odds of the trading “arising out of chance” were “about three in a trillion.” (It’s easier, in other words, to hit the lottery.)

But, the professors conclude, the Securities and Exchange Commission litigated only “about 4.7 percent of the 1,859 M.&A. deals included in our sample.”

The S.E.C. and the Justice Department have publicly made prosecuting insider trading a priority. Judging from the headlines about traders at Steven A. Cohen’s hedge fund or the hedge fund manager Raj Rajaratnam or the investigation involving the activist investor Carl C. Icahn, they do appear to be focused on it. The S.E.C. recently hired Palantir Technologies, a firm that has helped the government analyze data to find terrorists, to help it uncover illegal trading activity. And with the mini-merger boom — the first quarter of merger activity this year was the most active since 2007, according to Mergermarket — there should be fresh evidence of more insider trading.

Yet if history is any guide, based on the results of the study over 16 years, the government has a lot of catching up to do.

The professors found that “it takes the S.E.C., on average, 756 days to publicly announce its first litigation action in a given case. Thus, assuming that the litigation releases coincide approximately with the actual initiations of investigations, it takes the S.E.C. a bit more than two years, on average, to prosecute a rogue trade.” The average “rogue trade” the professors found, was worth about $1.6 million.

A spokeswoman for the S.E.C. had no immediate comment.

The professors — Menachem Brenner and Marti G. Subrahmanyam at N.Y.U. and Patrick Augustin at McGill — began their study, which won the Investor Responsibility Research Center Institute’s annual investor research competition, two years ago.

Continued in article


More accounting standards divergence instead of convergence

From the CPA Newsletter on June 24, 2014

IASB to create group to focus on rules for impairment of financial instruments
After failing to reach an agreement with the Financial Accounting Standards Board, the International Accounting Standards Board plans to form a working group that will address rules for impairment of financial instruments under International Financial Reporting Standards. The IASB is expected to release its financial instruments standard, IFRS 9, in July. Accounting Today (6/23)


From the CPA Newsletter on June 16, 2014

AICPA Center for Plain English Accounting provides guidance on complex technical inquiries
When AICPA Private Companies Practice Section member firms need detailed explanations or guidance on complex A&A technical concerns, the Center for Plain English Accounting is available to assist. PCPS members who sign up for CPEA receive monthly reports and regular alerts on timely topics, can participate in CPE-eligible webcasts throughout the year, have the ability to submit written questions on complex issues and receive written technical responses and more. Learn more by visiting the CPEA website.

From the CPA Newsletter on June 16, 2014

Senators ask Pentagon to stop using "plugs" to balance books
A bipartisan group of senators, which includes Sens. Charles Grassley, R-Iowa; Tom Coburn, R-Okla.; Thomas Carper, D-Del.; and Ron Johnson, R-Wis., have sent a letter to Defense Department Comptroller Robert Hale asking the Pentagon to cease using "plugging" accounting practice, referring to the use of false numbers in the Pentagon's accounting ledgers and financial reports to make the books balance. Use of these plugs or "reconciling amounts" totaled $9.6 billion last year, an 80% increase since 2008, the senators said.
Reuters (6/13)

Is it impossible to audit, as the GAO used to insist, the fraud-infested finances of the Pentagon?

"Pentagon Backtracks on Goals for First Audit, GAO Says,"  by Tony Capaccio, Bloomberg, May 13, 2014 ---

The Pentagon has backtracked from a pledge to have all budgetary accounts ready by Sept. 30 for the initial step toward its first-ever full financial audit.

Then-Defense Secretary Leon Panetta pledged an “all-hands effort” in 2011 to prepare for evaluation a “Statement of Budgetary Resources” -- covering funds received, unspent, obligated or put under contract over several years -- by the end of this fiscal year so that an audit could begin in 2015.

Instead the Defense Department has decided to “narrow the scope” of the initial budgetary data to a one-year snapshot of spending and accounts covering about 77 percent of those funds, according to a report by the U.S. Government Accountability Office scheduled for release today.

The delay may further undercut public confidence in the department’s ability to manage billions of dollars effectively even as the military seeks permanent relief from the automatic budget cuts known as sequestration. The current efforts are focused on having the initial set of budget books ready to start an audit in fiscal 2015 and the rest by 2017.

“The Pentagon’s accounting system is a broken mess,” a new advocacy group, Audit The Pentagon, said in a posting on Facebook. “The Defense Department is the only major federal agency that cannot pass an audit -- and DoD has no serious target date to do so.”

The GAO, the watchdog agency for Congress, has criticized the department for its inability to properly account for an inventory that makes up 33 percent of the federal government and includes $1.3 trillion in property, plants and equipment. The Pentagon’s budget accounts for almost half of the discretionary spending that Congress approves annually. Hagel’s Pledge

The new GAO report praised the Pentagon for committing “significant resources to improving funds controls for achieving sound financial management operations and audit readiness” and increasing the training of its workforce. Defense Secretary Chuck Hagel said on assuming office in 2013 that he was committed to Panetta’s initiative.

The narrowed scope of the initial data excludes all unspent funds previously appropriated by Congress “as well as information on the status and use of such funding in subsequent years,” the GAO said in its report for Senator Tom Carper, a Delaware Democrat who’s chairman of the Senate Homeland Security and Governmental Affairs committee. Carper’s Criticism

“Federal agencies have been required to produce auditable financial statements since the mid-1990s,” Carper said in an opening statement prepared for a committee hearing today. “Unfortunately, nearly two decades later, the Department of Defense -- which spends more than $2 billion every day -- has yet to meet this obligation. In fact, its books are so bad that auditors cannot even attempt to perform a complete audit.”

Navy Commander William Urban, a spokesman for the Defense Department comptroller, said in an e-mail that the Pentagon “is not backing off the goal for a full audit of the Statement of Budgetary Resources.”

“About a year ago, we did modify our audit plan in order to pursue a cost-effective strategy as required by law,” Urban said. “Congress was informed of the change shortly after it was put in place.”

Jensen Comment
The GAO also claimed that it would be impossible to audit the IRS. I don't think there's anybody to date that argues that it's possible to audit the IRS.

The Sad State of Governmental Accounting and Accountability ---

From EY on June 13, 2014

Dear CFOdirect member:

On June 10, 2014 the Public Company Accounting Oversight Board ("PCAOB" or "the Board") adopted Auditing Standard No. 18, Related Parties ("the standard") and related amendments to other auditing standards ("the amendments"). The standard and amendments are intended to strengthen auditor performance requirements regarding related parties, significant unusual transactions, and financial relationships and transactions with executive officers. The PCAOB adopted the standard and amendments substantially as they were re-proposed in May 2013.
The Board believes that the standard and amendments, which are aligned with the risk assessment standards, represent a cohesive audit approach that will contribute to audit effectiveness and provide opportunities for an efficient implementation.

The standard and amendments will be effective, subject to SEC approval, for audits of financial statements for fiscal years beginning on or after December 15, 2014, including reviews of interim financial information within these fiscal years.

Read our
In brief article for an overview of the PCAOB standard and amendments.


CFOdirect Network team

This incident at Yale University is why auditors should focus heavily on audit detail testing in purchasing departments. Purchasing departments are faced with the greatest moral hazards for kickbacks. Rumor has it that the detail auditing at Andersen got so bad that Andersen auditors were not even visiting the Purchasing Department at Worldcom whose CEO is still in prison --- and Andersen is history.

The PCAOB years later is constantly writing up audit firms of all sizes for failure to do enough detail testing. The largest multinational auditing firms appear to be ignoring their PCAOB inspection reports --- probably because the costs of detail testing in auditing is so huge relative to the miniscule fines that the PCAOB can impose.

"Yale Employee Is Accused of Taking Tens of Thousands in Kickbacks," Chronicle of Higher Education, June 17, 2014 ---

Bob Jensen's Fraud Updates ---

Should Hertz auditor PwC have caught this huge error?

"Hertz's Accounting Woes Wider Than Thought:   Car-Rental Company Needs to Restate 2011, Review Its Results Since Then," by Michael Colia, The Wall Street Journal, June 9, 2014 ---

Hertz Global Holdings Inc. HTZ -0.14% said it must restate results for 2011 and would correct and possibly restate 2012 and 2013 financial statements, according to a regulatory filing Friday that indicated more widespread accounting problems at the auto-rental company than had been thought.

Hertz, citing the results of an internal audit, said its results for 2011, most recently included in its annual report filed for 2013, "should no longer be relied upon," and that the company must restate them.

The disclosure follows the company's warning last month that it may have to restate 2011's results, as well as the detection of reporting errors in March and its naming of a new chief financial officer at the end of last year.

Shares of Hertz fell 9% Friday as the company also warned that its delayed first-quarter results would come in below estimates.

The company said it must correct its 2012 and 2013 financial statements to further reflect the errors in 2011. The results for those years may also be restated if further adjustments are determined to be material. The company added that it is reviewing if the issues have had any impact on results in 2014.

"It will take time to complete this process, and previously reported information is likely to change, although the actual size of any adjustments has yet to be determined and some adjustments may offset others," the company said in its filing with the U.S. Securities and Exchange Commission.

Hertz said management and the board's audit committee have determined that "at least one material weakness" was present in the company's internal financial-reporting controls, and that disclosure procedures and controls were ineffective at the conclusion of last year.

The company said it is continuing a review that began when it was preparing its first-quarter report.

The review "recently identified other errors related to allowances for uncollectable amounts with respect to renter obligations for damaged vehicles and restoration obligations at the end of facility leases," Hertz said.

Hertz said the chairman of its audit committee has discussed the matter with the company's external accountant, PricewaterhouseCoopers LLP, and that it "expects to receive an adverse opinion" from the firm on its internal controls over financial reporting as of Dec. 31.

A representative for PwC wasn't immediately available for comment.

In March, Hertz identified $46.3 million in reporting errors that dated back to 2011. At the time, PwC said, according to Hertz's filing, the car-rental company fairly presented its results and that the company "maintained, in all material respects, effective internal control over financial reporting."

PwC's expected shift in opinion on Hertz's internal controls shouldn't come as a surprise, given the restatement and revisions, said Charles K. Whitehead, a Cornell University professor who specializes in corporate and financial law.

"The real question is whether Hertz's managers and PwC reasonably should have been aware of the problems earlier, and how those problems were discovered," Mr. Whitehead said.

"Were they uncovered by Hertz and brought to PwC's attention, or did PwC's review—and potential change of opinion—prompt Hertz to get ahead of the problem?"

Hertz last month delayed the filing of its first-quarter financial results after identifying errors relating to conclusions about the capitalization and timing of depreciation for some non-fleet assets as well as allowances for doubtful accounts in Brazil, among other items.

At the time, the company expected to release results June 9 but said Friday that it doesn't expect to hold its planned conference call on that date. The company said it would file and report its first-quarter results when it files the amendment to its annual report.

Hertz earlier this year sought more time to file its results for 2013, saying it faced "significant issues" after implementing a system meant to improve financial disclosures.

The delayed report came as the company appointed a new chief financial officer, former Hilton Worldwide Inc. executive Thomas Kennedy, who was named to the post following the resignation of Elyse Douglas.

Hertz on Friday also warned that its attempt to resolve its accounting issues could delay the separation of its equipment-rental business, although the plans "remain on track."

In addition, the company said its results for the first quarter of this year are likely to come in below consensus analyst estimates, as they will reflect costs associated with the accounting review. Analysts polled by Thomson Reuters had recently projected per-share earnings of nine cents and revenue of $2.57 billion for the quarter.

Continued in article

"How Wheels Came Off of Hertz' Accounting," by Tammy Whitehouse, Compliance Week, June 24, 2014 --- Click Here

It's an experience almost anyone can appreciate: your car seems to perform so well for so long—then, suddenly, all the little things go at once. And you're stuck on the side of the road.

So seems to be the case with $10.7 billion Hertz, the auto rental company that warned on June 6 of a massive financial restatement yet to come. In a Form 8-K filing, Hertz warned that its current quarterly filing would be late and that its financial statements for 2011 should no longer be relied upon. Even worse, the 2012 and 2013 annual statements might be called into ...

Continued in article (subscription required)

"Shares Of Hertz Plunge On More Accounting Troubles," by Nathan Vardi, Forbes, June 6, 2014 ---

Hertz Global Holdings, a favorite stock in recent months of some closely-watched hedge funds, disclosed on Friday morning that its audit committee had concluded that problems with the company’s financial statements for the last three years must be corrected to reflect mistakes.

Shares of Hertz tumbled by 10.8% in early morning trading to $27.19. The stock had recently surged as investors of the car rental company anticipated its split into two companies by next year. Specifically, the company said its 2011 financial statements were no good and must be restated, and that its 2012 and 2013 financial statements need to be fixed.

Hertz’s stock has been popular with prominent hedge fund investors. As of the end of March, some of its biggest shareholders included billionaire Larry Robbins’ Glenview Capital Management, billionaire James Dinan’s York Capital Management, Jeffrey Tannenbaum’s Fir Tree and billionaire Dan Loeb’s Third Point. It is unclear to what extent those hedge funds still remain in the stock today.

“The audit committee has directed the company to conduct a thorough review of the financial records for fiscal years 2011, 2012 and 2013, and this review may require Hertz to make further adjustments to the 2012 and 2013 financial statements,” Hertz said in a Securities & Exchange Commission filing. “If these further adjustments to the 2012 and 2013 financial statements are determined to be material adjustments individually or in the aggregate, Hertz will need to also restate and withdraw reliance on those financial statements.”

Hertz had already delayed filings its first quarter financial statements last month after identifying errors related to its capitalization and timing of depreciation for non-fleet assets, allowances for doubtful accounts in Brazil and other items. It also found problems related to allowances for uncollectible amounts with respect to renter obligations for damaged cars. Previously this year, the company found $46.3 million in out-of-period accounting mistakes in the past three years.

Continued in article

Bob Jensen's threads on PwC are at

"VA Official Arrested For Allegedly Taking $40K In Illegal Gifts," by Colin Campbell, Business Insider, June 16, 2014 ---

Jensen Opinion
There's a zero percent chance he will be fired until he's convicted. After conviction he may be fired if he's sent to jail. But there's a 100% chance that taxpayers will have to keep on paying his Civil Service pension until he dies.

Bob Jensen's Fraud Updates ---

If one of your students asks about the phrase "carried interest," can  you explain the meaning of the phrase and its controversies?

"How Obama Can Increase Taxes on Carried Interest," by Victor Fleischer, The New York Times, June 12, 2014 ---

New IRS Commissioner John Koskinen promised to cooperate with Congress. But either he is being undermined by his staff, or he's aiding the agency's stonewalling. And now that we know that Justice was canoodling with Ms. Lerner, its own dilatory investigation becomes easier to understand. Or maybe that was a computer crash too.
"The IRS Loses Lerner's Emails And other news that the Beltway press corps won't cover," The Wall Street Journal, June 13, 2014 ---

The IRS—remember those jaunty folks?—announced Friday that it can't find two years of emails from Lois Lerner to the Departments of Justice or Treasury. And none to the White House or Democrats on Capitol Hill. An agency spokesman blames a computer crash.

Never underestimate government incompetence, but how convenient. The former IRS Director of Exempt Organizations was at the center of the IRS targeting of conservative groups and still won't testify before Congress. Now we'll never know whose orders she was following, or what directions she was giving. If the Reagan White House had ever offered up this excuse, John Dingell would have held the entire government in contempt.

The suspicion that this is willful obstruction of Congress is all the more warranted because this week we also learned that the IRS, days before the 2010 election, shipped a 1.1 million page database about tax-exempt groups to the FBI. Why? New emails turned up by Darrell Issa's House Oversight Committee show Department of Justice officials worked with Ms. Lerner to investigate groups critical of President Obama.

How out of bounds was this data dump? Consider the usual procedure. The IRS is charged with granting tax-exempt status to social-welfare organizations that spend less than 50% of their resources on politics. If the IRS believes a group has violated those rules, it can assign an agent to investigate and revoke its tax-exempt status. This routinely happens and isn't a criminal offense.

Ms. Lerner, by contrast, shipped a database of 12,000 nonprofit tax returns to the FBI, the investigating agency for Justice's Criminal Division. The IRS, in other words, was inviting Justice to engage in a fishing expedition, and inviting people not even licensed to fish in that pond. The Criminal Division (rather than the Tax Division) investigates and prosecutes under the Internal Revenue Code only when the crimes involve IRS personnel.

The Criminal Division knows this, which explains why the emails show that Ms. Lerner was meeting to discuss the possibility of using different statutes, specifically campaign-finance laws, to prosecute nonprofits. A separate email from September 2010 shows Jack Smith, the head of Justice's Public Integrity Unit (part of the Criminal Division) musing over whether Justice might instead "ever charge a 371" against nonprofits. A "371" refers to a section of the U.S. Code that allows prosecutors to broadly claim a conspiracy to defraud the U.S. You know, conspiracies like exercising the right to free political speech.

The IRS has admitted that this database included confidential taxpayer information—including donor details—for at least 33 nonprofits. The IRS claims this was inadvertent, and Justice says neither it nor the FBI used any information for any "investigative purpose." This blasé attitude is astonishing given the law on confidential taxpayer information was created to prevent federal agencies from misusing the information. News of this release alone ought to cause IRS heads to roll.

The latest revelations are a further refutation of Ms. Lerner's claim that the IRS targeting trickled up from underlings in the Cincinnati office. And they strongly add to the evidence that the IRS and Justice were motivated to target by the frequent calls for action by the Obama Administration and Congressional Democrats.

One email from September 21, 2010 shows Sarah Hall Ingram, a senior IRS official, thanking the IRS media team for their work with a New York Times NYT -2.44% reporter on an article about nonprofits in elections. "I do think it came out pretty well," she writes, in an email that was also sent to Ms. Lerner. "The 'secret donor' theme will continue—see Obama salvo and today's [radio interview with House Democratic Rep. Chris Van Hollen ]."

Several nonprofit groups have recently filed complaints with the Senate Ethics Committee against nine Democratic Senators for improperly interfering with the IRS. It's one thing for Senators to ask an agency about the status of a rule or investigation. But it is extraordinary for Illinois's Dick Durbin to demand that tax authorities punish specific conservative organizations, or for Michigan's Carl Levin to order the IRS to hand over confidential nonprofit tax information.

And it's no surprise to learn that Justice's renewed interest in investigating nonprofits in early 2013 immediately followed a hearing by Rhode Island Sen. Sheldon Whitehouse in which he dragged in officials from Justice and the IRS and demanded action. ***

It somehow took a year for the IRS to locate these Lerner exchanges with Justice, though they were clearly subject to Mr. Issa's original subpoenas. The Oversight Committee had to subpoena Justice to obtain them, and it only knew to do that after it was tipped to the correspondence by discoveries from the watchdog group Judicial Watch. Justice continues to drag its feet in offering up witnesses and documents. And now we have the two years of emails that have simply vanished into the government ether.

New IRS Commissioner John Koskinen promised to cooperate with Congress. But either he is being undermined by his staff, or he's aiding the agency's stonewalling. And now that we know that Justice was canoodling with Ms. Lerner, its own dilatory investigation becomes easier to understand. Or maybe that was a computer crash too.


Continued in article

"The IRS Scandal --- Day 401," by Paul Caron, TaxProf Blog, June 14, 2014 ---

Jensen Comment
Lois Lerner could straighten out all this confusion if she would only testify under oath that she was not politically pressured by the legislative and executive branches to target conservative groups and donors more than liberal groups and donors.

"Weekly Tax Roundup," Permalink via Paul Caron, TaxProf Blog, June 14, 2014


June 13, 2014 in Tax, Weekly Tax Roundup | Permalink | Comments (0)

"High-Frequency Trading Needs One Quick Fix:  Change Reg NMS Rule 611 to read 'best execution' instead of 'best price," by Andy Kessler, The Wall Street Journal, June 18, 2014 ---

In the "state your conclusion upfront department," the Senate Permanent Subcommittee on Investigations has scheduled a hearing for June 17 titled "Conflicts of Interest, Investor Loss of Confidence, and High Speed Trading in U.S. Stock Markets." They join the Securities and Exchange Commission, the FBI, the Justice Department, the Commodity Futures Trading Commission and, inevitably, Eric Schneiderman in uncovering what the New York attorney general calls "this new breed of predatory behavior."

Too bad none of the investigations will figure out that changing one word in a federal regulation can fix all this. Because none of them understands the old Wall Street adage: "On Wall Street, everybody gets paid."

Follow the money: In an initial public offering, the investment bankers get 7% underwriting fees, and the funds buying the newly issued shares get a 10%-15% first day trading pop. Mutual funds holding the stock charge 1%-2% annual fees, and hedge funds keep 20% of their upside. Stockbrokers sometimes collect commissions, though that's tougher in the days of $8.95 trades from discount brokers. And yes, stock traders need to get paid too.

Being a New York Stock Exchange specialist—each stock had one—was a lucrative business because there is information in every trade. Like Nasdaq market makers, they didn't charge commissions but instead would keep the spread, or the difference between the bid and the ask price, measured in quarters (25 cents) and eighths (12.5 cents). And specialists were notorious for front running customers. Simply put, if they didn't like the spread on a buy order, they would buy shares themselves and then raise the price of the shares they had to offer, knowing there was a buyer in the market. At a cocktail party many years ago, I asked a specialist about this and he told me, "You big investment banking guys shouldn't worry about it, we need to get paid too."

Adding insult to injury, spreads shrank to almost nothing after decimalization started on April 9, 2001. Even spreads of 1/16th or 6.025 cents were too large and we quickly moved to a penny. Trust me, it's hard to get paid trading for a penny spread.

Electronic trading was considered more efficient and even more honest. So in 2005 the SEC's Regulation National Market System or Reg NMS began encouraging it. At the same time, Wall Street firms stopped putting up their own capital or liquidity to facilitate trades because they couldn't get paid enough to bother. Over time they created their own electronic trading venues known as dark pools, to try to match customer buy and sell orders, but with little success until they let high-frequency trading into the pool.

Typical of most regulations, Reg NMS has had many unintended consequences. The main culprit has been NMS Rule 611, known as the Order Protection Rule. Due to expensive lobbying by existing exchanges, the rule requires trades to take place at the "best price." Sounds fair, but these two words sparked, as exposed in Michael Lewis's "Flash Boys," a massive spend on servers and fiber lines by high-frequency trading firms.

This is hard to explain in a sentence, but let me try. High-frequency trading firms would post the "best price" for every stock and then when hit with a trade, knowing there was a buyer in the market, take advantage of the fragmentation of exchanges and dark pools and latency (high-frequency traders can get to an exchange faster than you) to buy up shares from other HFTs or from Wall Street dark pools, and then nudge the price up and sell those shares. In other words, front run the customer, just like the old NYSE. My guess is they make about half a percent a trade, or about the same as in the old days of a 1/8th of a dollar spread on a $25 stock.

In other words, in an era with no spreads or commissions for trading stocks, high-frequency trading is just a complex system to move the price of a stock in order to get paid. As dark pools discovered, no pay, no trade.

This can't and won't stand. It's sleazy and maybe even illegal, akin to nanosecond-scale insider trading. We can fix this with the stroke of a pen by changing NMS Rule 611 to read "best execution" instead of "best price."

If you are trying to buy 100,000 shares, an offer to buy 100 shares at $20 looks good, but it isn't if the price gets bumped by high-frequency traders to $20.10. Much better is an offer of 100,000 shares at $20.05. This offer is not the "best price" but certainly the "best execution."

Another action plan is to move to nickelization, with five cent spreads for blocks of 10,000 shares or more. Along with best execution, this would instantly see a return of Wall Street firms putting up capital to facilitate customer trades, because . . . they can get paid doing it.

Should we even care? I always felt that trading is just plumbing. Real value is added elsewhere on Wall Street. The risk is not that the markets are unfair, but that markets don't function and things start to back up.

Remember, it was as early as 2006 when the marks, or mark-to-market pricing, of Collateral Debt Obligations were wrong because they didn't trade much and we saw almost two more years of creating new mortgage derivatives that never would have existed if they were trading at correct lower prices. The financial crisis was mainly driven by the drop in value of mortgages from these last two years. Markets are always about access to capital—feed the stars and starve the dogs. It is well-functioning markets, more than management or government, that yell stop and eventually whack the stock price of bad ideas like eToys, Enron and mortgage generation.

Continued in article

From the CFO Journal's Morning Ledger on June 6, 2014

SEC targets dark pools, high-speed trading
SEC Chairwoman Mary Jo White unveiled a sweeping set of initiatives to address mounting concerns about the impact of computer-driven trading on the stock market, the
WSJ’s Scott Patterson reports. Among the most significant proposals, Ms. White said high-frequency traders should register with regulators as broker dealers, which would pull them further under government scrutiny.

Jensen Comment on High Frequency Trading
There are two types of "middlemen" that take some of investors money when they buy and sell securities on the 11 or more securities exchanges in the USA (that are no longer confined to Wall Street trading). Type 1 is one that earns a contractual fee that is disclosed to investors who should be aware of what they are paying to buy and sell securities. Type 2 are the hidden "skimmers" who make profits that are not disclosed to investors. That does not make them necessarily bad, but creates a moral hazard for them to secretly take advantage of investors--- such as observing unfilled orders and racing to beat investors on sell or buy orders so as to make them pay more or get less than would otherwise be the case without high-frequency speed traders. On the other hand these HFT traders also help create markets that can sometimes benefit investors even with the high speed "skimming."

Michael Lewis: 'Wall Street Has Gone Insane' ---

"Everything You Need to Know About High-Frequency Trading:  Why the algobots that rule Wall Street are good—and why they're evil, too," by Matthew O'Brien, The Atlantic, April 11, 2014 ---

The stock market isn't rigged, but it is taxed.

It always has been. As Justin Fox  points out, for as long as people have been trading stocks, there have been middlemen taking a cut of the action. Now, that cut has gotten smaller as markets have gotten bigger and more technologically-advanced, but it's still there. It's the implicit fee that intermediaries charge for making sure there's a buyer for every seller, and a seller for every buyer—for "making markets."

But there's a new kind of middleman today. They don't work at stock exchanges or banks. They work at hedge funds, and trade at whiz-bang speeds. These "high-frequency traders" (HFT) use computer algorithms—a.k.a., algobots—to arbitrage away the most infinitesimal price discrepancies that only exist over the most infinitesimal time horizons. You can see just how small and how fast we're talking about in the chart below from a new paper by Eric Budish and John Shim of the University of Chicago and Peter Cramton of the University of Maryland. It uses 2011 data to show the price difference between futures (blue) and exchange-traded funds (green) that both track the S&P 500. These should be perfectly correlated, and they are—at minute intervals. But this correlation disappears at 250 millisecond intervals, a little more than half the time it takes to blink your eyes. This is the "inefficiency" that HFT makes less so.

This rise of the robots certainly seems to have helped ordinary investors. Bid-ask spreads—the difference between what buyers want to pay and sellers want to be paid—have fallen dramatically the past 20 years. Part of this is because, since 2001, stock prices have gone from trading in fractions to pennies—which has allowed them to be increasingly precise. Another part is that electronic trading, though not super-fast, has made markets more liquid. And the last part is that HFT has added even more liquidity, eliminating bid-ask spreads that would have been too small to do so before. Indeed, researchers found that Canadian bid-ask spreads increased by 9 percent in 2012 after the government introduced fees that effectively limited HFT.

That doesn't mean, though, that HFT is unambiguously good. It's not. In fact, it might not even be ambiguously good. As Noah Smith points out, we just don't know enough to do any kind of cost-benefit analysis. Now, we do know that smaller bid-ask spreads, which cut the cost of trading, are one benefit. But how much of one is it? Bid-ask spreads are down to around 3 basis points today—from 90 basis points 20 years ago—so even if curbing HFT increases them, say, 9 percent like it did in Canada, we're not talking about a big effect. There might be diminishing returns to liquidity that we've already hit, and then some.

Then there are the costs. Michael Lewis' new book, Flash Boys, describes some of them. In it, there's Lewis' requisite group of plucky outsiders—is there another kind?—taking on a rotten status quo. Except this time, they're not really outsiders; they're big bank traders. And they've figured out that the market doesn't work like it should for big investors, like pension and mutual funds, because of the algobots. But it's a little bit more complicated than that. Here are the three biggest, though hard to quantify, costs of HFT.

1. Market-taking, not market-making. Lewis' protagonist, a trader named Brad Katsuyama, had a problem. Every time he tried to buy stock for a client, he could only get a little bit of what was supposed to be there at the price he saw. Now, oddly enough, he could get all the stock he saw at one particular exchange, but he had to pay more at all the others. What was going on?

Well, he was being front-run. HFT firms pay public and private exchanges to see their incoming orders. That's why Katsuyama was getting all of his order filled at the exchange closest to him—that is, as the fiber optic cable lies—but nowhere else. The HFTers were seeing his order at the first exchange and then racing to buy all the rest of the stock he wanted everywhere else, so they could sell it to him for more. This happens all the time: Nicholas Hirschey of the London Business School found that HFT funds only tend to buy aggressively right before everybody else does.

It's not too different from what HFTers do when they buy early access to public data. Again, they're paying for a trading advantage that isn't really adding liquidity. It's what Barnard professor Rajiv Sethi calls "superfluous financial intermediation." HFT firms aren't connecting buyers and sellers who might not find each other. They're jumping in between buyers and sellers who would have found each other anyways in a few milliseconds. It's not making markets more efficient. It's cheating.

2. Nobody wants to lose to a robot. "When the market as displayed on his screens became illusory," Lewis writes, "[Katsuyama] became less willing to take risk in that market—to provide liquidity." It's what economists call "adverse selection," and it's a simple idea: HFTers crowd out other traders, because nobody wants to play against someone they know they'll lose to.

That includes HFT funds themselves. As Felix Salmon points out, HFT's share of all trading has fallen from 61 percent in 2009 to 51 percent in 2012. Why? Well, the algobots are fighting against each other now, and those fights don't end in trades. They end in fakes quotes—or "spoofing"—that the algobots send to try to draw each other out. Indeed, Johannes Breckenfelder of the Institute for Financial Research found that HFTs change their strategies when they're competing against each other like this. They don't make markets as much, and make directional bets on stocks instead—because those are the kind of things they can actually beat each other on. The result is actually less liquidity and more volatility, at least within each trading day. (HFTs don't hold stock overnight, so interday volatility isn't affected).

3. A waste of money and talent. Lots of HFT is personally profitable, but socially pointless—and that pointlessness adds up. Take Spread Networks. Lewis describes in colorful detail how it laid fiber optic cable in as straight a line as possible between Chicago and New York all to shave three milliseconds off the time it took to trade between the two. That meant spending $300 million to drill through the Alleghenies, and try to avoid laying fiber on both sides of the road, because each time they did, their CEO explained, it "cost them one hundred nanoseconds."

Now, Felix Salmon is right that there are some positive spillovers from all this IT infrastructure spending. But this takes us back to the question of diminishing returns. Is it really worth spending so much money on what, to anyone other than HFT, are unnoticeable improvements—especially compared to what it could have been spent on? Probably not.

The problem, though, is that HFT has to spend this money. It's an arms race, and there's no silver medal for finishing second. That's because every HFT strategy depends on not only being faster than ordinary investors, but being faster than each other too. Anytime somebody comes up with a new way to cut a few microseconds—that is, a millionth of a second—off of trading time, they have to spend whatever it takes to do it. Otherwise, they'll lose out to their competitors who do.

Continued in article

An article on HFT from the Knowledge@Wharton blog on April 15, 2015 ---
This is pretty much a defense of HFT. It focuses mostly on theory and avoids potentially fraudulent implementations that are now the focus of investigations of the SEC and the Department of Justice.

Charles Schwab Seems to Agree With Michael Lewis
SCHWAB: High-Frequency Trading Is A Growing Cancer That Must Be Addressed ---

Brokerages Make Millions Selling Orders To High Frequency Trading Firms ---

The Flash Boys book ---  
The Kindle Edition is only $9.18

From the CFO Journal's Morning Ledger on June 26, 2014

Securitization Accounting: Sorting Out Recent Rule Changes

The ninth edition of Deloitte's Securitization Accounting report tackles practical issues related to U.S. and international rule changes affecting such areas as consolidation of special purpose entities, how to determine a gain or loss on a sale, fair value measurement and reporting and other topics. It also discusses several key questions pertaining to mortgage servicing rights, transparency and how securitization impacts banks' regulatory capital.

Read More at CFO Journal »

Repo Accounting Rules Changes Again and Again and Again Since the Lehman Bros Deception (EY settled for $99 million)

From the CPA Newsletter on June 13, 2014

FASB revises standard for accounting of repurchase agreements
The Financial Accounting Standards Board on Thursday issued a revised standard that addresses investors' concerns with the financial reporting of repurchase agreements and brings U.S. GAAP accounting for such transactions into closer alignment with International Financial Reporting Standards. Journal of Accountancy online (6/12)

From the CPA Newsletter on June 13, 2014

6 developments for not-for-profit CPAs to watch
Not-for-profits face new challenges with the development of new accounting standards and emerging demands for transparency in an increasingly complex world. CPAs who work with not-for-profits won't want to ignore these developments. Journal of Accountancy online (6/12)

From the CPA Newsletter on June 10, 2014

A closer look at the CGMA exam
Those who wish to pursue the Chartered Global Management Accountant designation will have to take an exam starting 2015. This article provides answers to frequently asked questions about the exam. Journal of Accountancy print issue (6/2014)

Bob Jensen's threads on certification examinations ---

"Oregon's $1.1 billion in missing taxes: Can the state collect?" by By Katherine Driessen, Oregon Live, June 3, 2014 ---

Oregon legislators last week heard a report on efforts to collect some of the state's missing tax revenue – an estimated $1.1 billion in personal income taxes through 2010, according to the latest count.

It's called the "tax gap," the amount of taxes owed versus what's actually received. Department of Revenue senior economist Jon Hart told legislators that number is difficult both to calculate and collect.

Oregon is among a slew of states trying to shore up collections as budgets tighten.

Five years ago, the Legislature first required the department to provide a more accurate estimate of the tax gap. In 2013, the state again asked the Department of Revenue to do an estimate, which is based on Internal Revenue Service data.

That reporting has been coupled with internal efforts to boost tax compliance. Last year, the Legislature approved $3.8 million for the department to hire 31 more employees, divided among audit, fraud and collections efforts as part of a pilot program. Those hires are complete, according to spokesman Bob Estabrook, and expected to generate $33 million in returns. 

Continued in article

Summary information about the millions of students who take (but often do not complete) free non-credit MOOCs from prestigious universities
Surprise (maybe):  Only a third of the students are from North America

"8 Things You Should Know About MOOCs," by Jonah Newman and Soo Oh, Chronicle of Higher Education, June 13, 2014 ---

1. The overwhelming majority of MOOC students are male

2. MOOCs attract students who already have college degrees

3. The median age of MOOC participants is 24

4. One-third of MOOC participants are from North America

5. Nearly half of registrants never engage with any of the content

6. Europeans view the most course content

7. Students with a doctorate viewed more course material

8. Serial students are the most engaged

What we still don't know

Granted, these data are still a relatively small sample from a limited number of MOOCs. As the number and variety of MOOCs has grown exponentially since these initial courses were offered in 2012-13 — EdX alone has offered more than 200 courses from more than 30 partner institutions — there are certainly more data that can shed light on other interesting questions. What are the motivations and goals of registrants? What kinds of content engage students the most? Do students cherry-pick lessons throughout the course, or tend to drop out as the class progresses?

These are the questions future MOOC data releases can help us answer, so we can learn even more about how such courses are being used and by whom.

Jensen Comment
Because of the advanced and specialized content of most MOOCs, it's not surprising that MOOCs attract experts who already have doctorates. Many of them are most likely professors who are looking for content from prestigious universities that that they can add to their own teaching and research.

A median age of 24 does not tell us anything about the distribution of the students except that the middle age is 24. Half are older and half are younger.

Without assessment we cannot know how much of this content is really learned. Many students may sign up for ideas about ideas about what to study later on in life --- a little like my wife who has more planned projects than years left in her life.

Different MOOCs serve different purposes. For example, most MOOCs are probably taken by specialists who want to see how prestigious professors in their specialties deal with those specialties. For example, how does an Harvard expert on Dylan Thomas or James Joyce deal with the writings of Thomas or Joyce? Many MOOC students who sign up for the free MBA core courses from Penn's prestigious and expensive Wharton School do so to prepare for their own MBA core courses to be taken elsewhere.

Of course most people probably still sign up for MOOCs because they are curious about course content in prestigious universities. Most MOOC courses are filmed during live courses on prestigious university campuses.

Sometimes on-campus students are allowed to take the MOOCs rather than attend class, as in the case of the first MOOC course that originated in an artificial intelligence course at Stanford University. Students did not have to attend class, but they did have to do all the course assignments and take the course examinations. What they found is that more than have the students preferred to view the MOOCs rather than attend class. One reason might be the ability to pause and rerun portions of video lectures until every segment is better learned.

Students in interactive case courses will, of course, be required to attend live courses on campus, because what is learned in class is largely derived from what students contribute to discussions in class. Two sections of a Harvard Business School case course may differ like night versus day. MOOC courses tend to be more lecture-based than case-based. Students who sign up are usually more interested to learn what a professor knows rather than what the students in class know. Some of the best case-method teachers never reveal what they know about course content --- at least not directly.

Bob Jensen's threads about MOOC choices and how to sign up for them ---

"Ex-Goldman director Gupta loses bid to stay out of prison," by Jonathan Stempel, Reuters, June 12, 2014 ---

Former Goldman Sachs Group Inc director Rajat Gupta has failed to persuade the U.S. Supreme Court to delay the June 17 start of his two-year prison term while he pursues an appeal of his insider trading conviction.

Gupta, also a former global managing director of the consulting firm McKinsey & Co, had asked the country's highest court for permission to stay free during his appeal, after the 2nd U.S. Circuit Court of Appeals in Manhattan on May 30 denied him the same request.

Justice Ruth Bader Ginsburg, who handles emergency applications from the 2nd Circuit, on Wednesday denied Gupta's request to stay out of prison.

The full 2nd Circuit has yet to decide whether to rehear Gupta's appeal of his conviction, which a three-judge panel of that court upheld on March 25.

Gary Naftalis, a partner at Kramer Levin Naftalis & Frankel who represented Gupta, declined to comment. Seth Waxman, a WilmerHale partner and former U.S. solicitor general, is also among Gupta's lawyers.

Gupta, 65, is the highest-ranking corporate official to be convicted in the government's multi-year probe of insider trading in the hedge fund industry.

Continued in article

Bob Jensen's Fraud Updates ---

"The vanished grandeur of accounting," by Jacob Sull, The Boston Globe, June 10, 2014 ---

In Washington’s National Gallery of Art hangs a portrait by Jan Gossaert. Painted around 1530, at the very moment when the Dutch were becoming the undisputed masters of European trade, it shows the merchant Jan Snouck Jacobsz at work at his desk. The painter’s remarkable gift for detail is evident in Jacobsz’s dignified expression, his fine ermine clothes and expensive rings. Rendered just as carefully are his quill pen, account ledger, and receipts.

This is, in short, a portrait of not only wealth and material success, but of accounting. It might seem strange that an artist would lavish such care on the nuts and bolts of something so mundane, like a poet writing couplets about a corporate expense report. But the Jacobsz portrait is far from unique: Accounting paintings were a significant genre in Dutch art. For 200 years, the Dutch not only dominated world trade and portrayed themselves that way, but in hundreds of paintings, they also made sure to include the account books.

This was not simply a wealthy nation crowing about its financial success. The Dutch were the leading merchants of their time, and they saw good accounting as the key to both their wealth and the moral health of their society. To the audience of the time, the paintings carried a clear message: Mastering finance was an achievement requiring both skill and humility.

Today when we see accountants in art or entertainment, they are marginal figures—comically boring bean-counters or fraudsters cooking the books. Accounting is almost a synonym for drudgery: from the hapless daydreamer Walter Mitty to the iconic nerd accountant Rick Moranis plays in “Ghostbusters.” Accounting is seen as less a moral calling than a fussy brake on the action.

In the wake of decades of financial scandal—much of it linked to creative accounting, or to no accounting all—the Dutch tradition of accounting art suggests it might be us, not the Dutch, who have misjudged accounting’s importance in the world. Accounting in the modern sense was still a new idea in the 1500s, one with a weight that carried beyond the business world. A proper accounting invoked the idea of debts paid, the obligation of nightly personal reckonings, and even calling to account the wealthy and powerful through audits.

It was an idea powerful enough to occupy the attention of thinkers in religion, art, and philosophy. A look back at the tradition of accounting in art shows just how much is at stake in “good accounting,” and how much society can gain from seeing it, like the Dutch, not just as a tool but as a cultural principle and a moral position.


Scratches on ancient tablets show us that accounts have been kept for as long as humans have been able to record them, from ancient Mesopotamians to the Mayans. This kind of accounting was about measuring stores: Merchants and treasurers recorded how much grain, bread, gold, or silver they had. Most ledgers were simple lists of assets or payments.

Accounting in the modern sense started around 1300 in medieval Italy, when multipartner firms had to calculate their investments in foreign trade. We don’t know who, if anyone, can take credit for the invention, but it was around this time that double-entry bookkeeping emerged in Tuscany. Instead of a simple list, it consisted of two separate columns, recording income in one against expenditures in the other. Every transaction of expenditure could be checked against corresponding income: If one sold a goat for three florins, one gained three florins and, in the other column, lost a goat. It was a kind of self-checking mechanism that also helped calculate profit or loss.

Continued in article

Jensen Comment
One reason accountants historically were viewed as boring was that they were, almost without exception, honest bean counters. Now they are becoming more notorious as cheaters who no longer count just beans.

Shocker of the Year:  How The Most Prestigious Accounting Firms Raided The USA Treasury

"Confidence Games - How The Most Prestigious Accounting Firms Raided The Treasury," Peter J. Reilly, Forbes, June 10, 2014 ---

Did you miss that period when the most prestigious accounting firms in the country, PWC, EY, KPMG and BDO among them, were running criminal enterprises ? Janet Novack, my esteemed editor, and Laura Saunders broke the story in Forbes in 1998 in an article titled The Hustling Of X Rated Shelters while it was still ongoing. I have been writing about the aftermath for most of my tax blogging career. My first post on the drama concerned the travails of the estate of Richard Egan (founder of EMC and American Ambassador to the Republic of Ireland – not bad for a kid from Dorchester). Now thanks to Tanina Rostain and Milton C. Regan, Jr. you can read all about it in “Confidence Games – Lawyers, Accountants, and the Tax Shelter Industry”. It is a sad story with no heroes and only one villain, who is colorful enough to be engaging – Paul Dauugerdas, who is still awaiting sentencing on his second conviction (He got a do-over on his trial due to juror misconduct). The book is a must read for all tax professionals and others may enjoy it to. More importantly, the authors analyze the institutional flaws that created this scandal – the deprofessionalization of the practice of law and accounting and Congressional neglect of the IRS.

The Lawyers

The story about how Big Law tax practice evolved is one that I can’t attest to it, but it certainly seems plausible. Corporate law firms used to be much more club like with little client turnover and seniority based compensation systems. Clients were largely firm clients, not vulnerable to following individual attorneys. The attorneys were drawn for the most part from a small portion of the population – white, male and Protestants – what some would call the Waspocracy. The passing of the Waspocracy is reflected in many thing among them that best selling novelist James Gould Cozzens, their best chronicler, is little remembered today. Most dramatic perhaps is the fact that the Supreme Court has not a single Protestant. Even the African American is a graduate of the College Holy Cross (Choo, choo, rah, rah). Of course they would not have put it this way, but apparently their style of tax practice was to advise their clients “Don’t be a chazzer!” or as we also put it at Joseph B Cohan and Associates “Pigs get fed, hogs get slaughtered”. Their was a sense that the tax bar had a responsibility not only to their clients, but also to the system.

Although it was hardly alone, the law firm most singled out by the authors was Jenkens and Gilchrist. JG wanted to vault into the national scene and in order to make that leap, it need to increase “profits per partner”, once a closely guarded secret, but now a metric of surpassing importance. Profits per partner would attract winning rainmakers to the firm allowing it to expand.

Opinions on tax shelters were a great way to boost profits per partner, since they were valued billed, based on the client’s tax savings. One firm estimated that its hourly rate worked out to $9,000 on tax shelter opinions.

The Accountants

Many would think that it was greed that led accountants to this debacle, but I think that it was another of the seven capital sins that was at the root of it, something which the authors remark on:

In the late 1990s and 2000s, professionals at these firms compared their lot to that of professionals at financial institutions. They longed for a “Goldman-Sachs type practice” that would generate substantially more income.

The greatest hazard that most CPAs face is envy. The hard reality of professional practice is that you either have to do some actual work yourself or pay somebody, probably pretty well, to do some work. Tax practices try to get around this by having a “leverage model” that “pushes work down” to the lowest paid person possible. Then there is that vast pool of highly educated South Asians that the internet makes available for compliance work. Neither of those courses is the road to great profitability.

Regional firms were starting to get involved in directly providing other financial services. The schemes were usually presented as essentially free money. You refer your clients to the most genius money managers that ever walked the earth, who would then by some slightly twisted path kick you back 25 basis points or so. There are numerous reasons why this is not a good idea and I think most such arrangements were ultimately unwound. That bad idea was not available to the Big 6 or 5 or 4 (Maybe we should call them the Big Countdown). They had an even worse idea, a variation on the concept of “value billing”.

Design a cookie cutter tax shelter that actually has only one transaction (two if you want to be generous) and that by a hypertechnical interpretation of partnership tax provisions creates basis out of thin air. Have your audit partners tell clients who are about to experience “liquidity events” that instead of paying the federal government 20%, they can pay KPMG 3%. Only first they have to sign a non-disclosure and they can’t have somebody independently vet the deal. There are already law firms lined up who have “experience” with the deals that will provide you with an opinion letter that constitutes a “get out of jail free card”. Deutsche Bank has the transaction all teed up for you. Just remember that if anybody asks that you were hoping to score big on it and the tax benefits were incidental.

Putting it in biblical terms, the venerable accounting firms were selling their birthright for a mess of pottage. Within the firms, people who thought it was a bad idea found that resistance was futile.

Continued in article

Jensen Comment
Even though it was not her column in Forbes that broke this story, the large auditing firm hater Francine McKenna will have a field day carrying the ball on this one.

Bob Jensen's threads on the largest accounting and auditing firms ---

"Auditing Special Purpose Frameworks: To Sample or Not to Sample?" by Larry Perry, AccountingWeb, June 25, 2014 ---

Congratulations Francine
"University of Chicago Booth Capital Ideas Magazine: Two New Articles by Francine," by Francine McKenna, re:TheAuditors, June 22, 2014 ---

he Summer 2014 issue of Booth Capital Ideas magazine has two new longer pieces by me. Look for it online or at the Gleacher Center in downtown Chicago.

The first article is entitled, “How can you monitor a borrower without financial statements?” It’s based on research by Chicago Booth Assistant Professor Michael Minnis and Booth PhD candidate Andrew Sutherland.

The researchers find that a bank’s decision about whether to request a borrower’s financial statements depends on five things: the bank-borrower relationship, the loan’s credit spread (the difference between the interest rate on the loan and the prime rate), the presence of collateral, the availability of alternative information sources, and other loan contract terms.

Reputation and relationship play a unique role in this decision. As a bank’s relationship with a borrower grows longer, bankers request financial statements less often. However, when that same relationship grows deeper—meaning the borrower takes out more loans—bankers begin to request financial statements more often.

The research comes from this paper, “The Value of Financial Statement Verification in Debt Financing: Evidence from Private U.S. Firms,” Journal of Accounting Research (May 2011). Professor Minnis also has two more interesting working papers on related subjects.  Financial Statements as Monitoring Mechanisms: Evidence from Small Commercial Loans, with Andrew Sutherland, November 2013 and Financial Reporting Choices of U.S. Private Firms: Large-Sample Analysis of GAAP and Audit Use, with Petro Lisowsky, December 2013 are interesting. (The supplemental appendix for the November paper is available here.)

One key to understanding the power of this very large yet hidden economy is finding good, verifiable financial information about private firms.

From this article:

It’s difficult to find out because financial data is not publicly available for private firms the way it is for companies listed on a stock exchange. Most private firms do not have extensively public reporting requirements. Therefore, they are not required to follow generally accepted accounting principles (GAAP), produce audited financial statements, or report their results publicly. As a result, researchers are often unable to readily obtain financial data for private companies of all sizes, including pre-IPO companies, the new “emerging growth company” category created by the Jumpstart Our Business Startups (JOBS) Act, and companies owned by private-equity firms.

The trend is to make even less information available to investors, and researchers, regarding the financial viability and the financial controls in force at private firms of all sizes. The excuse is often something about “too much regulation” inhibiting “jobs and growth.”  Remember that next time someone has a hot IPO or private placement deal for you.

The second article in the Summer 2014 issue also deals with disclosure, the kind we as investors and taxpayers should have more of. Research by Chicago Booth Professor Haresh Sapra and the University of Pennsylvania’s Itay Goldstein is cited in my article, “Bank stress tests: How much do we need to know?”

Sapra and Goldstein “caution that while the tests are valuable, regulators should be careful about how much information they disclose about individual institutions. ”

“The Fed’s ultimate decision about stress test disclosure rests on the prioritization of its macroprudential and microprudential goals.

If microprudential stability of individual banks is a priority, individual results must be disclosed. In my opinion, regulators must mitigate unintended consequences but the disclosures should be made. Anat Admati, a professor of finance and economics at Stanford University’s Graduate School of Business and author of “The Bankers’ New Clothes,” agrees. “Hiding from reality and providing public support to banks that cannot otherwise survive…is dangerous and expensive.”

Mitt Romney's Former Firm Sues EY for Pocket Change ($60 million for certifying phony financial statements) ---

Bob Jensen's threads on EY ---

Message from EY on June 13, 2014

We have issued the general and industry-specific June 2014 editions of Financial reporting briefs. These publications provide you with a snapshot of the major accounting and regulatory developments during the quarter. The Reference library at the end of each document lists the publications we issued during the quarter, along with the links to them on our AccountingLink website.


The general Financial reporting briefs, and the industry-specific editions are available on AccountingLink.


Financial services


Health care


Life sciences


Media and entertainment


Oil and gas


Real estate






University of Minnesota Provides $2.2 Million Lifeline to Law School to Help Close $3 Million Budget Deficit Caused by 18% Enrollment Decline ---

"McGeorge Symposium: The State and Future of Legal Education," by Paul Caron, TaxProf Blog, June 4, 2014 ---

Symposium, The State and Future of Legal Education, 45 McGeorge L. Rev. 1-160 (2013):

Bob Jensen's Threads on Law Schools are in Distress ---

Do bonuses often lead to unethical behavior?

Sidetracked: Why Our Decisions Get Derailed, and How We Can Stick to the Plan by Francesca Gino (Feb 26, 2013)

The Honest Truth About Dishonesty: How We Lie to Everyone--Especially Ourselves by Dan Ariely (Jun 18, 2013)

Since Tom admits we don't really have any details about the FASB's vision of "fundamental changes" in financial reporting he probably should not term it a "con" at this point in time.

"On Golden’s Con: Selling False Hope for Fundamental Changes to Financial Reporting," by Tom Selling, The Accounting Onion, June 1, 2014 ---

“FASB is preparing to consider foundational changes that could significantly alter financial reporting in the future as well as standards improvements that will reduce complexity, board Chairman Russell Golden said … in a speech at the 13th annual Financial Reporting Conference in New York City …

The above was reported by the Journal of Accountancy.  Since the FASB will not be posting the text of Mr. Golden’s speech on the web, I’ll  have to rely on the JofA’s summary.  It lists five issues that Mr. Golden states “will be studied and debated by FASB in the coming years under active projects.”

For each of these issues, I’ll begin with a brief snippet from  JofA, and follow that with my reactions, which unfortunately, are largely negative.  I’m going to try my best to offset my negativity with constructive comments.


“FASB will debate an overarching measurement philosophy as part of its conceptual framework project because, Golden said, a conceptual philosophy of measurement does not exist in current standards.

“Overarching measurement philosophy”?  “Conceptual philosophy”?  I don’t know what these terms mean.

Sadly, the burst of attention from Enron and Sarbanes-Oxley on the role of principles in accounting standards has faded to a distant memory. If the FASB has succeeded completely at anything over the past 12 years, it has been to banish the utterance of “principles” in its public communications; i.e., to avoid making any sort of commitment to do what is generally accepted as the right thing.  In the place of accounting principles, the Board is promoting the development of “accounting concepts” in as many flavors as possible; for solemn invocation when it suits some political purpose.

There is no better example of this than the Board’s last stab at measurement “concepts” prior to Mr. Golden’s recent speech:

The measurement chapter [of the conceptual framework] should list and describe possible measurements … without prescribing specific measurements for particular assets and liabilities …”

“…[T]he best way to satisfy the objective of financial reporting through measurement is to consider the effect of a particular measurement selection on all of the financial statements, instead of emphasizing the statement of financial position over the statement of comprehensive income or vice versa.”

To be fair, Mr. Golden may now have something very different in mind than the above, which was posted in July 2010.  Yet, I can’t see how he will be able to deviate to any significant extent without offending one “constituency” or another.   If it’s history is any guide, the Board will want to retain the flexibility to specify  any form of so-called “measurement” it wants, any time it wants.

But, as significant as that problem is, other problems run deeper.  The reason I put “measurement” in quotes in the previous paragraph is because when Mr. Golden uses that word, he surely cannot mean real measurement.

Real measurement is the act of quantifying an attribute of something.  In the physical world, it’s an elementary concept.  In accounting, we could, for example, measure the historic cost of acquiring an asset, or the current cost of replacing it, or its sales value, or its value in use.  The lease accounting project, is most current of many many examples I can provide where what is touted as “measurement” is not real measurement.  The boards have correctly, in my view,  concluded that lease contracts convey a right of use (ROU) to the lessee that it should recognize as an asset; but what the board proposes as “measurement” of that ROU is a contrived number that is not even distantly related to real measurement. Nowhere does the Board provide a clue about the attribute of the ROU the Board believes is being measured — because they can’t.

Continued in article

Jensen Comment
My position on FASB and IASB standard setting is that with the focus on the balance sheet they destroyed whatever we once had in the measurement of the most important index of business performance in the eyes of investors and financial analysts --- the "real measurement" of net income! By combining legally earned revenue with unrealized (and possibly never-to-be-realized value changes in the case of hold-to-maturity securities) the Boards destroyed whatever we once had, controversial as it was with accruals, in net earnings reporting.

Now the FASB and the IASB can no longer even define net earnings, especially when confounded by the very controversial concept of ?comprehensive earnings."

However, in his criticism of the FASB and IASB I don't think rescuing the concept of net earnings is a goal of Tom Selling.

Here's the real disaster of the FASB and IASB that destroyed the most important index (net earnings) tracked by investors and financial analysts:
"The Asset-Liability Approach: Primacy does not mean Priority," by Robert Bloomfield, FASRI Financial Accounting Standards Research Initiative, October 6, 2009 ---

One Possible "Fundamental Change in Financial Reporting" --- No Bottom Line Reporting
One possible "fundamental change" in financial reporting for net income was suggested by former FASB Chairman Bob Herze that is cited below following the Jens Wüstemann and Wüstemann quotation below.

Largely because they cannot define net income on anything other than cherry-picked Hicksian theory, the FASB and IASB standard setters instead focus on the balance sheet where think they are on more solid footing conceptualizing  assets and liabilities. This, however, is not without its troubles.
"The Asset and Liability View: What It Is and What It Is Not—Implications for International Accounting Standard Setting from a Theoretical Point of View"
Jens Wüstemann, University of Mannheim; Sonja Wüstemann, Goethe University Frankfurt am Main
American Accounting Association Annual Meetings, August 4, 2010

I would like you, Tom, and Patricia to especially note the reference to the "stewardship function" below in the context of historical cost accounting.

In their current standard setting projects the FASB and the IASB seek to enhance consistency in the application of accounting standards and comparability of financial statements by fully implementing the asset and liability view. However, neither in standard setting nor in the accounting literature is there agreement on what the asset and liability view constitutes. In this paper, we show that the asset and liability view is compatible with different, sometimes even opposing concepts, such as historical cost accounting and fair value accounting, and thus cannot ensure internal consistency on its own. By means of the example of revenue recognition we point out the difficulty to determine the changes in assets and liabilities that shall give rise to revenue. We argue that the increase in assets that leads to revenue is the obtainment of the right to consideration and thus should be focused on by the


1. Introduction

A major aim of the FASB and the IASB in their current standard setting projects is to achieve internal consistency of the accounting regimes U.S. GAAP and IFRS (IASB 2008c, BC2.46; IASB 2008a, S3; IASB 2008d, par. 5; IASB 2009, p. 5). One of the reasons for inconsistencies in present U.S. GAAP and IFRS is that recognition and measurement principles and rules are developed on the basis of two competing concepts − the asset and liability view and the revenue and expense view (Wüstemann and Wüstemann 2010).

Until the 1970s the so called revenue and expense view had been prevailing in international accounting standard setting. In the U.S. this view was introduced by Paton and Littleton in the American Accounting Association Monograph No. 3 in 1940 (Paton and Littleton 1940: 1956) and soon became the state of the art in U.S. accounting theory and practice. Similar developments took place in other countries, e.g. Germany, where Schmalenbach (1919) was the main driver for the establishment of the comparable ’dynamic accounting theory’

(Dynamische Bilanztheorie)
According to the revenue and expense view the principal purpose of accounting is to determine periodic net income as a measure of an entity’s effectiveness in using inputs to obtain and sell output (
stewardship function) by recognising revenue when it is earned or realised and by matching the related costs with those revenues (FASB 1976, par. 38−42; Paton and Littleton 1940: 1956, p. 10 et sqq.; see for the tradition of the stewardship function Edwards, Dean and Clarke 2009). Some proponents of the revenue and expense view see net income as an indicator of an entity’s ‘usual, normal, or extended performance’ (‘earning power’) (FASB 1976, par. 62) that may help users not only to assess management’s performance but also to estimate the value of the firm (Black 1980, p. 20; Breidleman 1973, p. 654). This requires irregular and random events that distort net periodic profit, such as the receipt of grants and losses from bad debt, to be smoothed out (Beidleman 1973, p. 653 et sqq.; Bevis 1965: 1986, p. 104−107; FASB 1976, par. 59; Schmalenbach 1919, p. 32−36). Under the revenue and expense view the function of the balance sheet is to ‘store’ residuals resulting from the matching and allocation process; the deferred debits and credits depicted in the balance sheet do not necessarily represent resources and obligations (Paton and Littleton 1940: 1956, p. 72−74; Schmalenbach 1919, p. 26; Sprouse 1978, p. 68).

In the 1970s the FASB realised that the key concepts under the revenue and expense view − revenues and expenses − are not precisely definable making earnings ‘unduly subject to the effects of personal opinion about what earnings of an enterprise for a period should be’ (FASB 1976, par. 60). In order to limit arbitrary judgements and to achieve a more consistent income determination the FASB decided to shift the focus to the more robust concepts of assets and liabilities and thus to the asset and liability view as evidenced by the issuance of SFAC 3 Elements of Financial Statements (now SFAC 6) in 1980 (Storey 2003, p. 35 et sqq.; Miller 1990, p. 26 et seq.; see for a similar development in Germany around the same time Moxter 1993). The so called asset and liability view in the U.S. has its origins in the Sprouse and Moonitz monograph that was published in 1962 as part of the AICPA’s Accounting Research Studies.

Under this view all financial statement elements are derived from the definitions of assets and liabilities. Income resulting from changes in assets and liabilities measures an entity’s increase in net assets (FASB 1976, par. 34; Johnson 2004, p. 1; Ronen 2008, p. 184; Sprouse and Moonitz 1962, par. 11, 46, 49). The asset and liability view can serve the purpose to objectify income measurement by restricting recognition in the balance sheet to those items that embody resources and obligations (Sprouse 1978, p. 70). Alternatively, the asset and liability view can be adopted in order to inform users about future cash flows that are expected to flow from an entity’s assets and liabilities, which are supposed to help them in estimating firm value (Scott 1997, p. 159−162; Hitz 2007, p. 333 and 336−338).

Despite the declared shift from the revenue and expense view to the asset and liability view in the 1970s, certain U.S. standards and also the ‘older’ IFRS, for example those on revenue recognition, still follow the revenue and expense view (Ernst & Young 2009, p. 1558; Wüstemann and Kierzek 2005, p. 82 et seq.). In the beginning of the 21st century the FASB and the IASB have begun several projects, above all the Conceptual Framework Project, that shall lead to an all-embracing implementation of the asset and liability view (Wüstemann and Wüstemann 2010).

We observe that both in the accounting literature and the standard setting processes, there is confusion about the meaning and implications of the asset and liability view, especially as regards the role of the realisation principle and the matching principle as well as fair value measurement (see literature review below). A second problem is that the asset and liability view does not provide clear guidance on how assets and liabilities shall be defined and which changes in assets and liabilities shall give rise to income. The FASB and the IASB have − up to now − been struggling with the problem of bringing current revenue recognition guidance in conformity with the asset and liability view for seven years. In December 2008, they finally published a Discussion Paper ‘Preliminary Views on Revenue Recognition in Contracts with Customers’, but the issuance of the new standard is not yet foreseeable.

The aim of this paper is to shed light on the conceptual underpinnings of the asset and liability view, to clarify misunderstandings in the accounting literature and standard setting about its meaning and to discuss implications for international accounting standard setting. The remainder is organised as follows: In the first part of the paper we depict the different opinions that exist with regard to the asset and liability view and then clarify the concept by defining recognition and measurement principles as well as purposes of financial statements that are compatible with this view. Subsequently, we analyse in how far the asset and liability view is implemented in present U.S. GAAP and IFRS and in which areas accounting principles still exist that oppose the asset and liability view. In the final part we point out the difficulty to define assets and liabilities taking the current FASB’s and IASB’s joint project on revenue recognition as an example and make suggestions for improvement.

Continued in article

And after all these years of trying the standard setters have not yet come up with standards that are very good for evaluating financial performance of business firms, something that they are well aware of in Australia ---
"GAAP Based Financial Reporting:  Measurement and Business Performance" --- Click Here topics/Reporting/Resources and toolkits/Reports/GAAPbased_financial_reporting.ashx

 I think the major problem, aside from the cost of generating more relevant and reliable information, is that standards setters never look beyond single-column financial statements that inevitably lead them to horrid mixed model measurements that destroy aggregations into summary measures like "Total Assets" and "Net Income." Bob Herz recommends doing away with aggregating net income metrics. I recommend having multiple columns and multiple net income aggregations.

See Bob Herz's recommendations below.

Bob Jensen

Opportunity for Deep Down and Dirty Bayesians
"Quantitative Legal Prediction – or – How I Learned to Stop Worrying and Start Preparing for the Data Driven Future of the Legal Services Industry," by Daniel Martin Katz, SSRN, December 11, 2013

Do I have a case? What is our likely exposure? How much is this going to cost? What will happen if we leave this particular provision out of this contract? How can we best staff this particular legal matter? These are core questions asked by sophisticated clients such as general counsels as well as consumers at the retail level. Whether generated by a mental model or a sophisticated algorithm, prediction is a core component of the guidance that lawyers offer. Indeed, it is by generating informed answers to these types of questions that many lawyers earn their respective wage.

Every single day lawyers and law firms are providing predictions to their clients regarding their prospects in litigation and the cost associated with its pursuit (defense). How are these predictions being generated? Precisely what data or model is being leveraged? Could a subset of these predictions be improved by access to outcome data in a large number of 'similar' cases. Simply put, the answer is yes. Quantitative legal prediction already plays a significant role in certain practice areas and this role is likely increase as greater access to appropriate legal data becomes available.

This article is dedicated to highlighting the coming age of Quantitative Legal Prediction with hopes that practicing lawyers, law students and law schools will take heed and prepare to survive (thrive) in this new ordering. Simply put, most lawyers, law schools and law students are going to have to do more to prepare for the data driven future of this industry. In other words, welcome to Law's Information Revolution and yeah - there is going to be math on the exam.

Jensen Comments
It seems to me that much of this paper can also be extended to quantitative analysis (e.g., Bayesian) of clauses in a set of financial statements.


"FASB and IASB Issue Discussion Paper on Financial Statement Presentation,"  by Mark Crowley and Stephen McKinney, Deloitte & Touche LLP, Heads Up, November 10, 2008 Vol. 15, Issue 40 ---

Radical Changes in Financial Reporting
Yipes! Net earnings and eps will no longer be derived and presented. It's like getting your kid's report card with summaries of his/her weekly activities and no final grade

From the PCAOB
Pursuant to PCAOB Rule 4009(d), the PCAOB today made public additional portions of the following previously issued inspection reports because the firms did not address certain quality control issues to the satisfaction of the Board within the 12 months following the date of the reports.

§  Ernst & Young LLP (November 30, 2011) and related release

§  Grant Thornton LLP (July 9, 2009) and related release

§  Grant Thornton LLP (August 12, 2010) and related release

§  Watson Dauphinee & Masuch, Chartered Accountants (May 2, 2013)

Waterbury police have arrested a city (library) employee, who is accused of stealing $170,000 from a local library over five years because she thought she should be making more money.
"City Worker Stole $170K from Library," NBC Connecticut, June 10, 2014 ---

. . .

At first, James denied stealing the money, but then police presented the evidence and James admitted to taking the money because she thought she should be earning more.

She said she started taking the cash in 2006 to help pay for her son’s college education and food, according to police.

James was in charge of depositing money from the library and is accused of stealing as much as $100 per day over a five-year span.

The money came from fines that library patrons paid for overdue books and videos, according to police.

Police started investigating a little over a month ago and also determined that James was also paying herself thousands of dollars in an unauthorized stipend, police said.

NBC Connecticut went to James’ home for comment, but no one answered the door.

James is expected to be charged with first-degree larceny and appear in court later this month.

Jensen Comment
Sounds like a really ineffective internal control system.

"The IRS Wins a Big Offshore Case A millionaire could owe penalties of $2.2 million on a secret $1.5 million Swiss bank account," The Wall Street Journal, June 6, 2014 ---

"After Announcing Plans To Destroy Microsoft Windows, Meg Whitman Pulls A Gutsy Move," by Julie Bort, Business Insider, June 11, 2014 --- 

HP CEO Meg Whitman showed more than a little chutzpah on Thursday during her company's annual customer conference.

Moments after HP announced its grand new plans to compete with the Microsoft Windows operating system,  Whitman was thanking Microsoft for being a major sponsor of the conference and inviting the company's new CEO, Satya Nadella, on stage.

Nadella joined Whitman and Intel's new CEO Brian Krzanich for a fireside chat-style interview conducted by New York Times columnist and author, Tom Friedman.

But just before Nadella joined via video conferencing, during Whitman's keynote speech, CTO Martin Fink, head of HP Labs, showed off what HP hopes will be a game-changing new data center computer. It's internally calling that computer "The Machine."

HP is creating a lot of new technology to build The Machine, especially a new form of memory known as "memristors" which won't lose data if the power turns off (also known as "non-volatile memory").

The Machine's claim to fame is that it can process loads of information instantly while using hardly any power. HP wants this computer to replace the servers being used in today's data centers. But it also hopes the tech will become the basis for the next generation of PCs.

And The Machine will not use Windows.

In fact Fink announced on Thursday that the company is working on a brand new free and open-source operating system and is inviting universities to help research and build it.

Read more:

Jensen Comment
But wonders never cease. Now there's a mysterious sea animal that eats white sharks.

California Dreamin'
With 80% of the world's office workers trained on Windows, MS Office and software requiring Windows, business firms and government agencies are not about to spend a trillion dollars to drop Windows and retrain their computer users for other operating systems. Most USA government agencies like the IRS are still running on ancient Windows XP. Change does not come easy in government or business.

If anybody destroys Windows it will be Microsoft --- which since Version 7 may well be on its way to destroying Windows.

Interestingly, HP still offers new computers with Windows 7 installed rather than later versions of Windows. This shows you what HP customers think of later versions of Windows.

"More Millennial Mothers Are Single Than Married," by Belinda Luscombe, Time Magazine, June 17, 2014 ---

Despite the anxiety society still feels about single mothers, most American women aged 26 to 31 who have children are not married. And the number of these millennial single mothers is increasing. In fact, in a study just released by researchers at Johns Hopkins University, only about a third of all mothers in their late twenties were married.

The less education the young women have the higher the probability that they became a mom before they got married. Conversely, the married moms of that generation probably have a college degree. “It is now unusual for non-college graduates who have children in their teens and 20s to have all of them within marriage,” says Andrew Cherlin, one of the authors of the studyChanging Fertility Regimes and the Transition to Adulthood: Evidence from a Recent Cohort.”

Sociologists such as Cherlin have been tracking the decline of marriage as one of the milestones or goals of an individual’s life—the whole “first comes love, the comes marriage, then comes the baby with the baby carriage” paradigm. And it’s clear that an increasing number of young people are just not putting a ring on it. “The lofty place that marriage once held among the markers of adulthood is in serious question,” says Cherlin.

Motherhood is beginning to show the fissures along income and education lines that have already appeared in other aspects of U.S. society, with a small cluster of wealthy well educated people at one end (married with kids), a large cluster of struggling people at the other (kids, not married) and a thinning middle. While many children raised by single parents are fine, the advantages of a two parent family have been quite exhaustively documented. Some of these advantages can be tied to financial resources, but not all.

Among people with kids between the ages of 26 to 31 who didn’t graduate from college, 74% of the mothers and 70% of the fathers had at least one child outside of marriage, Cherlin found. And, 81% of births reported by women and 87 % of births reported by men had occurred to non-college graduates.

The chart below, using data from the National Longitude Study of people born in 1997, shows all the births reported by women who didn’t get through high school, how old they were when their kids were born and whether they were married. Only a quarter of these young moms were married, slightly more than a third were living with someone, not necessarily the child’s father, and almost 40% had no partner at all.

Continued in article

Bob Jensen's threads on the history of women in the professions, including the CPA profession, are at

Jensen Comment
Studies also show that USA women are delaying having their first child much longer than their own mothers and grandmothers and great grandmothers.

Teen pregnancies are at their lowest rates in years.

Unaccompanied children are pouring into the USA at unprecedented levels --- over 400 per day, although this number will probably decline if more and more of these children are returned to their parents in Latin America. President Obama assigned the task of stemming the tide to his Vice President Joe Biden. The tide will probably increase if more and more of these inflowing children are aided in seeking the American Dream.

"FASB updates accounting for stock compensation," by Sabine Vollmer, Journal of Accountancy, June 20, 2014 ---

From the CFO Journal's Morning Ledger on June 18, 2014

Inflation Worries and Safe Savings Discouragements
Good morning. With inflation showing signs of picking up pace, Wall Street is now debating what it means for investments, the
WSJ’s E.S. Browning reports. The Labor Department released the strongest inflation numbers since 2012 last week, and stock and bond investors are split on the impact.

An uptick in inflation could signal a stronger economy, which could boost stocks. But it could also mark the end of a decadeslong bond rally that has kept bond prices up and yields down since the early 1980s. That would mean higher interest rates, which do not bode well for home buyers, businesses and holders of existing, low-yielding bonds.

Inflation has averaged 2.3% over the past decade. While Fed Chairwoman Janet Yellen downplayed last week’s reading of 2.1%, the immediate question is whether inflation will rise enough to make the Fed raise rates more quickly than most people expect.


Jensen's Comment
Economists at the Federal Researve who took food and fuel out of their inflation index calculations have their heads in the sand.

Meanwhile the Fed discourages saving by paying virtually zero on Certificates of Deposit. Retired folks are getting ripped off on safe savings. They might as well go to casinos and pray.

From the CFO Journal's Morning Ledger on June 18, 2014

SEC official: Audit and financial reporting fraud are the “next frontier”
A top U.S. watchdog said Tuesday that enforcement actions will increasingly target fraud in financial reporting and audit,
CFOJ’s Emily Chasan reports. The SEC is “virtually past” its work on financial-crisis era litigation and now has the time to devote to other areas, such as financial reporting and market structure, said Andrew Ceresney, head of enforcement at the commission, in comments to the Wall Street Journal CFO Network

From the CFO Journal's Morning Ledger on June 20, 2014

Casino boom pinches Northeastern states. More casinos have opened in the Northeast over the past decade than in any other part of the country, pinching the revenue of early players, the WSJ reports. A recent Fitch Ratings report said the Northeastern market “is reaching a saturation point.” Twenty-six casinos have opened since 2004, fueling a 39% increase in total annual gambling revenue in the mid-Atlantic and New England.

From the CFO Journal's Morning Ledger on June 20, 2014

It may seem like an easy trick to buy for a foreign firm, adopt its overseas address and enjoy its more favorable tax rate.
But for Medtronic Inc., once it merges with Covidien PLC and becomes an Irish company, it will require additional maneuvering to escape the U.S. tax net, the
WSJ’s Joseph Walker reports.

It is a common misconception that once a U.S. company reincorporates abroad, its future earnings are automatically out of the reach of U.S. tax authorities. But an inversion is typically just the first step in a series. If the new, foreign-based Medtronic PLC wants to transfer foreign assets and future cash flows out from under the U.S. tax net and over to the new Ireland-based parent, it will likely face a tax bill from the U.S. on the fair market value of those assets. A company can also arrange an asset sale at fair market value between its subsidiaries without incurring U.S. taxes, but proceeds from the sale would accrue to the U.S. foreign subsidiary, possibly defeating the purpose of the inversion.

Old-fashioned maneuvers such as transfer pricing and intercompany debt can relocate profits overseas, but those methods are complicated and already available to U.S. companies. Tax experts say inversions are a long-term play aimed at gaining access to profits from still-in-development product lines and new acquisitions, not a quick fix to pull in overseas cash from existing revenue sources.

What's wrong with corporate taxation in the USA?

From the CFO Journal's Morning Ledger on June 18, 2014

Good morning. The recent wave of “tax inversions” by U.S. companies looking to sidestep U.S. corporate taxes by relocating offshore through foreign mergers got plenty of attention at The Wall Street Journal CFO Network annual meeting on Tuesday. And more than once, a suggested solution to the problem of an eroding tax base at home was to lower the U.S. corporate tax rate.

Senate Finance Committee Chairman Ron Wyden (D., Ore.) blamed the high U.S. statutory tax rate for the exodus of U.S. companies to lower-tax regions, CFOJ’s Emily Chasan reports. He has been advocating for lowering the corporate rate to 24% from today’s 35%, and told those in attendance, “Much of what we’re seeing today… stems from the fact that our corporate rate isn’t very efficient.” He said the next 15-month window is a “prime” time to get Congress focused on corporate-tax reform, starting with a renewal of the $54 billion package of so-called tax extenders for two years.

White House Council of Economic Advisers Chairman Jason Furman joined the call for lower tax rates, but said it should come as part of broader tax reform, CFOJ’s Vipal Monga reports. Mr. Furman used the debate over tax inversions to point to a tax code he called “deeply broken.” He also cited President Obama’s recent budget, which proposed making it harder for companies to move their domiciles offshore to avoid U.S. taxes. But he added that broader tax reform, including lower corporate rates, could encourage companies to stay put.

From the CFO Journal's Morning Ledger on June 16, 2014

Good morning. The European Union’s push to investigate whether member nations are allowing illegal corporate-tax strategies has apparently not been sufficiently intimidating to stop firms from undertaking “tax inversions” to escape U.S. taxes. Medtronic Inc.’s agreement Sunday to buy rival medical-device maker Covidien PLC for $42.9 billion is the latest in a wave of recent moves designed to sidestep U.S. corporate taxes, the WSJ reports.

A key attractive element of the buyout target is likely not just its business, but its address. Covidien is headquartered in Massachusetts but domiciled in Ireland, where the main corporate tax rate is 12.5%. The combined company will have its “operational headquarters” in Minneapolis, but its main executive offices will be in Ireland, far from the 35% tax rate in the U.S. Medtronic had $14 billion in cash as of April, much of it held offshore. This deal would let it deploy that cash and help Medtronic fulfill its promise to distribute half of its free cash flow to shareholders. A person familiar with the matter said that was one of the main reasons the company wants to do the deal.

The EU scrutiny of transfer pricing at multinationals may have the impact of boosting the appeal for a U.S. company of moving its headquarters to Europe altogether. Replacement-joint maker Smith & Nephew PLC has long been seen as a potential takeover target, but the EU corporate-tax crackdown could make it more so, the WSJ’s Hester Plumridge reports. Smith & Nephew’s U.K. address would make it convenient for a U.S. business with cash trapped offshore.

"Walgreens' Planned Move From Illinois to Switzerland Would Save $4 Billion in Taxes," by Paul Caron, TaxProf Blog, June 15, 2014 ---

Walgreens could cost taxpayers $4 billion in lost revenue over five years should the company decide to renounce its American corporate legal status and move its official address to Switzerland, a tax haven. The company is widely reported to be considering this move and says it will announce its intentions as soon as this summer. Walgreens is the nation’s largest pharmacy retailer with 8,200 stores and locations in all 50 states.


From the CFO Journal's Morning Ledger on June 14, 2014

Intel Thursday cited stronger-than-expected demand for business PCs, increasing revenue guidance for the year
”The change in outlook is driven mostly by strong demand for business PCs,” Intel said in a news release. For the second quarter, the company expects revenue between $13.4 billion and $14 billion, compared with its previous guidance of $12.5 billion to $13.5 billion. The Journal’s Josh Beckerman notes that companies that make computers or computer parts have benefited from businesses needing to update aging PCs because of the end of Microsoft’s support for Windows XP operating system.

From the CFO Journal's Morning Ledger on June 13, 2014

FASB to tweak accounting for inventories and income statements
U.S. accounting-rule makers decided this week to kick off two short-term projects aimed at simplifying generally accepted accounting principles,
CFOJ’s Emily Chasan reports. The projects will streamline inventory-measurement techniques and reduce extraordinary items in corporate income statements, the Financial Accounting Standards Board said.

From the CFO Journal's Morning Ledger on June 9, 2014

European nations move to measure the shadow economy
Several European nations are moving to include illicit doings like drugs and prostitution when tallying their GDP, but some economists are questioning the merit and methods of trying to measure the shadow economy, the
WSJ’s Josh Zumbrun reports. The U.K. could add as much as $9 billion to the value of its GDP by including prostitution and $7.4 billion by adding illegal drugs, by one estimate, enough to boost the size of its economy by 0.7%. Italy plans to include smuggling as well as drugs and prostitution.

"Sex, Drugs and GDP: the Challenge of Measuring the Shadow Economy Some Questioning the Value, Accuracy of European Nations' Move to Tally Illicit Doings," by Josh Zumbrun, The Wall Street Journal, June 8, 2014 ---

Jensen Comment
In the USA the shadow economy is estimated to be nearly $2 trillion and thus is a much bigger deal than in Europe because it extends to so many workers taking cash that is never reported or taxed --- hundreds of such workers as maids, roofers, gardeners, ranch hands, and others doing services for home owners. In San Antonio, where I lived for 24 years, there are widely known streets where day laborers accumulate each morning and wait for the shadow employers like roofing companies and landscape companies to pick them up. Housekeepers usually are hired by word of mouth. Mrs. Smith in a bridge club or on a golf course mentions that she found a really good mother-daughter team that slipped into the USA from Mexico.

But the shadow economy extends much further than the hiring of undocumented workers. My carpenter friend added a garage onto my barn at an amazing price as long as I paid cash up front. My wife had to have $12,000 of special dental work if I used a credit card. But he did the work for $8,000 cash up front. In each instance I'm absolutely certain that this was tax free cash for shadow economy services. It happens in a big way each and every day in the USA.

This is why the reported USA unemployment numbers are greatly inflated and the GDP is greatly understated. Many of our unemployed are actually working daily for cash.

Case Studies in Gaming the Income Tax Laws ---


From the CFO Journal's Morning Ledger on June 5, 2014

Shareholders Balk at Golden Parachutes
nvestors are trying to put the kibosh on generous executive pay packages in the event of a merger or sale. Shareholders at four companies voted in recent weeks to stop executives from cashing in on certain stock bonuses in the event of a sale, the
WSJ’s Liz Hoffman reports. The nonbinding votes at Valero Energy Corp., Gannett Co., Boston Properties Inc. and Dean Foods Co. follow a few years of pressure to curb severance benefits.

Defenders of golden parachutes say they can create value for investors by taking away the incentive to oppose a sale that might benefit shareholders for fear of losing income. But the recent votes come amid rising scrutiny of executive pay from both investors and regulators.

Even so, it’s worth remembering that those votes are nonbinding, as evidenced by Nabors Industries Ltd.’s decision to ignore the rebuke by its own shareholders of its executive compensation committee, the WSJ’s Daniel Gilbert reports. The board refused to fire the three directors on the committee by unanimous vote and said it has made strides to overhaul executive pay and improve performance. The board did, however, move two of the board members off of the compensation committee.

Bob Jensen's threads on outrageous executive compensation that rewards failure and fraud ---

From the CFO Journal's Morning Ledger on June 6, 2014

GM fires 15 workers over recall delays
General Motors Co. Chief Executive Mary Barra vowed to upend the corporate culture responsible for what she denounced as a “pattern of incompetence and neglect” in the auto maker’s failure to recall cars equipped with a defective ignition switch,
the WSJ reports. The strong words coincided with the release of a company funded report that could deepen GM’s legal vulnerability and scrutiny from regulators, prosecutors and lawmakers, but that exonerated the CEO, executives who report directly to her and the company’s board of directors.

Jensen Comment
As a rule the private sector is more inclined to fire workers charged with alleged wrong doing in high publicity cases. In comparison, government bureaucracy workers are usually just reassigned or suspended with pay. It's very hard to fire a government bureaucrat until convicted in a court of law. Watch to see if and when any government bureaucrats get fired for alleged “pattern of incompetence and neglect" in the recent VA scandal. My guess is that nobody gets fired until convicted in a court of law.

Of course some government bureaucrats like Lois Lerner grow weary of seemingly endless media criticisms and resign. Some that were "friends" of the private sector have no trouble finding higher paying jobs.

Nook Still Looking For a Niche

From the CFO Journal's Morning Ledger on June 6, 2014

Noble Inc. reached a deal to sell color tablets made by Samsung Electronics Co. co-branded with the book chain’s Nook label, the WSJ’s Jeffrey A. Trachtenberg reports. The deal fulfills Barnes & Noble’s previously stated plan to reduce its heavy investment in the Nook. ”What this means is that Barnes & Noble is still in the game,” said John Tinker, an analyst with the Maxim Group. “They no longer have all that risk associated with research and development and manufacturing, so they can quantify their liabilities.”

PWC:  Dataline: Discontinued operations - Revised standard significantly changes criteria for discontinued operations and disclosures for disposals (revised June 3, 2014*) (No. 2014-08) ---

In April 2014, the FASB issued a new standard changing the threshold for reporting discontinued operations and adding new disclosures for disposals.

The new guidance defines a discontinued operation as a component or group of components that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.”

A strategic shift could include a disposal of (i) a major geographical area of operations, (ii) a major line of business, (iii) a major equity method investment, or (iv) other major parts of an entity. Although “major” is not defined, the FASB provides examples of when a disposal qualifies as a discontinued operation.

Having significant continuing involvement with a component after a disposal or failing to eliminate the operations or cash flows of a disposed component from an entity’s ongoing operations will no longer preclude presentation as a discontinued operation.

New disclosure and presentation requirements apply to discontinued operations and to disposals of individually significant components that do not qualify as discontinued operations.

The guidance applies prospectively to new disposals of components and new classifications as held for sale beginning in 2015 for most entities, with early adoption allowed.

PwC’s Dataline summarizes the main provisions, provides insights into key aspects of the standard, and highlights areas to consider when applying the new guidance.

* The PwC observation related to paragraph .37 has been updated as of June 3, 2014 to reflect clarification of the revised standard’s early adoption provisions.


"Gender Bias Alleged at UCLA's Anderson Business School," by Melissa,Korn, The Wall Street Journal, June 4, 2014 ---

One of the nation's top-ranked business schools is "inhospitable to women faculty," according to an internal academic review.

Faculty of the Anderson Graduate School of Management at University of California, Los Angeles, received a confidential copy of the review, conducted by a group of university professors and outside business-school deans, in April. The next day, the institution's first female dean, Judy Olian, met with the heads of several other elite business schools at the White House, where the group discussed business schools' roles in making workplaces friendlier to women and working families.

Back on campus, many professors noted the irony. Among the findings of the report, which was reviewed by The Wall Street Journal: Anderson is inconsistent in how it hires and promotes women as compared with men; has created "gender ghettos" in certain academic areas; and shows a "lack of confidence" in female faculty.

Dr. Olian said her administration is taking the findings seriously, and that the climate for women has been a priority since she became dean eight years ago. "This is going to require a lot more than numbers and policies. It's really soul-searching," Dr. Olian said. "I have to ask myself, what here might have had unintended consequences? And what subtle things should we, can we, must we be doing to improve the climate?"

Dr. Olian has notched many accomplishments during her tenure at Anderson: She raised $190 million for the school, successfully wrested administrative control away from the state education system and, in the past four years, oversaw a 60% jump in full-time M.B.A. applications.

But other than the dean herself, no women hold any of the school's 24 endowed chairs, prestigious positions used to attract and retain top talent.

Women made up 20% of tenure-track faculty at Anderson and 14.3% of those with tenure in the 2012-2013 academic year, including Dr. Olian, according to school figures.

By comparison, an analysis of 16 peer institutions—including the business schools at the University of Virginia, Stanford University and University of Michigan—found that, on average, about 30% of tenure-track and 19.5% of tenured faculty were women in the 2012-2013 year. That analysis was done by the Association to Advance Collegiate Schools of Business, an accrediting group.

Gender is a fraught issue at many elite business schools. Harvard Business School gained attention last fall for its aggressive efforts to help women faculty and students thrive more in the classroom. And at the Yale School of Management, an instructor sued in federal court late last year, alleging gender and age discrimination after her appointment wasn't renewed. Yale says the suit is without merit.

Interviews with professors and administrators at a number of top programs suggest that the problems are particularly acute at Anderson. The internal report states that women have high rates of job satisfaction when beginning careers at the school, but face a "lack of respect" regarding their work and "unevenly applied" standards on decisions about pay and promotions.

Twice in the past three years, the university's governing academic body took the relatively rare step of overruling Dr. Olian, who had recommended against the promotion of one woman and against giving tenure to another, according to four Anderson professors.

In one case, the university found that policies allowing faculty to take parental leave without falling behind on the tenure track had been incorrectly applied to the candidate. In that same period, they said, a male candidate for promotion passed through the Anderson review, but didn't get clearance from the university.

Dr. Olian and a UCLA representative declined to comment, citing personnel privacy.

After seeing the review's initial findings in January, Dr. Olian created a Gender Equity Task Force. Among other things, the group wants to standardize promotion review criteria, said Aimee Drolet Rossi, a marketing professor and a member of the task force.

Prof. Rossi, who has been at the school since 1997, said she hasn't observed overt discrimination or hostility at Anderson, but said she has witnessed subtle digs and dismissive comments directed at women from colleagues and students. "It's death by a thousand paper cuts," she said.

The concerns at Anderson arose from a November review by the university's academic senate, which regularly assesses the academic health of UCLA's departments. The authors of the report—a group that included four UCLA professors and deans of three other business schools—set out to review issues related to academics only, but concerns about women faculty arose repeatedly during the evaluation, the report said.

The report praised the school's academic rigor and world-class faculty under Dr. Olian's leadership. But it also concluded that school administrators have done little to address problems raised in a 2006 study of gender at Anderson.

Dr. Olian disputed that: "To say that [the 2006 report] didn't capture the attention of the administration I don't think is really in line with the facts. In fact, I think it's wrong," she said in an interview, adding that the school implemented eight or nine of about a dozen recommendations.

Anderson this school year added female faculty and reduced the overall tenure-track pool, bringing to 28% the share of tenure-track faculty who are women. And the number of female full professors has tripled during Dr. Olian's tenure—to six, not including Dr. Olian—making women 12% of the 49 full professors on faculty.

The percentage of women enrolled in Anderson's full-time M.B.A. program rose to 34% last year from 28% in 2006.

Professors of both sexes at Anderson said the latest report accurately captured the atmosphere.

"I was, like, 'Wow, it's spot on,' " said one woman management professor who asked to remain anonymous. "I was pleased to see it come out."

Barbara Lawrence, a tenured professor of management and organizations who has spent 30-plus years at Anderson, is leaving the school this month, weary of being told, for example, that her research was insignificant.

She also said she fought for years both before and after Dr. Olian's arrival to bring her salary in line with male peers after discovering a $30,000 gap, finally nearing parity in 2009.

In an interview, Dr. Olian declined to comment on Prof. Lawrence's pay differential claim, but said most merit reviews run on a three to four year cycle.

Continued in article

History of Professional Women ---

Bob Jensen's threads on gender issues in academe ---

"Former UNC Basketball Star Says He Got Straight A's Without Going To A Single Class," by Emmitt Knowlton, Business Insider, June 6, 2014 --- 

Rashad McCants, the second-leading scorer on the University of North Carolina's 2004-05 basketball team that won the national championship, told ESPN's "Outside the Lines" that he rarely attended class, turned in papers written entirely by tutors, and took bogus courses in the African-American Studies department during his three years in Chapel Hill. 


"I didn't write any papers," McCants said. "When it was time to turn in our papers for our paper classes, we would get a call from our tutor ... carpool over to the tutor's house and basically get our papers and go about our business."

During the spring term of 2005, McCants says he made the Dean's List and got straight-A's in four classes that he never attended.

When asked if UNC men's basketball coach Roy Williams knew about this, McCants told Outside The Lines, "I think he knew 100%. ... It was something that was a part of the program." 

Read more:

Chapel Hill Researcher at Center of Turmoil Over Athletes’ Literacy Resigns ---

"University of North Carolina learning specialist receives death threats after her research finds one in 10 college athletes have reading age of a THIRD GRADER," by Sara Malm, Daily Mail, January 10, 2014 ---

Mary Willingham exposed college athletes' lack of academic abilities

  • She found that 10 per cent read at elementary school level
  • A majority of players' reading level was between 4th and 8th grade
  • Men's basketball makes $16.9m-a-year for University of North Carolina

Continued in article


Jensen Comment
More often than not employers make it uncomfortable for whistleblowers who don't resign. UNC does not deny that for ten years varsity athletes took fake courses and were "allowed" to change their grades. They just contend that these athletes did not suffer academically because they were in the wonderful learning environment of the University of North Carolina. Yeah Right!

UNC Fudging the Grades of Athletes
"Scandal Bowl: Why Tar Heel Fraud Might Be Just the Start," by Paul M. Barrett, Bloomberg Businessweek, January 6, 2014 ---

The corruption of academics at the University of North Carolina’s Chapel Hill campus could turn into the most revelatory of all of the undergraduate sports scandals in recent memory. Beginning three years ago with what sounded like garden-variety reports of under-the-table payments from agents and improper classroom help for athletes, the affair has spread and deepened to include evidence of hundreds of sham courses offered since the early 1990s. Untold numbers of grades have been changed without authorization and faculty signatures forged—all in the service of an elaborate campaign to keep elite basketball and football players academically eligible to play.

After belatedly catching up with the UNC debacle in this recent dispatch, I’ve decided the still-developing story deserves wider attention. Or, to put it more precisely, the excellent reporting already done by the News & Observer of Raleigh merits amplification outside of North Carolina.

The rot in Chapel Hill undermines UNC’s reputation as one of the nation’s finest public institutions of higher learning. Officials created classes that did not meet. That’s not the only reason more scrutiny is needed. There’s also the particularly pernicious way that the school’s African and Afro-American Studies Department has been used to inflate the GPAs of basketball and football players. The corruption of a scholarly discipline devoted to black history and culture underscores a racial subtext to the exploitation of college athletes that typically goes unidentified in polite discussion. (UNC’s former longtime Afro-Am chairman, Julius Nyang’oro, has been criminally indicted for fraud.)

Another reason Chapel Hill requires sustained investigation is the manner in which the athletic and academic hierarchies at UNC, along with the National Collegiate Athletic Association, have so far whitewashed the scandal. Officials have repeatedly denied that the fiasco’s roots trace to an illicit agenda that, in the name of coddling a disproportionately black undergraduate athlete population, has left many students intellectually crippled.

Dan Kane, the News & Observer‘s lead investigative reporter, does old-school, just-the-facts-m’am work—and more power to him. Digging up the basic data has been a lonely and arduous task for which Kane has been rewarded with craven accusations of home state disloyalty. As he wrote last month, the six official “reviews” and “investigations” of the wayward Afro-Am Department have all failed to connect the dots in any meaningful way. In coming weeks and months, I hope I can supplement Kane’s dogged efforts with some long-distance perspective. Valuable tips from concerned local people, some of them UNC alumni, are already pouring in, and that’s part of the reason I’m going to pursue the story. Keep those e-mails coming.

One source of insight is Jay Smith, a professor of early modern French history at UNC. A serious scholar who understands the university’s sports-happy culture, Smith has developed a powerful distaste for the way his employer has obfuscated the scandal. “What’s going on here is so important,” he told me by telephone, “because it’s emblematic of what I think goes on at major universities all across the country,” where the business of sports undermines the mission of education. That sounds right to me.

Smith has the best sort of self-interested motivation for making sense of what has happened on his campus: He’s writing a book about the whole mess, based in part on statistics and personal experiences proffered by UNC instructors assigned over the years to assist varsity athletes. To me that sounds like a page-turner—and even the basis of an HBO movie.

I asked Smith what he thinks is going to happen next. He pointed to comments that the local district attorney made when the disgraced former Afro-Am chairman, Nyang’oro, was indicted in December. Orange County DA Jim Woodall told the News & Observer that a second person is also under investigation and could be indicted soon. Woodall did not identify the second target, except to say the person is not someone who currently works for UNC. ”Other probes have identified Nyang’oro’s longtime department manager, Deborah Crowder, as being involved in the bogus classes,” the News & Observer noted. “She retired in 2009.” Both Crowder and Nyang’oro have refused to comment publicly, and Nyang’oro’s criminal defense lawyer didn’t return my e-mail inquiry.

The indictment of Crowder, a relatively low-level administrative figure, could crack open the case. It defies logic that Nyang’oro and his assistant would have operated a rogue department without the knowledge of more senior faculty members, if not top university administrators. It further defies reason that this pair would have created phony classes for athletes without the urging and participation of people in the UNC athletic bureaucracy. Nyang’oro and Crowder are going to have ample reason to sing as part of potential plea deals.

Even before that happens, according to Smith, one or more well-positioned whistle-blowers are likely to go public and start naming names if they think the powers that be are planning to isolate Crowder and Nyang’oro as the sole villains. This thing goes much higher, and there’s much more to come from Chapel Hill.


"Alleged Academic Fraud at U. of North Carolina Tests NCAA's Reach:  Myths surrounding the group's investigation cloud the controversy at Chapel Hill," by Brad Wolverton, Chronicle of Higher Education, September 7, 2012 ---

"North Carolina Admits to Academic Fraud in Sports Program," Inside Higher Ed, September 20, 2011 ---

Bob Jensen's threads on professors and Teachers Who Let Students Cheat ---

From PwC on June 16, 2014

This edition of EITF observer provides a synopsis of the discussions and decisions reached at the June 12 EITF meeting.

From the CFO Journal's Morning Ledger on June 6, 2014

Americans’ wealth hits record as rich get richer
Americans’ wealth hit a fresh record in the first quarter amid a rise in home values and stock prices, a trajectory poised to continue as U.S. markets push higher but one that doesn’t necessarily figure to rev up the sluggish recovery, the
WSJ’s Neil Shah reports. The net worth of U.S. households and nonprofit organizations rose roughly 2%, or about $1.5 trillion, between January and March to $81.8 trillion, the highest on record, according to the Federal Reserve.


"Dropping the bomb America’s fierce campaign against tax cheats is doing more harm than good," The Economist, June 28, 2014 ---|hig|27-06-2014|536d497184958af23b817074|NA

At a recent conference for offshore wealth managers in Geneva, Basil Zirinis of Sullivan & Cromwell, a law firm, began his presentation with a discussion of events in Iraq, where Islamist fighters were advancing on Baghdad. Barack Obama, he claimed, was drawing a red line around the city and, if necessary, would “drop FATCA on them”. Worse, they would get no deadline extension. The nuclear option, he added, was to treat them as if they were Swiss.

The analogy was tasteless, but also telling. FATCA stands for Foreign Account Tax Compliance Act, an American law passed in 2010 to crack down on the use of offshore banks, particularly in Zurich and Geneva, to hide taxable assets. The law, part of which takes effect on July 1st, is the most important and controversial development in decades in the international fight against tax evasion. It is feared and loathed by moneymen because of its complexity, its global reach and the high cost of compliance. One senior banker denounces it as “breathtakingly extraterritorial”. In this section

. . .

Transparency campaigners love it because it threatens to blow apart the old way of exchanging tax information between countries “on request”, which they view as unwieldy and soft on cheats. FATCA, they hope, will usher in “automatic” exchange of data, leaving the tax-shy with nowhere to hide.

In essence, FATCA turns foreign banks and other financial institutions into enforcement arms of America’s Internal Revenue Service (IRS). They must choose between turning over information on clients who are “US persons” or handing 30% of all payments they receive from America to Uncle Sam. The threat appears to be working. More than 77,000 financial firms have signed up. About 80 countries have struck agreements with America to allow their banks to hand over data.

The financial industry is struggling to work out which funds, trusts and other non-bank entities count as “financial institutions” under the law. There is also confusion over who is a “US person”. The definition is broad and includes not only citizens but current and former green-card holders and non-Americans with various personal and economic ties to the United States. Some Canadian “snowbirds” who travel to America for part of each year could be caught in the net, says Allison Christians, a tax professor at McGill University. As the complexities of implementation have grown apparent, the American authorities have had to extend several deadlines. Banks, for instance, will get a two-year moratorium on enforcement as long as they are striving to comply.

FATCA has already sent a chill through the 7m Americans who live abroad. Thousands have been told by their local banks and investment advisers that they no longer want their custom because it is too much hassle. Many others will now have to spend thousands of dollars to straighten out their paperwork with the IRS, even if they owe no tax (and most do not, since they will have paid a greater amount abroad, which counts as a credit against tax owed in America).

A record 2,999 of these exasperated expats renounced their citizenship or green cards in 2013. More than 1,000 did so in the first quarter of 2014. (Before FATCA the number was a few hundred a year.) Others have remained American and fought back against unfriendly banks. Using anti-discrimination laws, a Dutch-American sued a Dutch lender that had pre-emptively shut his account and 149 others; he won the case in April. To its credit, the IRS acknowledges the problem and is trying to soften the blow. It recently introduced a streamlined compliance programme for expats who inadvertently failed to fill out the right forms, for example—although this still requires refiling three years of returns.

FATCA also places a burden on the IRS, by generating an unwieldy amount of information. The agency is being given far more to do with far fewer people (thanks to budget cuts), leaving it “on the verge of collapse”, according to a former senior official.

It is not clear that the law will ensnare its quarry. Seasoned tax dodgers are not so naive as to hold money in their own names. FATCA will penetrate some of the shell companies and other structures they hide behind, but Senate investigators and other experts say loopholes remain.

Related to that is the question of whether FATCA will pay for itself. Counting only the expense for American financial firms, the answer is maybe, if it brings in at least the $800m a year estimated by Congress. (The law was passed without any formal cost-benefit analysis.) However, the overall costs of complying, borne mostly by non-American banks, are likely to far exceed the extra tax receipts.

FATCA is about “putting private-sector assets on a bonfire so that government can collect the ashes,” complains Richard Hay of Stikeman Elliot, a law firm. Mark Matthews, a former deputy commissioner of the IRS now with Caplin & Drysdale, another law firm, argues that the effort put into hunting offshore tax evaders is disproportionate: the sums they rob from the public purse “look like a pinprick” compared with other types of tax dodging, such as the under-declaration of income by small businesses.

Another question is whether FATCA might be subsumed into a scheme being promoted by the OECD, a club of mostly rich countries, whereby signatories would share data on financial accounts annually. It has won backing from around 50 countries, including big European nations, India, China and Brazil (and from big banks, which assume compliance costs will be lower under a single global standard). It differs from FATCA in an important respect: information-sharing will be based on residence, not citizenship.

Continued in article

Let's Call it the 186 Club of the One Percent Tax Avoiders
A new law allows Americans to pay minimal or no taxes if they live on the island for at least 183 days a year, and unlike with a move to Singapore or Bermuda, Americans don't have to turn in their passports.--- 

Thomas Pekkety ---

Piketty’s second law regards the relationship between capital (e.g., machines, software, buildings) and national income. Piketty argues that the owners of capital will capture a growing share of national income at the expense of labor. He says that will happen because savings and investment will continue to grow, even as population growth and technological progress slow, along with overall economic growth.
Piketty's 'Second Law

We simply do not at all agree with the macroeconomic reasoning that undergirds his forecast . . . Robert Solow, a Nobel prize-winning economist, was closer to the truth in 1956, when he said that as the economy’s growth rate slows toward zero, so will the national savings rate. “Postwar U.S. data, moreover, [are] consistent with this theory in that decades with low growth have typically been associated with low (or even negative) net savings rates,” . . .
Tony Smith, a Yale University economist, and Per Krusell of Stockholm University’s Institute for International Economic Studies

"Is Piketty's 'Second Law of Capitalism' Really a Law?" by Peter Coy, Bloomberg Businessweek June 6, 2014 --- 

The two economists agree with Piketty that wealth inequality has grown, but they say the causes include “educational institutions, skill-biased technical change, globalization, and changes in the structure of capital markets.”

Update, June 6: In an email Piketty wrote that he didn’t understand the professors’ case. He said his book argues that savings rates have been falling more slowly than growth rates, not that the process will go on forever. Or, as he put it:

We’ve never written that the capital income ratio beta=s/g should go to infinity if g goes to zero: presumably people would stop saving (i.e. s would go to zero) much before that! We’re just saying that the simplest way to explain the rise in capital-income ratios that we observe in the data in recent decades is that saving rates did not fall as much as growth rates, so that mechanically the capital-income ratio tends to rise to relatively high levels, just like in the 19th century. I don’t think they are disputing this. Also note that the rise of capital-income ratio is certainly not bad per se, and does not necessarily imply high inequality. Tell me if I missed something!

Martin Feldstein ---

"Piketty's Numbers Don't Add Up:  Ignoring dramatic changes in tax rules since 1980 creates the false impression that income inequality is rising," by Harvard's Martin Feldstein, The Wall Street Journal, May 14,  2014 ---

Thomas Piketty has recently attracted widespread attention for his claim that capitalism will now lead inexorably to an increasing inequality of income and wealth unless there are radical changes in taxation. Although his book, "Capital in the Twenty-First Century," has been praised by those who advocate income redistribution, his thesis rests on a false theory of how wealth evolves in a market economy, a flawed interpretation of U.S. income-tax data, and a misunderstanding of the current nature of household wealth.

Mr. Piketty's theoretical analysis starts with the correct fact that the rate of return on capital—the extra income that results from investing an additional dollar in plant and equipment—exceeds the rate of growth of the economy. He then jumps to the false conclusion that this difference between the rate of return and the rate of growth leads through time to an ever-increasing inequality of wealth and of income unless the process is interrupted by depression, war or confiscatory taxation. He advocates a top tax rate above 80% on very high salaries, combined with a global tax that increases with the amount of wealth to 2% or more.

His conclusion about ever-increasing inequality could be correct if people lived forever. But they don't. Individuals save during their working years and spend most of their accumulated assets during retirement. They pass on some of their wealth to the next generation. But the cumulative effect of such bequests is diluted by the combination of existing estate taxes and the number of children and grandchildren who share the bequests.

The result is that total wealth grows over time roughly in proportion to total income. Since 1960, the Federal Reserve flow-of-funds data report that real total household wealth in the U.S. has grown at 3.2% a year while the real total personal income calculated by the Department of Commerce grew at 3.3%.

The second problem with Mr. Piketty's conclusions about increasing inequality is his use of income-tax returns without recognizing the importance of the changes that have occurred in tax rules. Internal Revenue Service data, he notes, show that the income reported on tax returns by the top 10% of taxpayers was relatively constant as a share of national income from the end of World War II to 1980, but the ratio has risen significantly since then. Yet the income reported on tax returns is not the same as individuals' real total income. The changes in tax rules since 1980 create a false impression of rising inequality.

In 1981 the top tax rate on interest, dividends and other investment income was reduced to 50% from 70%, nearly doubling the after-tax share that owners of taxable capital income could keep. That rate reduction thus provided a strong incentive to shift assets from low-yielding, tax-exempt investments like municipal bonds to higher yielding taxable investments. The tax data therefore signaled an increase in measured income inequality even though there was no change in real inequality.

The Tax Reform Act of 1986 lowered the top rate on all income to 28% from 50%. That reinforced the incentive to raise the taxable yield on portfolio investments. It also increased other forms of taxable income by encouraging more work, by causing more income to be paid as taxable salaries rather than as fringe benefits and deferred compensation, and by reducing the use of deductions and exclusions.

The 1986 tax reform also repealed the General Utilities doctrine, a provision that had encouraged high-income individuals to run their business and professional activities as Subchapter C corporations, which were taxed at a lower rate than their personal income. This corporate income of professionals and small businesses did not appear in the income-tax data that Mr. Piketty studied.

The repeal of the General Utilities doctrine and the decline in the top personal tax rate to less than the corporate rate caused high-income taxpayers to shift their business income out of taxable corporations and onto their personal tax returns. Some of this transformation was achieved by paying themselves interest, rent or salaries from their corporations. Alternatively, their entire corporation could be converted to a Subchapter S corporation whose profits are included with other personal taxable income.

These changes in taxpayer behavior substantially increased the amount of income included on the returns of high-income individuals. This creates the false impression of a sharp rise in the incomes of high-income taxpayers even though there was only a change in the legal form of that income. This transformation occurred gradually over many years as taxpayers changed their behavior and their accounting practices to reflect the new rules. The business income of Subchapter S corporations alone rose from $500 billion in 1986 to $1.8 trillion by 1992.

Mr. Piketty's practice of comparing the incomes of top earners with total national income has another flaw. National income excludes the value of government transfer payments including Social Security, health benefits and food stamps that are a large and growing part of the personal incomes of low- and middle-income households. Comparing the incomes of the top 10% of the population with the total personal incomes of the rest of the population would show a much smaller rise in the relative size of incomes at the top.

Finally, Mr. Piketty's use of estate-tax data to explore what he sees as the increasing inequality of wealth is problematic. In part, this is because of changes in estate and gift-tax rules, but more fundamentally because bequeathable assets are only a small part of the wealth that most individuals have for their retirement years. That wealth includes the present actuarial value of Social Security and retiree health benefits, and the income that will flow from employer-provided pensions. If this wealth were taken into account, the measured concentration of wealth would be much less than Mr. Piketty's numbers imply.

The problem with the distribution of income in this country is not that some people earn high incomes because of skill, training or luck. The problem is the persistence of poverty. To reduce that persistent poverty we need stronger economic growth and a different approach to education and training, not the confiscatory taxes on income and wealth that Mr. Piketty recommends.

"A modern Marx:  Thomas Piketty’s blockbuster book is a great piece of scholarship, but a poor guide to policy," The Economist, May 3, 2014 ---

"Thomas Piketty: Marx 2.0," by Rana Foroohar, Time Magazine, May 19, 2014, pp. 46-49 ---

But "redistribute wealth" is a relative term.  Paul Krugman's review ---
Jensen Comment
Especially note Krugman's point about how technology changed the structure of wealth in America to a point where Piketty's European world is not quite the same as the U.S. world of the wealthy in 2012. Piketty does not entirely overlook that in his book.

Ten ways to fight inequality without Piketty's Wealth Tax ---


Jensen Comment
History does not repeat itself in the 21st Century replacement of labor with capital. Never before in history has capital become so effective and efficient in replacing labor with robotics and other technology. Soon we will have driverless  on the highways,

Amazon orders will be filled entirely by robots. The parcels will be delivered by drones above the maddening unemployed crowds below. Soon our wars will be fought with robots and drowns.

The only human thing left to dissidents will be terrorists blowing up the power grid and innocent people. Thant and poisoning our food and water supplies.

"Starbucks Plan Shines a Light on the Profits in Online Education Starbucks Plan Shines a Light on the Profits in Online Education:  That Arizona State U. can afford to offer such big discounts to employees of the coffee company suggests just how much higher-education institutions earn from distance learning," by Goldie Blumenstyk, Chronicle of Higher Education, June 27, 2014 ---

Jensen Comment
Without mentioning it, Goldie has hit on what we teach in managerial accounting as "Cost-Profit-Volume (CPV)" analysis. The contribution margin is price minus variable costs. Such margins apply first to recovering fixed costs and then go to operating profits. Higher volume (sales) means that it's possible to make lower contribution margins profitable by lowering prices ceteris paribus.

Key to CPV analysis is management of variable and fixed costs. The Starbucks plan is ingeniously designed to reduce costs. Firstly it applies only to the continuance of the last two years of college education. This avoids much of the cost associated with students in their first two years. Firstly, it avoids the need for so much remedial work since students that pass the first two years are less likely to need added remedial education. Secondly, such students are less likely to waste resources by dropping out. Thirdly, most of them will have had previous distance education such that they do not have to be initially trained on how to take distance education courses.

Actually many universities are finding distance education courses more profitable than onsite courses. One reason is the demand function. Onsite courses often are quite sensitive to tuition pricing because students have to consider other costs such as commuting costs, child care costs, and maybe even boarding costs. Online students often avoid such costs and therefore are somewhat less sensitive to slightly higher online pricing. 

There are many other things that case writers could build into the "Starbucks Case." These include such factors as operating leverage, sales mix analysis, and demand elasticity analysis. Also increasing employee benefits sometimes means that employees will work for lower cash wages.

In any case, I think it would make sense for managerial accounting teachers to assign student teams to write up cases and solutions to the "Starbucks Case" and other real-world instances of distance education.

Teaching Case on CPV Analysis
From The Wall Street Journal Accounting Weekly Review on January 6, 2012

Starbucks to Raise Prices
by: Annie Gasparro
Jan 04, 2012
Click here to view the full article on
Click here to view the video on WSJ Video

TOPICS: Commitments, Cost Accounting, Cost Management, Managerial Accounting, Product strategy

SUMMARY: Starbucks Corp. "said Tuesday it is raising prices an average of about 1% in the Northeast and Sunbelt regions...." Price increases will be posted for some but not all sizes of its brewed coffee products; the company "...isn't raising prices for packaged coffee sold at its cafes or at grocery stores." The article comments on pricing strategy, cost control, and profit margins. The related video discusses the company's purchase of a long term contract for coffee at high prices just before coffee prices fell overall.

CLASSROOM APPLICATION: The article is useful to introduce manufacturing cost components and cost behavior with a simple product with which most students should be familiar.

1. (Introductory) Why is Starbucks raising the price of some of its locations for some of its products?

2. (Introductory) On which products will Starbucks raise prices? In which locations? Why will the company's pricing vary by product and region?

3. (Advanced) According to one statement in the article about Starbucks products, " represents a bigger portion of the cost of its packaged goods than of brewed coffee." What are the other cost components for a cup of brewed coffee that are not present in a package of whole coffee beans for sale in a grocery store?

4. (Advanced) What was the impact of a contract for coffee purchases on Starbucks's costs for its product?

5. (Advanced) Based on the discussion in the related online video, how does Starbucks expect coffee purchase costs to even out over the long term?

Reviewed By: Judy Beckman, University of Rhode Island

"Starbucks to Raise Prices," by: Annie Gasparro, The Wall Street Journal, January 4, 2012 ---

Starbucks Corp. is raising brewed-coffee prices in some regions to offset its higher costs.

The Seattle chain said Tuesday it is raising prices an average of about 1% in the Northeast and Sunbelt regions, including such cities as Boston, New York, Washington, Atlanta, Dallas and Albuquerque, N.M.

Starbucks didn't give details on all the areas where prices will increase but said most southern states are included. Prices won't rise in California and Florida.

Starbucks has raised prices in its cafes annually since the recession began, though the company said its increases have been "far less" than those of its rivals.

Starbucks will face higher commodity costs than some of its competitors in the coming months. The chain made contracts to buy coffee for the fiscal year that began in October because prices were rising and Starbucks wanted to eliminate the volatility of buying on the spot market. But the market for coffee soon fell, and Starbucks was stuck paying more than it would have otherwise.

Over the past couple of years, Starbucks has topped the industry in sales and been able to manage commodity inflation, "not with pricing, but with a more efficient cost structure and strong traffic growth," Chief Financial Officer Troy Alstead said in November when the company reported earnings.

Because the chain's high-end consumer base is less sensitive to prices than that of some rivals, Starbucks has said it didn't think increases would affect customer purchases, even in a struggling economy. Some chains, especially fast-food restaurants that focus on low prices, risk losing customers when prices rise.

Starbucks shares rose 43% last year. The stock fell 73 cents, or 1.6%, to $45.29 in 4 p.m. composite trading Tuesday on the Nasdaq Stock Market.

The latest change, which was reported earlier by Reuters news service, raises the cost of a "tall," or 12-ounce, coffee in some New York City stores by 10 cents to $1.85. Not all sizes will see price increases.

Starbucks isn't raising prices for packaged coffee sold at its cafes or at grocery stores. That's where Starbucks faces the greater pressure on profit margins, largely because coffee represents a bigger portion of the cost of its packaged goods than of brewed coffee.

Continued in article


From EY Newsletter on June 27, 2014

Comment letter on AICPA’s proposed statement on standards for attestation engagements


In our comment letter on the Proposed Statement on Standards for Attestation Engagements, Subject-Matter Specific Attestation Standards: Clarification and Recodification, we supported clarifying the standards in accordance with the clarity drafting conventions used in the proposed general attestation standard. We also supported moving AT section 501, An Examination of an Entity’s Internal Control Over Financial Reporting That Is Integrated With an Audit of Its Financial Statements, to a Statement on Auditing Standards and replacing it with a generic standard that provides guidance on examining an entity’s internal control related to financial reporting, operations or compliance.

From the CFO Journal's Morning Ledger on June 5, 2014

Investors may be overlooking repatriation taxes
Markets may be overvaluing companies with large overseas earnings, reports CFOJ’s Vipal Monga, by ignoring the taxes they would have to pay if they tried to bring those profits to the U.S., according to a report by Fitch Ratings. A sample of 40 large holders of unrepatriated overseas earnings analyzed by Fitch made an average $28.4 billion in foreign jurisdictions in 2013, up $3.1 billion in 2012, but those earnings may be worth less than investors think. “What you can get your hands on is less than what you can see,” said Fitch analyst Stéphane Buemi. A recalculation of the earnings’ value with that in mind would reduce the basic earnings per share of the top 40 overseas earners by an average of 18%, according to Fitch.

From the CFO Journal's Morning Ledger on June 5, 2014

Court says Citi judge went too far
An appeals court overturned a lower court’s decision to reject a settlement between the Securities and Exchange Commission and Citigroup Inc., saying the deal was in the “public interest” and the judge had shown “an abuse of discretion” in blocking it, the WSJ’s Christopher M. Matthews reports. In the lower court rejection, U.S. District Judge Jed Rakoff had rebuked the SEC for allowing the bank to settle without admitting wrongdoing.

Naked Shorts ---

"Venezuelan Prostitutes Are Making A Killing By Doubling As Currency Traders," by Linette Lopez, Business Insider, June 9, 2014 ---

So Much for Accounting Standard Neutrality (not that I think that most standards are neutral)

"Banks expect to set aside more capital following IFRS 9 accounting changes,", June 2014 ---

Forthcoming accounting rules which will govern how banks in Europe book losses are expected to require banks to set aside more capital according to over half the banks surveyed on the issue by auditors Deloitte.20 Jun 2014.

More than 50% of banks questioned believe the International Financial Reporting Standards 9 (IFRS 9) rules will increase the amount that banks have to hold to cover loans by up to 50%, Deloitte said. A total of 70% of banks expect the new provisions "to exceed current regulatory measures, potentially increasing the amount of capital that banks will need to hold", said Deloitte.

The figures are contained in Deloitte’s Fourth Global IFRS Banking Survey which took into account views from 54 banks from Europe, the Middle East, Africa, Asia Pacific and the Americas.

The IFRS 9 Financial Instruments rules are expected to be issued this summer by the London-based International Accounting Standards Board (IASB) and are expected to come into effect in 2018.

The new standard is designed to address concerns which emerged following the global financial crisis when banks were unable to account for losses until they were incurred, even when it was apparent to them that they were going to experience those losses. Under the new loss rules, it is anticipated that banks will be able to make provisions for losses and ensure they are appropriately capitalised for the loans they have already written, according to the Financial Times.

According to the banks surveyed by Deloitte, the anticipated increased capital requirement could drive up the cost of some products. 56% of the banks said the pricing of lending will be affected.  

Continued in article

"Un-Fathom-able: The Hidden History of Ed-Tech #CETIS14," by Audrey Watters, Hacked Education, June 18, 2014 ---

Jensen and Sandlin Book entitled Electronic Teaching and Learning: Trends in Adapting to Hypertext, Hypermedia, and Networks in Higher Education
(both the 1994 and 1997 Updated Versions)

Teaching Case
From The Wall Street Journal Weekly Accounting Review on June 20, 2014

Rough Seas Haven't Been Kind to Carnival
by: Spencer Jakab
Jun 24, 2014
Click here to view the full article on

TOPICS: Analysts' Forecasts, Interim Financial Statements, Revenue Forecast

SUMMARY: "Analysts polled by FactSet predict earnings of two cents a share for the second fiscal quarter" ended May 31, 2014 for Carnival Corp. That estimate is down from five cents a share for one year ago even though the company's CEO in March said that "bookings for the year were higher" apparently indicating that discounts were needed to make the bookings. "The damage to the brand [from the February 2013 fire that left passengers electricity or working toilets] seems to have been worse than anticipated."

CLASSROOM APPLICATION: The article may be used to review basics of earnings forecasting and quarterly reporting in an introductory or MBA financial accounting class.

1. (Introductory) What recent events have harmed reputations of cruises in general? What recent event damaged the reputation of Carnival cruises in particular?

2. (Advanced) What is the evidence that Carnival Cruise had to discount its cruise prices in order to maintain bookings?

3. (Advanced) What financial report will confirm or deny the information about the cruise bookings? Explain specifically what financial statement item or disclosure you think will provide this information.

4. (Advanced) Access the Carnival Corporation & plc press release of its second fiscal quarter earnings filed on Form 8-K with the Securities and Exchange Commission and available at Read the first through third paragraphs of the press release as well as the first paragraph under "Key metrics for the second quarter 2014..." How did the actual results compare with forecasts discussed in this article?

Reviewed By: Judy Beckman, University of Rhode Island

"Rough Seas Haven't Been Kind to Carnival," by Spencer Jakab, The Wall Street Journal, June 27, 2014 ---

Carnival Corp.'s CCL -0.11% new captain grabbed the tiller in some awfully choppy seas for a landlubber.

But former Monsanto MON -0.43% executive Arnold Donald, who took over as chief executive last July and is the first person outside the Arison family to head the world's largest cruise operator by capacity, could have looked like an old sea dog by now. Because the period for which Carnival will report results on Tuesday compares with one dented by an embarrassing accident in February 2013, business seemingly had nowhere to go but up.

That is particularly important since the so-called wave season, roughly January through March, represents the lion's share of annual bookings. Mr. Donald said in March that bookings for the year were higher, which was unsurprising, but that prices were lower. Analysts at ITG Investment Research think the discounts needed to fill Carnival's ships may be even steeper than what Wall Street has penciled in.

Analysts polled by FactSet predict earnings of 2 cents a share for the second fiscal quarter through May, down from 5 cents a year ago. And a weak wave season would be particularly negative for the third quarter.

Comparisons should have been flattering compared with the months after last year's fire on the Carnival Triumph that stranded thousands of passengers in squalid conditions. The damage to the brand seems to have been worse than anticipated.

Even so, cheap berths and time eventually heal all wounds for the cruise industry. Meanwhile, the industry is on the cusp of rapid growth outside mature markets. North America and European passengers make up about 85% of bookings globally, but Asia, and Greater China in particular, are the future. Carnival announced last month that it was sending a fourth ship to China, where the company has expanded capacity by a whopping 140% in the past two years.

Enthusiastic investors pushed up Carnival's forward earnings multiple in the second half of 2013 to north of 23 times. It has fallen since, but is still above 19 times, higher than throughout much of the heady 1990s and 2000s.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on June 20, 2014

GM Repair Costs Jump to $2 Billion
by: Jeff Bennett
Jun 17, 2014
Click here to view the full article on

TOPICS: Contingent Liabilities, Product Recall

SUMMARY: General Motors pushed its repair-cost estimate for auto recalls this year to $2 billion as it disclosed plans to replace potentially faulty ignition keys on 3.37 million older model cars in North America. The filing is located on the web at In it, the company states, "GM expects to take a charge of up to approximately $700 million in the second quarter for the cost of recall-related repairs announced in the quarter. This amount includes a previously disclosed $400 million charge for recalls announced May 15 and May 20." These statements imply a $1.3 billion charge in the first quarter of 2014. In the 10-Q for the quarter ended March 31, 2014, under Notes Tables, Product Warranty and Related Liabilities, $1,386 million is disclosed as "Warranties issued and assumed in period - recall campaigns and courtesy transportation." Students are asked to find this amount.

CLASSROOM APPLICATION: The article can be used to cover accounting for estimated warranty liability with this current issue facing General Motors.

1. (Introductory) In the article, the author writes that GM's repair cost estimate for auto recalls this year now totals $2 billion. Summarize the accounting for this estimate.

2. (Advanced) Access the SEC filing describing this estimate in a press release located at Scroll down to read until you find the actual amounts recorded by GM. In what time periods has this estimate been recorded?

3. (Advanced) Explain the difference between the $2 billion highlighted in the title to this article and the amount disclosed in the press release. How much warranty costs do you think were estimated and recorded in the first quarter of 2014?

4. (Advanced) Access the General Motors first quarter 2014 financial statements filed with the SEC and available at Confirm the amount you determined in the question above. Where do you find this information?

5. (Advanced) Compare this estimate to the one made for these 3 months in the preceding year.

6. (Advanced) What other warranty provisions also are made in the first quarter of 2014? How do those compare to the preceding year?

7. (Introductory) Has this warranty/product recall work actually been executed and paid for in this quarter? Explain.

Reviewed By: Judy Beckman, University of Rhode Island

General Motors Recalls 1.7 Million More Vehicles
by Jeff Bennett
Mar 18, 2014
Page: A

"GM Repair Costs Jump to $2 Billion," by Jeff Bennett, The Wall Street Journal, June 20, 2014 ---

General Motors Co. GM -0.21% on Monday pushed its repair-cost estimate for auto recalls this year to $2 billion as it disclosed plans to replace potentially faulty ignition keys on 3.37 million older model cars in North America.

The move comes two days before Chief Executive Mary Barra is set to testify before a House committee on the auto maker's mishandling of an ignition switch recall involving Chevrolet Cobalts and other older models.

The nation's largest auto maker is attempting to "clear the decks" of any potential recall problems ahead of Ms. Barra's testimony in a show of good faith to lawmakers currently investigating its safety operations, according to people familiar with the matter.

Detroit-based GM said it would expand a second quarter charge to earnings by $300 million, to $700 million, to cover the costs for recalling older Buicks, Chevrolets and Cadillacs covered by the latest recall. The charge is in addition to a $1.3 billion spent in the first quarter.

It was the second major ignition switch-related recall in less than a week. The auto maker on Friday recalled 500,000 newer-model Chevrolet Camaros with an ignition-switch that could turn off when jarred. It plans to change the key in those cars.

In the latest action, GM would rework or replace the keys on about 3.37 million 2000 to 2014 model year cars in the U.S. because of a similar shift if the key is carrying extra weight and is jarred or bumped. Regulators continue to probe car parts suppliers about switches and air bag shut offs.

GM intends to turn the slot on the end of the key head—used to hold a key ring—to a hole, alleviating the weight issue. The auto maker cited eight crashes and six injuries related to the latest recall.

Continued in article

Bob Jensen's threads on cost and managerial accounting ---

Teaching Case
From The Wall Street Journal Weekly Accounting Review on June 15, 2014

FASB to Tweak Accounting for Inventories and Income Statements
by: Emily Chasan
Jun 11, 2014
Click here to view the full article on


SUMMARY: "U.S. accounting rule makers decided this week to start two, short-term projects aimed simplifying Generally Accepted Accounting Principles [in the areas of accounting for inventories and presentation of extraordinary items]."

CLASSROOM APPLICATION: The article may be used in a financial reporting class to emphasize impending changes and conceptual reasoning in areas in which students may simply be trying to memorize rules as they now stand.

1. (Introductory) Name and summarize the procedures used for the inventory accounting method that requires using replacement cost, profit margin, and net realizable value of inventory.

2. (Advanced) Why do accounting standards require the inventory analysis described above? Can we achieve the same objective using only inventory cost and net realizable value? Explain.

3. (Advanced) What is the reasoning behind showing extraordinary items in the income statement?

4. (Advanced) How might presentation of extraordinary items in the income statement be confusing for financial statement readers?

Reviewed By: Judy Beckman, University of Rhode Island

"FASB to Tweak Accounting for Inventories and Income Statements," by Emily Chasan, The Wall Street Journal, June 11, 2014 ---

U.S. accounting rule makers decided this week to start two, short-term projects aimed simplifying Generally Accepted Accounting Principles.

The projects will streamline inventory measurement techniques and to reduce extraordinary items in corporate income statements, the Financial Accounting Standards Board said.

“We believe we could reduce cost and complexity,” FASB Chairman Russell Golden said in a statement.

The move is part of a broader initiative by the board, which is researching several additional suggestions by stakeholders.

Under current U.S. accounting rules, companies have to consider replacement cost, profit margin and the realizable value of their inventory to measure it. FASB tentatively decided companies should instead choose the lower of either their inventory cost or its net realizable value. Net realizable value is the estimated sales price of a company’s inventory, minus selling costs.

The income statement project would remove the concept of “extraordinary items” from GAAP. Currently, companies are required to separately evaluate and disclose those items.

Bob Jensen's threads on replacement cost and other alternatives for inventory valuation ---  

Accountant's Handbook. Edited by William A. Paton,  Second Edition (Ronald Press, 1932, Page 419).
Replacement Cost Inventories
. . . Further in the retail market selling prices do not always fluctuate closely in terms of replacement costs and accordingly the point that the merchandise reports to management should in all cases show current costs rather than actual book costs has less force in this field. This is particularly true of style goods and highly specialized goods in general; it is less true in staples such as flour, sugar, coal, etc. In the wholesale market, on the other hand, selling prices tend to move more closely with changing costs and hence there is more force to the argument in favor of valuation on a replacement cost basis in this field.

Specific Objections

  1. It is not approved for income tax purposes by the Bureau of Internal Revenue. (in 1932 there were no computers such that having more than one basis of inventory valuation was a computational nightmare)
  2. Where it means the inclusion of appreciation in income it has no general legal standing. (meaning that co-mingling unrealized price appreciations with realized revenues renders mixed-model income statements confusing)
  3. It is viewed as non-conservative by accountants, bankers, and business men generally. (in 1932 there was a significantly lower proportion of business women)
  4. It requires the determination of replacement costs for entire stock at the inventory date, a considerable task, especially for certain classes of goods. (this is a problem that still exists in the 21st Century after having witnessed the extreme inaccuracies of firms that tried to comply with FAS 33 while it was in effect)
  5. It leaves the more or less dependable field of book records for a territory where estimate plays a considerable part. (which is why auditors to this day are not allowed by auditing standards to generally attest to current values of non-financial assets except in the cases of extreme impairment where inaccuracies are more acceptable in the accounting standards)

Paton continues the discussion here with the "Meaning of Replacement Cost"


Teaching Case
From The Wall Street Journal Weekly Accounting Review on June 15, 2014

VA Audit Finds Delays in Care Widespread
by: Ben Kesling
Jun 10, 2014
Click here to view the full article on

TOPICS: Auditing, Internal Auditing

SUMMARY: "During a nearly monthlong audit of 731 VA facilities and nearly 4,000 employees, the VA found widespread problems with appointment scheduling." The related video also begins with a statement about the internal audit. Regarding the performance metrics that are the focus of the related article, "starting in 2011, when the VA instituted a new system to track performance standards, five VA hospitals notched consistently poor scores on a range of critical-care outcomes, including mortality and infection rates."

CLASSROOM APPLICATION: The article may be used to discuss different types of audits; their importance for verifying measures, in this case, of health outcomes rather than financial outcomes; and internal auditing versus external auditing,

1. (Introductory) What issues have led to the resignation of Veterans Affairs Secretary Eric Shinseki?

2. (Introductory) Review the graphic in the related article entitled "Weak Links." Summarize the points being made with the three metrics about death rates.

3. (Advanced) How has a Veterans Affairs audit identified information related to these issues? Who conducted the audit? What type of audit was conducted?

4. (Advanced) According to the article, what additional audit will now be undertaken? What type of audit do you think it will be? Who do you think will conduct the audit?

Reviewed By: Judy Beckman, University of Rhode Island

VA Halted Turnaround Visits to Troubled Hospitals
by Thomas M. Burton
Jun 10, 2014
Page: A1

"VA Audit Finds Delays in Care Widespread," by Ben Kesling, The Wall Street Journal, June 10, 2014 ---

Nearly 60,000 veterans are waiting to get appointments at the Department of Veterans Affairs and 70% of facilities have used an alternative to official appointment schedules to make wait times appear shorter, according to an internal VA audit released Monday.

During a nearly monthlong audit of 731 VA facilities and nearly 4,000 employees, the VA found widespread problems with appointment scheduling and pressure on employees to change data. More than 10% of scheduling staff were given instruction on how to alter patient appointment scheduling, according to the audit.

"Today, we're providing the details to offer transparency into the scale of our challenges, and of our system itself," said Sloan Gibson, acting VA secretary, in a release. "I'll repeat—this data shows the extent of the systemic problems we face, problems that demand immediate actions."

Monday's report is the culmination of an extensive audit ordered by Eric Shinseki, the former VA secretary, in the wake of widespread reports of the use of unauthorized patient wait lists throughout the VA system that made official wait times appear to be much shorter than the actual wait times faced by veterans.

As of May 15, roughly 57,436 veterans were waiting to be scheduled for care and another 63,869 had enrolled in the VA health-care system over the past decade yet have never been seen for an appointment.

Mr. Shinseki presented President Barack Obama with preliminary findings then resigned his position on May 30.

The VA's independent inspector general has also released an interim report on its review, which has found systemic problems with appointment-scheduling procedures at the VA. The full report from the independent IG is expected to be released in August, according to an IG spokeswoman.

At a House Committee on Veterans' Affairs hearing Monday evening, Richard Griffin, the VA's acting inspector general, said his office is reviewing 69 VA medical facilities and is coordinating with the Justice Department when inspectors identify potential criminal violations.

At his last appearance before a congressional hearing in mid-May, Mr. Griffin said the IG was reviewing 42 facilities. The IG issued an interim report soon after those hearings.

"The issue of manipulation of wait lists is not new to VA," said Mr. Griffin. "And since 2005 the [inspector general] has issued 18 reports that identified at both the national and local level deficiencies in scheduling, resulting in lengthy wait times and in negative impact on patient care."

Mr. Griffin also said his office has found no evidence of willful destruction of evidence at any of the locations they have reviewed during unannounced visits.

Accompanying the release of the VA's review data Monday morning, Mr. Gibson announced a hiring freeze among senior positions at the VA, and has said the VA will "trigger administrative procedures" against senior leaders in charge of problem facilities.

Mr. Gibson also said the VA will be creating an independent, external audit of scheduling practices. The Government Accountability Office has routinely said in reports and testimony from GAO officials that the VA lacks third-party validation of scheduling reform.

The VA-wide audit was ordered by Mr. Shinseki and took place over three weeks beginning on May 12.

In a conference call with reporters, a senior VA official noted that schedulers have to contend with a software system first launched in 1985 and which hasn't had a total overhaul since then. "The current scheduling practice predates the Internet," the official said, adding that designing scheduling policy is complicated because officials have to contend with this difficult-to-use software

Last week, Mr. Gibson made his first public appearances as acting VA secretary, traveling to Phoenix and San Antonio to address ongoing issues concerning patient scheduling procedures and wait times for appointments.

"We now know there is a leadership and integrity problem among some of the leaders of our health care facilities, which can and must be fixed," Mr. Gibson said in Phoenix Thursday. "That breach of integrity is indefensible."


Teaching Case
From The Wall Street Journal Weekly Accounting Review on June 6, 2014

New Rules to Alter How Companies Book Revenue
by: Michael Rapoport
May 28, 2014
Click here to view the full article on

TOPICS: Financial Accounting Standards Board, International Accounting Standards Board, Revenue Recognition

SUMMARY: "New rules released Wednesday[, May 28, 2014, jointly by the FASB and IASB] will overhaul the way businesses record revenue...capping a 12-year project....The new standards...will take effect in 2017 [and will cause] ... a broad array of companies...either to speed up or slow down the rate at which they book at least some of their revenue....Companies were cautious in assessing the potential impact of the overhaul...." Many companies are optimistic about eliminating the many inconsistencies across industries in current U.S. revenue recognition requirements. With greater consistency in timing of revenue recognition, the new standard also should help improve reporting issues because "...allegations of improperly speeding up or deferring revenue have been at the heart of many accounting-fraud scandals."

CLASSROOM APPLICATION: The article may be used in any financial accounting course covering revenue recognition. It is more helpful to access information from the FASB's web site to understand the objectives and requirements of the standard. The summary of the Accounting Standards Update (ASU) is linked in the first question. The article focuses more on the expected results and effects across different industries.

1. (Advanced) Summarize the revenue recognition process in the new accounting standard. You may access the summary of the Accounting Standards Update to help answer this question. It is available on the FASB web site at

2. (Introductory) According to the article, what types of industries or products will be most affected by the new requirements?

3. (Introductory) Review the graphic entitled "On the Books" which compares accounting for software, wireless devices, and automobiles under present GAAP and the new revenue recognition requirements. How do the new requirements move the accounting to be more similar across these three products?

4. (Advanced) Consider the current requirements for revenue recognition in these three products. What was the reasoning behind these differences? That is, what is the determining factor for the point of recognizing a sale and how does it differ across these three products? Cite any source you use in developing your answer.

Reviewed By: Judy Beckman, University of Rhode Island

"New Rules to Alter How Companies Book Revenue," by: Michael Rapoport, The Wall Street Journal, May 28, 2014 ---

New rules released Wednesday will overhaul the way businesses record revenue on their books, capping a 12-year project that will affect companies ranging from software firms to auto makers to wireless providers.

The new standards, issued jointly by U.S. and global rule makers, will take effect in 2017, prompting a broad array of companies—from software giants like Microsoft Corp. MSFT -0.42% and Oracle Corp. ORCL +0.23% to major appliance makers—either to speed up or slow down the rate at which they book at least some of their revenue.

The rules aim to simplify and inject more uniformity into one of the most basic yardsticks of a company's performance—how well its products or services are selling.

"It's one of the most important metrics for investors in the capital markets," said Russell Golden, chairman of the Financial Accounting Standards Board, which sets accounting rules for U.S. companies and collaborated on the new rules with the global International Accounting Standards Board.

Companies were cautious in assessing the potential impact of the overhaul, but some were optimistic. "We've been waiting for it for a long time," said Ken Goldman, chief financial officer of Black Duck Software Inc., a provider of software and consulting services. "This levels the playing field and takes a lot of the ambiguity out of what are overly restrictive rules."

The rules are designed to replace fragmented and inconsistent standards under which companies in different industries often record their revenue differently and sometimes book a portion of it well before or after the sales that generate it.

"We wanted to make sure there was a consistent method for companies to identify revenue," said the FASB's Mr. Golden.

But the new rules could make corporate earnings more volatile, accounting experts said, by changing the timing of when revenue is recorded. They also could lead to increased costs for companies as they seek to track their performance while providing the additional disclosure the new standards require.

"This has at least the potential to affect every company," said Joel Osnoss, a partner at accounting firm Deloitte & Touche LLP. They "really should look at the standard" and ask how the revenue-rule changes will affect them, he said.

Accounting rule makers have long focused on the question of when businesses should book revenue, because it touches every company and can be an area ripe for fraud. Allegations of improperly speeding up or deferring revenue have been at the heart of many accounting-fraud scandals.

In 2002, for example, Xerox Corp. XRX +0.93% paid a big settlement to the Securities and Exchange Commission to resolve allegations that it had improperly accelerated revenue. Xerox didn't admit or deny the SEC's allegations.

The new rule's impact will be most felt in a handful of industries in which goods and services are "bundled" together and parts of that package are provided long before or after customers pay for them. These include such benefits as maintenance that comes with the purchase of a new car, or software upgrades given to customers who bought the original program.

In such cases, the time at which companies recognize revenue is often out of sync by months or years with when customers get the goods and services associated with it. For instance, when auto and appliance makers sell their products, they typically book the purchase price immediately, but the transactions can also include free maintenance or repairs under warranty that the company might not provide for months or years.

Under the new rules, the manufacturer would book less revenue up front and more revenue later, because some of the revenue from the car or appliance would be assigned to cover future service costs. As a result, some of a company's revenue might be stretched over a longer period.

Conversely, software makers such as Microsoft and Oracle might be able to recognize some revenue more quickly. Software companies now often have to recognize their revenue over time, because they have to wait until all of the software upgrades and other pieces of a sale are delivered to the customer. The new rules will make it easier for companies to value upgrades separately and so recognize more of the software's overall revenue upfront, Mr. Golden said.

Microsoft and Oracle declined to comment.

Similarly, wireless phone companies like Verizon Communications Inc. VZ +0.32% and AT&T Inc. T -0.14% might book some revenue faster under the new rules. Currently, a wireless company books revenue each month, as customers receive wireless services—but none of that revenue is allocated to any phone that customers get free or for a low price.

That will change under the new rules; some of the monthly revenue will be applied to those phones. And since customers get the phone when they first sign up, at the beginning of their contracts, that will have the effect of pulling the revenue forward in time, allowing the company to book it earlier.

Verizon and AT&T didn't have any immediate comment.

Even companies that aren't affected so much by the timing changes will have to disclose more about the nature and certainty of their revenue—something Deloitte & Touche's Mr. Osnoss said will help investors. "I think investors are going to have much more of a view into the company."

But companies may find that providing that information complicates their lives and raises their costs. "For the majority of people, it's going to be difficult," said Peter Bible, chief risk officer for accounting firm EisnerAmper and a former chief accounting officer at General Motors Co. GM +0.39%

Continued in article

Teaching Case
From The Wall Street Journal Weekly Accounting Review on June 6, 2014

CFO Journal: Finance Chiefs React to New Revenue Recognition Rules
by: Maxwell Murphy
May 28, 2014
Click here to view the full article on

TOPICS: Revenue Recognition

SUMMARY: The new revenue recognition standard is such a significant topic that this is the second article in this review, covering CFO reactions to the change. CFOs from a small software provider to Trulia, the real estate web site, to Corning Inc. are interviewed. Most are upbeat about the improvements in comparability of revenue recognition across companies and industries. However, the article begins with a statement that companies have plenty of time to plan implementation for 2017 but that is not really the case because of comparative periods presented in the income statement. Non-public companies have one year longer to implement.

CLASSROOM APPLICATION: The article can be used in a financial reporting class covering revenue recognition.

1. (Introductory) Why is the area of accounting for revenue recognition so significant?

2. (Advanced) What are the major changes in the new revenue recognition standard from current requirements?

3. (Introductory) When must the new revenue recognition requirements be implemented?

4. (Advanced) Mr. Goldman said the rules changes won't affect [his] company, [Black Duck Software, Inc.] until it goes public. Does that mean these rules only apply to publicly traded companies? Explain.

Reviewed By: Judy Beckman, University of Rhode Island

At a Glance: New Accounting Rules
May 28, 2014
Online Exclusive

"CFO Journal: Finance Chiefs React to New Revenue Recognition Rules," by Maxwell Murphy, The Wall Street Journal, May 28, 2014 ---

Public companies have until 2017 to prepare for a new global standard for recording revenue, giving finance chiefs ample time to let Wall Street know how the new accounting rules will speed up or draw out their recognition of sales.

Some companies, like software makers and wireless providers, could record revenue more quickly than under current rules, while auto and appliance makers may need to spread the sales over a longer period than they traditionally have. The new standard, developed jointly by the U.S.’s Financial Accounting Standards Board and the International Accounting Standards Board, aims to standardize revenue recognition across industries and streamline comparisons between companies, notes The Wall Street Journal’s Michael Rapoport.

“We’ve been waiting for it for a long time,” said Ken Goldman, CFO of Burlington, Mass.-based Black Duck Software Inc., a closely held provider of open-source software and consulting services. “This levels the playing field and takes a lot of the ambiguity out of what are overly restrictive rules.”

Mr. Goldman said the rules change won’t affect the company until it goes public, which it expects will be two to three years from now, but he said the company will adopt the change before it goes into effect at the end of 2016 if it is able. Some software firms give away their services for free and instead charging more for the software, which allows them to book revenue sooner and “thereby gaming the system,” he added, and “the new rule makes that problem go away.”

Companies shouldn’t ignore the overhaul, even if they expect changes under the new rules will be minor.

Sean Aggarwal, CFO of Trulia Inc., a website for homes for sale, said the new guidance should be easier to implement, but he’s concerned about the “additional disclosures” that will be required. “I’m curious at what point we stop adding new disclosures and instead focus on simplifying redundant portions of the current disclosures.”

Tony Tripeny, corporate controller for glass products maker Corning Inc.GLW -0.09%, said “the real question companies now have to deal with pretty quickly is, when they do adopt this standard, will they go back retroactively and restate prior years, or do they just do a cumulative adjustment,” he said, a matter Corning is currently evaluating.

As BlackLine Systems Inc. eyes an initial public offering in the coming years, the Los Angeles-based provider of software that helps companies close their books already prepares results that are compliant with U.S. generally accepted accounting principles, CFO Charles Best said. He said the Securities and Exchange Commission and the two accounting boards have not yet issued guidance on how to implement the changes, which could affect whether companies choose to restate results or make one cumulative adjustment.

Karan Rai, CFO of ADS Inc., a closely held logistics provider and specialty distributor to the U.S. Defense Department based in Virginia Beach, Va., is upbeat on the new rules. “There are going to be a few companies with aggressive accounting policies that are not going to like it, but I’m in favor of it,” he said.

“If it is good for investors in terms of transparency,” Mr. Rai said, “it’s probably good for the company.”

Bob Jensen's threads on Revenue Accounting Controversies ---

Is Google God (or at least Skynet?)

"Is Google Replacing God? There are some things that the all-knowing Internet can't provide," by Christine Rosen, The Wall Street Journal, June 12, 2014 ---

January 3, 2005 message from Glen Gray

Maybe my mind is drifting—or maybe 2 plus 2 does equal 4.

Terminator 3 has been playing recently on cable. [Don’t read further if you don’t want to know the ending!]

At the end of Terminator 3, we learn that Skynet (which takes over the world in the future and tries to kill all humans) is not controlled by just one major computer as we thought in Terminators 1 and 2, but instead, Skynet is all the computers on earth connected together—acting as one giant computer brain.

Tonight I was watching 60 Minutes on TV and they dedicated 30 minutes to Google. Google is able to search all computers connected to the Internet. Recently Google released software that will search all the computers on LANS. Now you can Google on your cell phone, search libraries, etc. etc. etc. Now they are working on a universal translator (Start Trek anyone?) that will automatically search and translate any document in any language.

Is Google Skynet? Think about it.

Glen L. Gray, PhD, CPA
Dept. of Accounting & Information Systems
College of Business & Economics
California State University, Northridge
Northridge, CA 91330  

January 3, 2005 reply from Bob Jensen

Hi Glen,

I also watched the excellent 60 Minute module.   Google is amazing in almost every aspect, including how it is managed.  I think that all business policy and organization behavior students should watch this module.  It will be interesting to see how long the company can continue to grow at an exponential pace and maintain its long-standing motto to “Do No Evil.”   These guys really believe in that motto.  Google is probably the most cautious firm in the world about who gets hired and promoted.

There has never been anything quite like Google in terms of management, except SAS probably comes a little bit close.

Yes I think Google could become Skynet if it were not for the serious policy of Google to not be a monopolist (except by default) which is the antithesis of Microsoft Corporation.  Also there is the black cloud of Microsoft hanging over Google to pull down Google’s Skynet even if it takes a trillion dollars.  

There were some very fascinating things that I learned from the 60 Minutes module.  For one thing, Google is getting closer to scanning the documents in alternate languages around the world and then translating each hit into a language of choice (probably English to begin with).  Secondly, I knew that Google bought Keyhole, but I had not played in recent years with the amazing keyhole (not Google Views) ---

Readers interested in the wonderful “Defining Google” 60 Minutes module should go to

I might also add that this module was followed by another module on The World’s Most Beautiful Woman ---
She’s very articulate and a pure delight in this world of sinking morality even though her movie roles to date have been
Bombay frivolous.

From The Wall Street Journal Weekly Accounting Review on June 6, 2014

What's the Real Cost of the EPA's Emissions Cap?
by: Cassandra Sweet and Amy Harder
Jun 03, 2014
Click here to view the full article on

TOPICS: Cost Behavior, Environmental Cleanup Costs, Forecasting

SUMMARY: This article examines whether the new federal limits on greenhouse-gas emissions are going to cost a lot, primarily to the end user. The impact on power companies is the focus of detailed questions in the review.

CLASSROOM APPLICATION: The article may be used in any general accounting class for discussion of this current topic. One assessment question is advanced, it covers the requirement to show items as operating versus non-operating in the income statement.

1. (Introductory) What are greenhouse gases? What entities generate greenhouse-gas emissions?

2. (Introductory) What new requirements to limit these emissions have been established?

3. (Introductory) What are the business concerns about these new limits?

4. (Advanced) What components of power companies' income statements would be affected by the EPA changes to produce "potential financial losses"-revenues, costs, or both? Explain your answer.

5. (Advanced) Who provided forecasts of the cost of implementing the new greenhouse gas emission limits? What factors in these forecasts seem to be sufficiently subjective and variable to produce varying forecasts?

Reviewed By: Judy Beckman, University of Rhode Island

New EPA Carbon Rules Pinch States Unevenly
by Amy Harder and Alicia Mundy
Jun 03, 2014
Online Exclusive

"What's the Real Cost of the EPA's Emissions Cap?" by Cassandra Sweet and Amy Harder, The Wall Street Journal, June 3, 2014 ---

Are the new federal limits on greenhouse-gas emissions going to cost a lot, as critics say, or a little, as the Environmental Protection Agency asserts?

That depends on whether you think Americans are going to use more electricity in coming years or cut way back.

The EPA assumes electricity consumption will drop sharply. That plays a significant role in the agency's calculation of the cost of complying with new rules to slash the carbon emissions from the utility industry. The industry accounts for about a third of all U.S. emissions, most of it from burning coal.

The agency forecasts that the effort to cut those emissions by 30% from their 2005 level will cost utilities and their customers $8.8 billion a year in 2030. That is less than the cost of other recent EPA rules, such as a limit on mercury emissions from coal-fired power plants that is costing utilities $9.6 billion a year.

"Other people using more realistic assumptions would predict a higher cost," said Jeffrey Holmstead, an EPA official during the Bush administration who now works as a lawyer and consultant for Bracewell & Giuliani LLP in Washington.

The U.S. Chamber of Commerce put the carbon-limit cost at up to $28.1 billion a year, in a study based on analysis by energy consulting firm IHS. The report was done before the new rules came out, however, and assumes they would require a bigger cut than the EPA ultimately proposed.

But the main difference between the EPA and the business group is their forecasts about energy usage.

A big factor in the EPA's cost forecast: successful energy-efficiency programs. These can include steps consumers take, such as more energy-efficient refrigerators, and programs utilities pay for, such as giving companies credits for shifting power use to periods of low demand.

"If a utility is investing more in energy efficiency that means they're going to spend less on things like fuel," an EPA official said.

It was unclear whether the agency considered potential financial losses by power companies that could end up selling less electricity if growth in power demand slows, as the EPA predicts. The agency points to energy-efficiency programs mandated in about half the states that require utilities to try to cut electricity use.

But critics say few states have actually achieved significant annual energy savings. The Electric Reliability Coordinating Council, an industry group, recently called out the EPA for "highly unrealistic assumptions regarding energy efficiency programs."

Unlike the EPA, which assumes growth in energy demand will slow sharply, the Chamber of Commerce assumes a big increase—and thus big spending on new plants or retrofitting to keep up with demand.

The chamber forecasts that Americans will use 1.4% more electricity a year.

Critics of the study have noted that is about twice the rate of increase in recent years. In fact, a problem for the electricity business in recent years is that demand for power, which fell during the recession, has remained slack even as the economy has picked up.

The federal Energy Information Administration last month forecast electricity demand will grow 0.9% a year until 2040.

The EPA is proposing different emission-reduction targets for each state, which then must develop a plan to meet its target and submit it to EPA. That ultimately could mean that the compliance cost could be higher or lower than the EPA estimated.

The EPA predicts that program would increase average U.S. electricity prices by up to 7% by 2020 and another 3% by 2030.

"The reason EPA's electric bill impacts look so good is they are assuming that demand-side energy efficiency will allow electric customers to purchase as much as 12% less electricity per year by 2030," said Brian Potts, a partner at Foley & Lardner LLP, based in Wisconsin.

Humor June 1-30, 2014

Flight Attendant Makes The Most Hilariously Sassy Safety Speech Ever ---

Forwarded by Denny Beresford
Answering Machine Message at an Australian School ---

Jon Stewart Perfectly Mocks Liberals Who Deny Science ---

Dick Cavett’s Worst Show: Starring John Cassavetes, Peter Falk & Ben Gazzara (1970) ---

"Dumbest Burglar Ever Logs In to Facebook on Victim’s Home Computer, Forgets to Log Out" ---
This is dumb, but probably not the dumbest ever thief. Candidate 1 is the drunk who tried to rob a bank but mistook it for the police station next door. Candidate 2 is the bank robber who handed the robbery note to a teller with the message written on the back of his personal deposit slip. There are many other example of idiots who received Darwin Awards (nobody should breed with their children) ---

Forwarded by Auntie Bev

WELCOME to 2014:

• Our Phones – Wireless
• Cooking – Fireless
• Cars – Keyless
• Food – Fatless
• Tires –Tubeless
• Dress – Sleeveless
• Youth – Jobless
• Leaders – Shameless
• Relationships – Meaningless
• Attitudes – Careless
• Babies – Fatherless
• Feelings – Heartless
• Education – Valueless
• Children – Mannerless
• Country – Godless

Congress - Clueless

Forwarded by Maureen

          As we Silver Surfers know, sometimes we have trouble with our

          Yesterday, I had a problem, so I called Georgie, the 11 year old
next door, whose bedroom looks like Mission Control, and asked him to come

          Georgie clicked a couple of buttons and solved the problem.

          As he was walking away, I called after him, 'So, what was wrong?

          He replied, 'It was an ID ten T error.'

          I didn't want to appear stupid, but nonetheless inquired, 'An,
ID ten T error? What's that? In case I need to fix it again.'

          Georgie grinned...'Haven't you ever heard of an ID ten T error

          'No,' I replied.

          'Write it down,' he said, 'and I think you'll figure it out.'

          So I wrote down:


          I used to like Georgie, the little shithead.

Humor Between May 1-31, 2014, 2014 ---

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Humor Between September 1 and September 30, 2013 ---

Humor Between July 1 and August 31, 2013 ---

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And that's the way it was on June 30, 2014 with a little help from my friends.

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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)

“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?


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May 31, 2014

Bob Jensen's New Bookmarks May 1-31, 2014
Bob Jensen at Trinity University 

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Bob Jensen
February 19, 2014
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Statistical Science Reading List for June 2014 Compiled by David Giles in Canada ---

Put away that novel! Here's some really fun June reading:

My favorite critique of statistical inference:
The Cult of Statistical Significance: How Standard Error Costs Us Jobs, Justice, and Lives ---

A True Story of an Accounting Graduate:  Her Student Loan Repayments are over $1,400 per month
Tales Of An Accountant: I'm $130K In Debt," by Danielle Mascio, as told to Meghan Rabbit, Forbes, May 29, 2014 ---

Jensen Comment
In history a woman brought her dowry into the marriage. In the USA in the 21st Century she (or he) might instead bring a huge negative dowry into the marriage. This is a reason, certainly not the only reason, why couples today live together without getting married. It's an even bigger reason why they delay having children. Maybe student loans are more important than the pill in terms declining birth rates.

Link forwarded by Tom Selling
"Student Debt and the Crushing of the American Dream," by Joseph E. Stiglitz, The New York Times, January 12, 2014 ---

A CERTAIN drama has become familiar in the United States (and some other advanced industrialized countries): Bankers encourage people to borrow beyond their means, preying especially on those who are financially unsophisticated. They use their political influence to get favorable treatment of one form or another. Debts mount. Journalists record the human toll. Then comes bewilderment: How could we let this happen again? Officials promise to fix things. Something is done about the most egregious abuses. People move on, reassured that the crisis has abated, but suspecting that it will recur soon.

The crisis that is about to break out involves student debt and how we finance higher education. Like the housing crisis that preceded it, this crisis is intimately connected to America’s soaring inequality, and how, as Americans on the bottom rungs of the ladder strive to climb up, they are inevitably pulled down — some to a point even lower than where they began.

This new crisis is emerging even before the last one has been resolved, and the two are becoming intertwined. In the decades after World War II, homeownership and higher education became signs of success in America.

Before the housing bubble burst in 2007, banks persuaded low- and moderate-income homeowners that they could turn their houses and apartments into piggy banks. They seduced them into taking out home-equity loans — and in the end, millions lost their homes. In other cases, the banks, mortgage brokers and real-estate agents pushed aspiring homeowners to borrow beyond their means. The wizards of finance, who prided themselves on risk management, sold toxic mortgages that were designed to explode. They bundled the dubious loans into complex financial instruments and sold them to unsuspecting investors.

Everyone recognizes that education is the only way up, but as a college degree becomes increasingly essential to making one’s way in a 21st-century economy, education for those not to the manner born is increasingly unaffordable. Student debt for seniors graduating with loans now exceeds $26,000, about a 40 percent increase (not adjusted for inflation) in just seven years. But an “average” like this masks huge variations.

According to the Federal Reserve Bank of New York, almost 13 percent of student-loan borrowers of all ages owe more than $50,000, and nearly 4 percent owe more than $100,000. These debts are beyond students’ ability to repay, (especially in our nearly jobless recovery); this is demonstrated by the fact that delinquency and default rates are soaring. Some 17 percent of student-loan borrowers were 90 days or more behind in payments at the end of 2012. When only those in repayment were counted — in other words, not including borrowers who were in loan deferment or forbearance — more than 30 percent were 90 days or more behind. For federal loans taken out in the 2009 fiscal year, three-year default rates exceeded 13 percent.

America is distinctive among advanced industrialized countries in the burden it places on students and their parents for financing higher education. America is also exceptional among comparable countries for the high cost of a college degree, including at public universities. Average tuition, and room and board, at four-year colleges is just short of $22,000 a year, up from under $9,000 (adjusted for inflation) in 1980-81.

Compare this more-than-doubling in tuition with the stagnation in median family income, which is now about $50,000, compared to $46,000 in 1980 (adjusted for inflation).

Like much else, the problem of student debt worsened during the Great Recession: tuition costs at public universities increased by 27 percent in the past five years — partly because of cutbacks — while median income shrank. In California, inflation-adjusted tuition more than doubled in public two-year community colleges (which for poorer Americans are often the key to upward mobility), and by more than 70 percent in four-year public schools, from 2007-8 to 2012-13.

With costs soaring, incomes stagnating and little help from government, it was not surprising that total student debt, around $1 trillion, surpassed total credit-card debt last year. Responsible Americans have learned how to curb their credit-card debt — many have forsaken them for debit cards, or educated themselves about usurious interest rates, fees and penalties charged by card issuers — but the challenge of controlling student debt is even more unsettling.

Curbing student debt is tantamount to curbing social and economic opportunity. College graduates earn $12,000 more per year than those without college degrees; the gap has almost tripled just since 1980. Our economy is increasingly reliant on knowledge-related industries. No matter what happens with currency wars and trade balances, the United States is not going to return to making textiles. Unemployment rates among college graduates are much lower than among those with only a high school diploma.

America — home of the land-grant university, the G.I. Bill and world-class public universities from California to Michigan to Texas — has fallen from the top in terms of university education. With strangling student debt, we are likely to fall further. What economists call “human capital” — investing in people — is a key to long-term growth. To be competitive in the 21st century is to have a highly educated labor force, one with college and advanced degrees. Instead, we are foreclosing on our future as a nation.

Student debt also is a drag on the slow recovery that began in 2009. By dampening consumption, it hinders economic growth. It is also holding back recovery in real estate, the sector where the Great Recession started.

It’s true that housing prices seem to be on the upswing, but home construction is far from the levels reached in the years before the bubble burst of 2007.

Those with huge debts are likely to be cautious before undertaking the additional burdens of a family. But even when they do, they will find it more difficult to get a mortgage. And if they do, it will be smaller, and the real estate recovery will consequently be weaker. (One study of recent Rutgers University graduates showed that 40 percent had delayed making a major home purchase, and for a quarter, the high level of debt had an effect on household formation or getting further education. Another recent study showed that homeownership among 30-year-olds with a history of student debt fell by more than 10 percentage points during the Great Recession and in its aftermath.)

It’s a vicious cycle: lack of demand for housing contributes to a lack of jobs, which contributes to weak household formation, which contributes to a lack of demand for housing.

As bad as things are, they may get worse. With budgetary pressures mounting — along with demands for cutbacks in “discretionary domestic programs” (read: K-12 education subsidies, Pell Grants for poor kids to attend college, research money) — students and families are left to fend for themselves. College costs will continue to rise far faster than incomes. As has been repeatedly observed, all of the economic gains since the Great Recession have gone to the top 1 percent.

Continued in article

Cancelled student loan debt is a taxpayer nightmare ---

When Kim Thompson’s $91,000 student loan balance was cancelled due to total disability, she thought she had put at least one of her problems behind her. Instead, she traded it for another: a massive debt to the IRS.

Two years ago, Thompson, who lives in New Jersey, was diagnosed with a tumor that eventually led to the removal of most of her small intestine, a pulmonary embolism, and 12-hour-a-day IV feeding sessions. She retired from her job on a disability pension in July 2010, and was able to get her federal student loans cancelled.

There was no mention, however, that the debt would be reported to the IRS as Cancellation of Debt Income (CODI).

“They didn’t tell me it was taxable income,” she says. “I had no idea.”

The Tax Man Will Come

The IRS considers most types of cancelled debt taxable income. Lenders must report cancelled debts of $600 or more to the IRS on a 1099-C form. The IRS estimates some 6.3 million 1099-Cs – for all types of debts, including student loans, credit cards, mortgages, etc. – were filed to this year reporting CODI for the 2011 tax year.

Not all cancelled student loan debt is taxable. If Thompson’s debt had been forgiven because she worked in a job that qualified her to have some or all of her debt wiped out (certain medical, teaching or law enforcement positions, for example) she wouldn’t now owe the IRS some $26,000. In addition, she owes $5,000 to the state of New Jersey for cancellation of debt income.

But there is no tax break for student loan debt that has been cancelled due to disability, despite the fact that borrowers who qualify for cancellation are considered totally and permanently disabled, and may never work again. In fact, the Department of the Treasury has specifically stated that student loans cancelled due to the Death and Disability Discharge (Section 437(a) of the Higher Education Act of 1965) are taxable.

Your Options

Another option, the insolvency exclusion, which requires debtors to be insolvent immediately prior to the discharge, may have allowed her to avoid paying taxes on some or all of the $91,000 of CODI. Thompson’s accountant concluded she did not qualify, though she’s has some doubt as to whether that’s true.

“The (IRS) forms are incredibly confusing,” she notes.

As a former social worker with a Master’s degree, Thompson says she’s not intimidated by government forms. She filled out all her paperwork to file for disability on her own, for example. However, even though she spent hours researching the rules surrounding cancellation of debt income, she found no relief for her situation. She tried calling the IRS for assistance. The first time she called, she says the IRS representative hung up on her. The second time, she says she waited on hold for over an hour and was then told to call back after she filed her tax return. She claims that ultimately she was warned that if she couldn’t pay the amount due, the IRS would put a tax lien on her house and report her to the credit reporting agencies. (We’ve reached out to the IRS a number of times on this and other issues relating to the 1099-C, but to date haven’t gotten a response.)

Continued in article


My Questions
Loan Forgiveness in a Real Estate Foreclosure

I have unanswered questions about loan forgiveness following a real estate foreclosure. The issue concerns a situation where the value of the collateral (e.g. a building and its lot) is less than the debt --- what we call an underwater mortgage.
If the bank insists of collecting this difference perhaps the only way out of the debt is to declare corporate or personal bankruptcy. But it's extremely common for banks to forgive the difference above and beyond the value of the collateral.
If the bank essentially forgives collecting the difference there's still a problem of loan forgiveness which the IRS says is taxable income (at least in theory). However, the IRS seems to have let a lot of homeowners off the hook following the millions of foreclosures when the real estate bubble burst in 2006.
My question concerns the issue of when and how the IRS lets a homeowner off the hook for debt forgiveness in a foreclosure?
If the homeowner is a corporation that receives loan forgiveness in a property foreclosure the corporation is technically liable for for income taxes on the amount of loan forgiveness by the bank. If this is a big deal the corporation may have to simply go out of business. Unless there is fraud, the owners of the corporation are not liable for the corporate taxes owed to the IRS. If the corporation stays in business then the amount of loan forgiveness is taxable income (I think). If there's fraud the guilty parties should tremble in fear of the IRS.
If the homeowner is not a corporation then my confusion begins.
Presumably the homeowner is liable for the income tax on the amount of loan forgiveness when the bank forecloses on the home in an underwater mortgage situation. Unlike a corporation, the homeowner cannot simply get out of the tax due by declaring personal bankruptcy since the bankruptcy does not wipe out the amount owed to the IRS for individuals unless the homeowner dies a pauper before the tax is collected.
I have not investigated the situation, but I don't think the IRS is enforcing loan forgiveness taxation on millions of homeowners who lost their homes after the real estate bubble burst in 2006.

My questions to the AECM:

  1. Is the IRS enforcing loan forgiveness taxation on homeowners who lost their homes due to bank foreclosures?

  2. If the answer is yes, then I think there would be riots in the streets.

  3. If the answer is no then there are probably complicated tax rules similar to the complicated rules for student debt forgiveness. Does anybody know where to read about those rules?

May 13, 2014 reply from Elliot Kamlet

Hi Bob

You were not the only one concerned about riots in the streets over taxation of cancellation of home mortgage debt.  Congress came to the rescue.  From 2007-2013 (it has expired now) there was a provision of the code excluding home mortgage debt cancellation from income.

Sec. 108  (a) Exclusion from gross income
(1) In general
Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer —
(A) the discharge occurs in a title 11 case,
(B) the discharge occurs when the taxpayer is insolvent,
(C) the indebtedness discharged is qualified farm indebtedness,
(D) in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness, or
(E) the indebtedness discharged is qualified principal residence indebtedness which is discharged before January 1, 2014.

As far as the woman in the disability case goes, I would think she is a good candidate for an "offer in compromise", an IRS program meant to relieve taxpayers of their past due tax burden if their future prospects for earnings are minimal.

May 16, 2014 reply from Bob Jensen

Thank you Elliott,

That's the reference I was looking for but could not find.

I assume that the sole shareholder of a corporation that owns a hotel is off the hook for a tax on debt forgiveness as long as the corporation simply closes for good when the hotel is foreclosed on by the bank.

However, readers should not take my word for this. The above statements could be wrong.

May 24, 2014 update from Elliot Kamlet

As a follow up to the thread on taxability of forgiven mortgage debt, and under the better late than never category, the IRS has just released this YOUTUBE video:
Taxpayers may not need to report forgiven mortgage debt as income on their tax returns. Get more information by watching this new YouTube video.

Watch this and other videos on the IRS YouTube Channel. 


IRS Employees are Orchestrating Some of the Identity Thefts for Purposes of Sharing in Illegal Tax Refunds and Other Crimes ---

Dupont Formula Partitioning of Return on Equity ---

I really liked the following "classic" article by Selling and Stickney:
A New Approach," by T.I. Selling and C.P.  Stickney, Accounting Horizons, December 1990, pp. 9-17. 

"Goldman Sachs Explains The 'Return On Equity' Formula That Every CFA Test Taker Needs To Know," by Sam Ro, Business Insider, May 26, 2014 ---

For investors, one of the most important metrics of a company is return on equity (ROE), which can be calculated by taking net income and dividing it by equity.

"The decision to expand into the market of a competitor and seek additional return is not a decision driven by the expected profit margin, the expected return relative to the anticipated quantity of sales," said Jesse Livermore, the pseudonymous author of the Philosophical Economics blog. "Rather, it’s a decision driven instead by the expected ROE, the expected return relative to the amount of capital that will have to be invested, put at risk, in order to earn it."

Unfortunately, ROE alone doesn't tell you much about a company's operating or capital structure. That's why analysts decompose the ROE into multiple components, including a measure of profit margin (see article).

The Chartered Financial Analyst (CFA) exam, which will be administered on June 7, is among the advanced Wall Street exams that tests test-takers on at least two decompositions of ROE.  The more complicated one is the DuPont model. Goldman Sachs' Stuart Kaiser recently included the formula for reference in an April 2 note sent out to its clients.

[Exhibit not shown here]

Continued in article

Jensen Comment
I want to especially thank David Stout, Editor of the May 2001 edition of Issues in Accounting Education.  There has been something special in all the editions edited by David, but the May edition is very special to me.  All the articles in that edition are helpful, but I want to call attention to three articles that I will use intently in my graduate Accounting Theory course.


There is a flurry of literature flying by us daily, and it is rare to find three articles in one journal that will become central to my theory course.  Thank you David for giving me those three articles in this AAA journal that now rejects over 90% of the submissions.  I am grateful that you did not reject the three articles mentioned above.


Bob Jensen's threads on ROE and ROI ---

"Harvard and MIT Release MOOC Student Data Set," Inside Higher Ed, June 2, 2014 ---

Harvard University and the Massachusetts Institute of Technology, the two universities behind the massive open online course provider edX, on Friday released the data sets behind the data visualization tool Insights. The data covers students who enrolled in the 16 edX courses offered by the two institutions during 2012-13, and has been scrubbed for information that could identify individuals. The data set can be downloaded from the MITx and HarvardX Dataverse.

Read more:
Inside Higher Ed


"Will MOOCs Undermine Top Business Schools, or Help Them?" Chronicle of Higher Education, June 3, 2014 --- "

Massive open online courses are not currently cannibalizing tuition-based programs at top business schools, according to an enthusiastic report from the University of Pennsylvania. Rather, MOOCs could become a recruiting tool for tapping new pools of potential students.

Business schools that offer MOOCs should also figure out how to charge the many students who sign up for the online courses without intending to complete them, write the authors of the report.

The report looks at data and survey responses from students in nine MOOCs offered by Penn’s Wharton School. The researchers found that 78 percent of the students were from outside the United States, and 35 percent of the U.S. residents taking the business MOOCs were foreign-born. Among the Americans, 19 percent were members of underrepresented minority groups, compared with 11 percent among M.B.A. students as a whole.

“Our data suggest that, at least at present, MOOCs run by elite business schools primarily attract students for whom traditional business-school offerings are out of reach,” write the authors.

Rather than undermine the existing business model, MOOCs may help Wharton and other business schools recruit outside the normal pipelines, the researchers speculate. “These three groups—students from outside the United States, especially developing countries, foreign-born Americans, and underrepresented American minorities—are students that business schools are trying to attract,” they write.

The Penn report also reiterates a point that has become a refrain among researchers looking at free online courses: Completion rates are poor metrics for judging the success of a MOOC because the goals of students who register for such courses vary. Indeed, only 5 percent of the registrants in Penn’s business MOOCs finished their courses, and those who completed were “disproportionately male, well-educated, employed,” and from countries in the Organization for Economic Cooperation and Development; also, American students “tend to be white.” But a mere 43 percent of students who were surveyed said that obtaining a certificate of completion was important to them.

Based on the apparently diverse motivations of people who sign up for MOOCs, the Penn researchers offer some business advice to institutions offering them: Find ways to charge students who have no plans to complete their MOOCs.

“Business schools must bear this in mind and move away from a business model of charging for certificates of completion,” the authors advise. “Instead, they must tailor offerings to the goals of these learners, whatever they may be.”

Penn, which has released several reports (not all of them flattering) based on data from its MOOCs, was an early institutional partner with Coursera, the largest MOOC company. The university also owns a stake in the company. Penn’s provost, Vincent Price, is listed as a member of Coursera’s advisory board.

Bob Jensen's threads on MOOCs and other free education materials from prestigious universities ---

"What accounting courses are available on a listing of 1,000 free courses from prestigious universities?" Chronicle of Higher Education, June 3, 2014 ---


Note that advanced accounting is not covered nearly as well as philosophy, ethics, computer science, literature, history, etc.
A Master List of 1,000 Free Courses From Top Universities: 30,000 Hours of Audio/Video Lectures ---
There are 150 free business courses ---
Principles of Managerial Accounting - Free iTunes Audio - Anthony Catanach & Noah Barskey, Villanova ---
Accounting and Its Use in Business Decisions - Free – Alison ---
Accounting in 60 Minutes: A Brief Introduction - Free - Udemy ---
Fundamentals of Accounting – Free - Alison ---
Introduction to Accounting - Free – US Small Business Administration ---
Introduction to Cash Accounting - Free – Alison ---
Managerial Accounting - Free – ---

Bob Jensen's threads on free course material, videos, tutorials, and entire courses from prestigious universities ---


From the CFO Journal's Morning Ledger on June 3, 2014

Good morning. The reports are in on companies’ first attempts to scour their supply chains for metals tied to armed militias in Africa, and so far there are a lot of maybes and not-sures. But among the nearly 1,300 U.S. listed firms that have filed their first audits on the use of “conflict minerals,” a dozen companies, including Google Inc. and J. Crew Group Inc., said they or their suppliers may have obtained metals from mines in a region known to use mining to fund militias, CFOJ’s John Kester and Maxwell Murphy report.

Most of the companies whose filings were reviewed by The Wall Street Journal said they still haven’t been able to figure out whether their products contain metals with the tainted sourcing. J.C. Penney Co., for example, listed an array of goods that could have components difficult to trace, such as zippers and window coverings. Many companies said their suppliers didn’t respond to questionnaires or gave incomplete answers.

The inconclusive filings follow years of work, and millions of dollars in expenditures, to comply with a regulatory deadline that was part of the 2010 Dodd-Frank Act. The SEC estimated conflict-mineral reports would cost companies up to $4 billion in the first year, and drop to between $200 million and $600 million in later years. A March court ruling struck down part of the rule that said companies had to list their products as “conflict-free” or not, but the audits were still required, and their conclusions, even when inconclusive, still needed to be filed with the SEC.


From the CFO Journal's Morning Ledger on May 31, 2014

Good morning. The 12-year collaboration on revenue-recognition standards between the Financial Accounting Standards Board and the International Accounting Standards Board came to fruition Wednesday, with new rules that will affect companies ranging from software firms to auto makers around the globe, the WSJ’s Michael Rapoport reports. The new standards will take effect in 2017, and will lead many firms to shift the pace at which revenue is booked—in some cases more quickly, in others, more slowly.

The rules aim to simplify and inject more uniformity into how sales of products and services are reported. Software companies, for instance, currently must delay recognizing part of their revenue until software upgrades that are part of the initial purchase are delivered months or years later. But under the rules, they will be able to book more revenue upfront, since it will be easier to value the upgrades separately. Auto makers, on the other hand, must delay recognizing the part of the sale of a vehicle that is assigned to future maintenance.

The 2017 start date for the rules gives financial chiefs ample time to prepare, CFOJ’s Maxwell Murphy reports. “We’ve been waiting for it for a long time,” said Ken Goldman, CFO of Black Duck Software Inc. “This levels the playing field and takes a lot of the ambiguity out of what are overly restrictive rules.” But not all CFOs were entirely pleased. Sean Aggarwal, CFO of Trulia Inc., said the new guidance should be easier to implement, but he’s concerned about the “additional disclosures” that will be required. “I’m curious at what point we stop adding new disclosures and instead focus on simplifying redundant portions of the current disclosures.


From EY

The FASB and the IASB released new converged standards for recognizing revenue. Our To the Point publication tells you what you need to know about the final standards.

To the Point Article ---

What you need to know

• The FASB and the IASB issued a comprehensive new revenue recognition standard that will supersede virtually all existing revenue guidance under US GAAP and IFRS.

• Calendar year - end public entities will be required to apply the standard for the first time in the first quarter of 2017.

 • While the effect on companies will vary, some companies may face significant changes in revenue recognition . Companies should assess how they will be affected as soon as possible so they can determine how t o prepare to implement the new standard. • Public entities should disclose information about the new standard in their next SEC filing .

Overview The Financial Accounting Standard s Board (FASB) and the International Accounting Standards Boa rd (IASB) (collectively, the Boards) jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under US GAAP and IFRS .

The standard ’s core principle is that a company will recognize revenue when it transfer s promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance . These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.

"The Cost of Compliance: FIN 48 and Audit Fees," by Matthew Erickson , Nathan C. Goldman and James Stekelberg, SSRN, Date posted: 16 May 2014 ---

We investigate the cost of compliance with FIN 48 uncertain tax benefit (UTB) disclosure requirements in terms of external audit fees, based on the proposition that mandatory disclosure of estimated UTBs may lead auditors to increase their assessed levels of effort and risk. We document a positive association between UTBs and audit fees and find that this association is stronger among firms with greater R&D expenditures and tax haven operations, our proxies for the uncertainty of the specific tax positions comprising firms’ UTBs. We also find that only auditors with informational advantages — expert auditors and auditors whose firm also provides tax services — charge a fee premium to examine UTBs. This study quantifies and identifies the determinants of a specific and economically significant cost associated with FIN 48 and thus may be of interest to standard setters, firms, and auditors. Our findings also add to the literatures on the effect of regulatory reform on audit fees and the auditing of accounting estimates.

Number of Pages in PDF File: 46

"Does it Matter Who Serves on the Financial Accounting Standards Board? Bob Herz's Resignation and Fair Value Accounting for Loans," by John (Xuefeng) Jiang , Isabel Yanyan Wang and Yuan Xie, SSRN,  Date posted: 10 May 2014

Despite the perceived importance of accounting standard setters, it remains unknown whether and how much individual FASB board members can influence specific accounting policies because it is difficult to measure any board member’s impact during the process of accounting standard setting absent an exogenous shock. In this study we utilize a unique setting to answer this question. On August 24, 2010, the then FASB chairman Bob Herz resigned unexpectedly. Prior to his resignation, he had supported a highly contested accounting proposal on fair value on bank loans. Earlier in May Herz cast the deciding vote for the FASB to propose applying fair value to bank loans, causing strong pushbacks from banks and bank regulators. We examine whether Herz’s abrupt resignation changes the market’s expectation on whether the fair value proposal would be finalized. We find that banks responded positively to Herz’s resignation, more so for banks that would be affected more. They also responded negatively when the FASB first proposed the fair value requirement and positively when the FASB later dropped it. Our results indicate that the stock markets believe that Herz’s position is crucial in affecting the direction of the fair value accounting for bank loans. Our study provides initial evidence of a single FASB board member’s influence on accounting policymaking.

Number of Pages in PDF File: 37

Jensen Comment
It's very hard to extrapolate from the data built upon one FASB Board Member. Counter evidence should be considered regarding other FASB Board Members on other controversial issues. For example, the tech industry in the Roaring 1990s lobbied heavily to prevent FAS 123R (requiring the booking of employee stock options as expenses) and FAS 133 (requiring the booking of some derivative financial instruments not previously even disclosed such as interest rate swaps and forward contracts).

Although I'm inclined to believe the FASB takes input from constituencies quite seriously, often heavy lobbying pressure has failed to make the FASB adopt what it thinks is bad accounting. The one constituency that probably has more clout on the FASB is the SEC. In the case of FAS 123R and FAS 133 the SEC wanted these standards but might have itself caved if the decisions were left up to the SEC. The SEC is more vulnerable to pressures from the legislative branch of the USA government (Exhibit A the way the SEC caved to the oil industry in an override of the new FASB standard regarding expensing of dry holes).

I would argue that on many controversial standards the FASB stood its ground amidst overwhelming pressures to change its positions. The Bob Herz resignation (perhaps for reasons we will never know) may be somewhat unique, but I'm inclined to think that the fair value of bank loans accounting faced many obstacles (justified obstacles in my opinion) that may have prevented Bob from winning the day had he remained Chairman of the FASB.

Without all the accountics science findings, it's obvious, at least to me, that at times "Who Serves on the Financial Accounting Standards Board" will matter.  Some Board members at varying times and circumstances are going to have more or less influence than thousands of others who might fill their shoes. Board members are human beings subject to group dynamics like everybody else on juries, committees, etc. But I don't think one resignation at one point in time says a whole lot about future group dynamics.

There are too many missing variables to rely on accountics science findings regarding the fair value of bank loans proposal.

From the CPA Newsletter on June 3, 2014

The AICPA issues its revised Code of Professional Conduct
The revised AICPA Code of Professional Conduct is accessible on a dynamic electronic platform that allows users to conduct and save basic and advanced searches. The platform includes features such as pop-ups for defined terms, the ability to create and name bookmarks, and create and save notes, as well as hyperlinking to content in the code and to external nonauthoritative material issued by staff of the Ethics Division. Visit to access the revised code

From the CPA Newsletter on May 30, 2014

6 things to consider about new revenue recognition guidance
After releasing the much-awaited new revenue recognition standard Wednesday, members of the Financial Accounting Standards Board and the International Accounting Standards Board shared some of the most important things to consider in the guidance.

Explore the AICPA's revenue recognition resources, including industry task forces, video, webcasts and more.
Journal of Accountancy online (5/28)

Bob Jensen's threads on revenue accounting --- 

"Barclays Manipulated Gold as Soon as It Stopped Manipulating Libor," by Matt Levine, Bloomberg View, May 23, 2014 ---

Libor Fraud (bigger than Enron) ---

Jensen Comment
The London banks may be the most fraudulent of the global banks (with the exception of enabling global tax evasion in Swiss, Cayman Island, and Luxemburg banks).

Bob Jensen's Fraud Updates ---

"Fraudulent Government Accounting:  How Congress disguises the real cost of federal loan guarantees," The Wall Street Journal, June 2, 2014 ---

This headline will strike many readers as redundant. But we're hoping that through repetition Members of Congress may be motivated to stop misleading their constituents about the cost of federal credit programs.

Many politicians still claim that taxpayers make money on things like student loans, single-family home mortgages backed by the Federal Housing Administration, and long-term guarantees from the Export-Import Bank. Yet under honest accounting, taxpayers lose on all three.

The Congressional Budget Office, Washington's official financial scorekeeper, says in a new report that the Department of Education's four largest student loan programs will yield an official savings of about $135 billion in fiscal years 2015-2024. That's $135 billion that Congress will claim it has available to spend.

But CBO also notes that under fair-value accounting that is practiced in the real world, the four student loan programs will likely cost $88 billion. An official $14 billion projected taxpayer gain at the Export-Import Bank is actually a $2 billion loss. And the official $63 billion windfall expected from the FHA's single-family mortgage guarantee program is in reality a $30 billion taxpayer fleecing.

CBO is obligated to practice bogus accounting under the amusingly titled Federal Credit Reform Act of 1990. But CBO periodically does a public service by calling attention to this legal fraud and explaining why its official estimates don't accurately measure what these programs really cost. CBO's new report is especially informative. You see, federal law does not allow official bookkeeping to account for a phenomenon that must seem alien to the Beltway culture: "market risk."

As CBO helpfully explains: "The government is exposed to market risk when the economy is weak because borrowers default on their debt obligations more frequently and recoveries from borrowers are lower." Yet even after the financial crisis and a historically weak recovery, Washington officially will not admit that such a scenario is possible.

Just as loans look less expensive for taxpayers than they really are, government guarantees can appear to be nearly a free lunch under federal accounting rules. But the government bears the risk of losses. "Because of that government commitment a lender places more value on a loan with a guarantee than on the same loan without a guarantee. The difference in value between them is the 'fair value' of the guarantee," says CBO.

As bad as the math appears once honest accounting is applied, it still doesn't fully describe the problem for taxpayers. That's because none of these figures includes the administrative costs of federal credit programs, which are counted separately in the federal budget.

CBO is expecting robust growth in loan volumes at both the FHA and the Department of Education. If taxpayers are forced to come along for this ride, the least the Congress should do is enact Rep. Scott Garrett's (R., N.J.) plan to require fair-value accounting in government loan programs.

And as for the Export-Import Bank—a corporate welfare program that disproportionately benefits a handful of giant multinationals—bogus accounting is one more reason to allow its charter to expire on schedule at the end of September.

"The Government Doesn’t Know How Much Its Student Loans Cost," by Karen Weise, Bloomberg Businessweek, January 31, 2013 ---

Depending on whom you ask, the government either makes tens of billions of dollars on the backs of student borrowers, or more or less breaks even. The debate, which boils down to the arcana of accounting techniques, was hotly contested last year, with Democrats such as Massachusetts Senator Elizabeth Warren decrying how the government “profits” off student loans. The controversy caused Congress to ask the Government Accountability Office to weigh in, which led to a report released today. The GAO came back with a non-answer, finding that there’s no good way to know how much the government spends or makes on funding student loans.

The GAO said it could take as long as 40 years to figure the true costs of the program because there are so many variables, from the overall interest rate environment to the number of students who take advantage of different repayment options. In the meantime, the government is stuck using estimates that can vary greatly based on several factors, most important the amount students pay in interest and what it costs the government itself to borrow. The government readjusts its models each year based on more recent data, which can lead to highly volatile results. One year the budget assumed loans taken out in 2008 made the government $9.09 per hundred dollars borrowed. The next year it estimated the very same loans cost the government 24¢ per hundred dollars.

One figure is pretty clear: how much the Department of Education spends administering the loans. That’s jumped from $314 million in 2007 to $864 million in 2012, reflecting changes in the federal program that removed banks as intermediaries and caused the number of loans directly issued by the government to increase threefold. Overall, the administration costs per borrower has stayed the same or even fallen slightly.

The overall difficulty in nailing down these estimates is an increasingly relevant problem as student debt tops $1 trillionmost of it financed by the government.

Jensen Comment
It might be a good project for governmental accounting or managerial accounting students to be assigned to advise the government on how to compute the cost of student loans.

Bob Jensen's threads on the sad state of governmental accounting ---

Note the KPMG lettering on Phil's cap in this WSJ article. Check in future tournaments if he changes caps at the request of KPMG.

"Insider-Trading Probe Hits Snag News of Investigation Derails Effort to Deploy Wire Taps," by Michael Rothfeld and Susan Pulliam, The Wall Street Journal, June 1, 2014 --- 

A snag has hit the insider-trading investigation of investor Carl Icahn, golfer Phil Mickelson and sports bettor William "Billy" Walters: News of the probe derailed government efforts to secretly deploy wiretaps, which have been key components of many successful insider-trading cases.

Criminal and civil investigators are examining whether Mr. Icahn tipped Mr. Walters about his plans relating to stocks of several companies, including Clorox Co. CLX +0.16% , according to people briefed on the probe. The investigation was first reported by The Wall Street Journal on Friday. Messrs. Icahn, Walters and Mickelson have denied any wrongdoing.

Mr. Walters on Sunday declined to comment on the latest development, and Mr. Icahn didn't return calls for comment.

Continued in article

Jensen Comment
If Phil Mickelson was an employee of KPMG such accusations this far along probably would result in termination. However, since Phil is only a spokesman and promoter for KPMG it is less clear whether his efforts on behalf of KPMG will be suspended.

Note the KPMG lettering on Phil's cap in this WSJ article. Check in future tournaments if he changes caps at the request of KPMG.

Bob Jensen's Fraud Updates are at

"How Statisticians Found Air France Flight 447 Two Years After It Crashed Into Atlantic," MIT's Technology Review, May 27, 2014 --- Click Here

After more than a year of unsuccessful searching, authorities called in an elite group of statisticians. Working on their recommendations, the next search found the wreckage just a week later.

Continued in article

Jensen Comment
Quantitative methods often do very well in conditions of steady states and equilibrium. However, if the underwater currents and other forces moved this wreckage daily, the quant experts lose a lot of their powers. This is why the same statisticians who found Flight 447 usually do not get rich in the stock markets.

A Good Site for Accountics Scientists Who Want to Learn More Than Regression

MoneyScience ---

Financial Education Focus ---

From the Financial Education Daily on May 31, 2014

A case study of how to obtain 140 times speed-ups over C++ code for your Monte Carlo pricing models using the open source project Kooderive and a Tesla K20 graphics card. This is a practical course.---

Really difficult environmental decisions should be studied from the standpoint of decision theory

"California Drains Reservoirs in the Middle of a Drought:  The state desperately needs water, yet federal policy sends huge 'pulse flows' into the Pacific to benefit fish," by Tom McClintock, The Wall Street Journal, May 23, 2014 ---

Jensen Comment
There are two environmental benefit and cost factors going on where accountants and economists really do not have good answers about measurement.

  1. Accountants and economists are not good at measurement when their are externalities (non-convexities) that blow up their simplistic models ---

  2. Accountants and economists are not good at measurement of long-term costs and benefits. The water for fish versus farms illustration above is a perfect example of where food prices for the most people in the short term are helped by diverting water to Sacramento Valley farmers but the resulting long-term harm to fishing may be more costlly in the long term. Also, with El Nino becoming more likely, perhaps the rains might come in time to save the farmers but not the fisheries (but I'm just guessing here).

I don't fault accountants and economists for being so hapless when it comes to measuring environmental benefits and costs. Some problems just cannot be solved in today's world.

I once wrote a research monograph for the American Accounting Association with the title Phantasmagoric Accounting which was critical of misleading simplistic benefit and cost modeling that can be more misleading than helpful.
Scroll down to Volume 14 at

Large CEO pay raises only for a handful of executives and "largest rewards did not necessarily correlate to a company’s size or results"
From the CFO Journal's Morning Ledger on May 28, 2014

Good morning. Pay packages for most big company CEOs are rising moderately, with compensation increasingly tied to future financial performance – with some big exceptions. The Wall Street Journal’s annual compensation survey found that big pay raises were concentrated among a relatively small handful of executives, and that the largest rewards did not necessarily correlate to a company’s size or results.

CEO compensation across the 300 large, publicly-traded U.S. firms in the survey rose by a median 5.5% to $11.4 million, nearly two-thirds of which was tied to performance. That’s a smaller increase than the companies’ median profit rise of 8% and median total shareholder return of 34%. Pay for ordinary employees in the private sector, meanwhile, only rose an average of 1.8% last year, according to the Labor Department.

But companies with the highest-paid CEOs often bucked the pay-for-performance trend. None of the companies with the 10 best-paid CEOs ranked in the top 10% by 2013 performance. Oracle Corp.’s Larry Ellison, last year’s top earner in the group, received $76.9 million in total direct compensation. That marked the fourth time he has been in the top 10 since 2010. But Oracle came in 152nd in the group by 2013 performance.

Jensen Comment
The system is rigged. The Board members that approve an outrageous compensation package of a CEO were all appointed by that CEO.

Bob Jensen's threads on outrageous executive compensation ---

The First-Ever Look at the Original Disneyland Prospectus (1953) ---

Bob Jensen's threads on accounting history ---

"The Wild West of “Nonauthoritative” GAAP," by Tom Selling, The Accounting Onion, May 19, 2014 ---

. . .


The latest pronouncement on the matter of nonauthoritative GAAP is Statement of Financial Accounting Standards No. 168 (2009).  As the last SFAS issued by the FASB, it pronounced that the Accounting Standards Codification would become the sole “authoritative” source of U.S. GAAP.  As to the  enduring question of what to do when authoritative sources do not directly (or by suitable analogy) address a particular transaction, ASC 105-10-05-3 enumerates the following potentially permissible nonauthoritative sources that could be referred to as GAAP:

ASC Topic 105 makes clear that an issuer has broad discretion to choose amongst analogy to authoritative GAAP or from the above smorgasbord of nonauthoritative sources.  Although auditors would have some say on the matter, the PCAOB’s guidance to them is clear as mud.  Per AU 411 as amended by the PCAOB:

“The auditor’s opinion that financial statements present fairly … in conformity with [GAAP] should be based on his or her judgment as to whether (a) the accounting principles [whatever that means] selected and applied have general acceptance [whatever that means]; (b) the accounting principles are [merely] appropriate in the circumstances; (c) the financial statements, including the related notes, are [merely] informative … and (e) the financial statements reflect the underlying transactions and events … within a range of acceptable limits, that is, limits that are reasonable and practicable….

I encourage you to think about how the auditors have applied AU 411 when reading the following two cases.


Case #1: Revenue Recognition by For-Profit Universities

About five years ago, I had occasion to review the revenue recognition policies of a for-profit university (FPU).  Below is what I found for what evidently constitutes “practices that are … prevalent … in the industry.”

Students are billed on a course-by-course basis.  They are billed on the first day of attendance, and a journal entry is made to debit A/R and credit deferred revenue for the amount of the billing.  The A/R is ultimately adjusted by an allowance for uncollectible accounts of around 30%, and the deferred revenue is recognized pro rata over the duration of the course.

Does prevalent industry practice justify recognition of executory contracts?  FPUs, like other enterprises engage in all manner of executory contracts; but, with the exception of some lease contracts, none are given accounting recognition before any performance has occurred.  Evidently, if FPUs act together to violate a broad-based convention, that’s okay, because it makes ‘industry practice.’    

But, recognition of executory contracts is not even the most glaring inconsistency with authoritative GAAP by FPUs.  Long-established and generally accepted (literally, for once) principles of revenue recognition run counter to what FPUs are doing.  Specifically, SFAC No. 5 enshrines the long-held view that revenue should not be recognized until it is earned and realizable (or realized), and practically all of the specifics in the ASC, not to mention SEC interpretive guidance, is consistent with this aspect of SFAC No. 5.

Is anything “earned” by an FPU until grades are recorded in transcripts?  I think it’s safe to stipulate two things: (1) from a student’s perspective, nothing is owed if the FPU doesn’t fulfill the obligation of recording a grade in a transcript that a student can use to document performance; yet (2)  there is no  “authoritative” GAAP that specifically speaks to this question.  Ergo:

“If the guidance for a transaction or event is not specified within a source of authoritative GAAP for that entity, an entity shall first consider accounting principles for similar transactions … and then consider nonauthoritative guidance.”  [ASC 105-10-05-2, emphasis supplied]

Call me cynical, but that language is squishy enough for an FPU to do pretty much anything it wants regarding the timing of revenue recognition.  So it does.

But, determining the revenue recognition trigger is still a mere quibble compared to the “realizable” question.  A typical company estimates its allowance for doubtful accounts to be around 2% of gross accounts receivable; but an FPU’s allowance could be 30%. If, after an allowance is initially accrued, it is discovered that the actual uncollectible amount was one-third higher than the accrual, the premature recognition of earnings by the typical company may or may not be material; but for an FPU, it will be a cataclysmic income statement event.

Continued in article

Notice from the SEC to the Sustainability Accounting Standards Board (SASB) and Other Unauthorized Accounting Standard Setters
Only the FASB is Authorized by the SEC to Set Accounting Standards

"SEC's Gallagher Rails on Third-Party Rule Makers," by Tammy Whitehouse, Compliance Week, April 16, 2014 ---

Third parties trying to set disclosure standards for public company financial reports are ruffling some feathers at the Securities and Exchange Commission.

EC Commissioner Daniel Gallagher recently singled out the Sustainability Accounting Standards Board as a group not authorized by the SEC to tell companies what they should disclose in their financial statements, even though SASB issues standards that it says tell companies what they should disclose related to various sustainability topics. Aside from the Financial Accounting Standards Board, which writes financial accounting rules, the SEC has not given any other body the responsibility or authority to establish disclosure requirements, he said.

Gallagher was speaking at a law conference when he used SASB as an example of an outside entity trying to influence corporate disclosures, especially as the SEC undertakes an effort to re-examine corporate disclosure requirements. “We must take exception to efforts by third parties that attempt to prescribe what should be in corporate filings,” he said. “It is the commission's responsibility to set the parameters of required disclosure.”

SASB is an independent, nonprofit group that writes industry-specific standards for disclosing material sustainability issues that the SEC requires companies to address in their mandatory filings. In a letter to Gallagher, SASB pleads it is only trying to help. SASB "is a market-driven response to the problem of disclosure overload and immaterial information," says Jean Rogers, founder and CEO of the board. "SASB develops standards that assist companies in fulfilling their disclosure obligations. The standards help companies to identify those factors that are material to the company's short- and long-term sustainability and to provide a model for reporting on those factors in a decision-useful way for investors in the MD&A section of the Form 10-K."

Rogers has said the board isn't seeking to supplant SEC requirements, but to give companies some guidance around how to determine materiality of sustainability issues and fulfill the disclosure requirements that exist. She has said SASB seeks to provide an infrastructure for how to comply with disclosure requirements related to sustainability areas, much the way FASB provides the infrastructure for how to comply with financial accounting requirements.

Gallagher, one of five commissioners, is having none of it. “The SASB argues that its disclosure standards elicit material information that management should assess for inclusion in companies' periodic filings with the commission,” he said. Except for FASB, however, the SEC has given no outside group such authority, he said. “So while companies are free to make whatever disclosures they choose on their own time, so to speak, it is important to remember that groups like SASB have no role in the establishment of mandated disclosure requirements.”

Jensen Comment
There are ways to be misleading in standard setting. One is an act of commission --- to lie about being authorized in the law as a standard setter. The other is an act of omission --- to never lie about being authorized in the law but also by never pointing out that your board is not authorized in the law. I seriously doubt that the SASB is misleading by either commission or omission.

I think the following statement at the SASB Website suffers some from omission ---

What others write might be even less clear with respect to omission. For example, the first paragraph in Wikipedia does not, in my opinion, make this entirely clear at

Both of the above Web pages should be rewritten to make it entirely clear that the SASB standards are in no way recognized in the law, and that the SASB is not authorized by the SEC or any other government agency to set accounting standards.

Having said this I applaud the efforts of the SASB to set voluntary standards with respected experts who have some reporting goals that are, in my viewpoint, worthwhile. Compliance, however, with SASB standards probably will be totally voluntary for quite a long time to come.

Bob Jensen's threads on standard setting controversies are at

The "Hot Hand Fallacy" in Gambling (and investing)
"How Gamblers Get Hot," Jay Caspian Kang, The New Yorker, May 20, 2014 ---

When your betting “hobby” goes degenerate and those Sunday football bets spill over into Monday Night Football bets and then Wednesday college-basketball bets and then lunch-break bets on the five horse in the third race at the Aqueduct, there’s one mantra that can bring you a measure of comfort: every gambling theory is wrong, and, because gamblers all have theories, every gambler will eventually be as broke as you. The sense of community among the people who fall asleep at poker tables or ride the bus to Foxwoods or crowd around off-track betting screens comes, in part, from a collective sense of bewilderment. How could all of us be wrong all the time?

Last month, researchers at University College, London, released a study that seems to confirm the existence of one of gambling’s most ubiquitous and destructive theories: the “hot hand.” Loosely defined, the hot hand, better known as the hot-hand fallacy, is the idea that winning begets more winning. Suppose you’re playing blackjack and you hit sixteen against the dealer’s ten and then pull a five. This swing of luck prompts you, on your next hand, to double down on nine against a dealer seven. When the dealer slides you an ace, for a total of twenty, you win, and you certainly aren’t going to stop betting now. So, in the next hand, you split sevens against a dealer eight (a terrible decision) because you’ve just won two hands in a row and how could you possibly lose a third? That’s the hot hand in all its ruinous glory.

Juemin Xu and Nigel Harvey, the study’s authors, took a sampling of 569,915 bets taken on an online sports-gambling site and tracked how previous wins and losses affected the probability of wins in the future. Over all, the winning percentage of the bets was somewhere around forty eight per cent. Xu and Harvey isolated the winners and tracked how they fared in their subsequent bets. In bet two, winners won at a rate of forty-nine per cent. From there, the numbers go haywire. A player who had won two bets in a row won his third bet at a rate of fifty-seven per cent. His fourth bet won sixty-seven percent of the time, his fifth bet seventy-two. The best gamblers in Las Vegas expect to win fifty-five per cent of their bets every year. Seventy-two per cent verges on omniscience. The hot hand, it appears, is real.

Losers, unsurprisingly, continued to lose. Of the 190,359 bettors who lost their initial bet, fifty-three per cent lost their next, and those who had enough money left for a third round lost sixty per cent of the time. When unfortunate bettors got to five straight losses, their chance of winning dropped to twenty-three per cent. The losing streaks should be familiar to problem gamblers and can be explained by another well-worn theory called the gambler’s fallacy. If you’ve ever called heads on a coin flip, seen the coin land tails up, and then called heads again because “heads is due,” you’ve been caught up in the gambler’s fallacy.

Winning and losing streaks had no correlation with the skill or risk aversion of the gambler. Xu and Harvey examined the over-all payoffs of gamblers across three currencies and found no significant difference between hot-streakers and cold-streakers.

What the research did find was that gamblers on streaks—good or bad—acted under the influence of the gambler’s fallacy. Winning bettors began placing more prudent bets because they assumed their luck would soon run out. Losers began placing bets with longer odds because they wanted to win big when their luck finally, inevitably changed.

What this means is that streaky gamblers who win do so because they expect to lose, and streaky gamblers who lose do so because they expect to win. Or, more simply put, when you’re losing, you’re wrong, but when you’re winning, you’re also wrong.

Xu and Harvey’s study was commissioned by the Responsible Gambling Trust, an organization funded by casino companies which seeks out ways to prevent problem betting. The headlines on articles about the research, which include “Are ‘Lucky Streaks’ Real? Science Says Yes,” and “The ‘Hot Hand’ of Gambling Is No Fantasy,” might suggest an ulterior motive. For the most part, the articles written about the study will eventually clarify the nuances of the researchers’ argument, but Xu has come across a few sites that used the research as proof that God loves some bettors more than others. She sent e-mails politely asking for corrections. “I certainly don’t want people to think that if you’re winning that you’re more likely to win and eventually you win, win, win,” Xu told me. “That’s absolutely not the case.”

Continued in article

"The Backfire Effect: The Psychology of Why We Have a Hard Time Changing Our Minds," by Maria Popova, Brain Pickings, May 13, 2014 ---

From the CFO Journal's Morning Ledger on June 2, 2014

Value Killers: What You Can Do to Understand and Prepare for Them

The last decade saw several sudden “value-killer” events impacting the shares of individual companies, and at times whole markets. And not all share prices recovered. A report from Deloitte LLP, The 'Value Killers' Revisited: A Risk Management Study, looks at the top drivers of value-killer share declines between 2003 to 2012, based on an analysis of the 1,000 largest global public companies. It also discusses five major themes underlying the declines and how companies can address potential value-killer events.

Read More at CFO Journal ---

"GASB proposal would define fair value," by Ken Tysiac, Journal of Accountancy, May 15, 2014 ---

A GASB proposal released Thursday describes how fair value should be defined and measured in state and local government financial reporting.

GASB is proposing in its Fair Value Measurement and Application exposure draft that fair value be defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Under the proposal, investments would generally be measured at fair value. Investments would be defined as a security or other asset that a government holds primarily for the purpose of income or profit that serves solely to generate cash or to be sold to generate cash.

Certain investments continue to be excluded from measurement at fair value, such as investments in money market instruments with remaining maturities at time of purchase of one year or less.

Current accounting standards require state and local governments to disclose how they arrived at their measures of fair value if they are not based on quoted market prices. GASB’s proposal would expand those disclosures to include the input a government uses to measure fair value and the judgments made to arrive at those inputs.

Bob Jensen's threads on fair value accounting ---

"DC Schools: $29,349 Per Pupil, 83% Not Proficient in Reading," by Terence P. Jeffrey, CNS News, May 14, 2014 ---

The public schools in Washington, D.C., spent $29,349 per pupil in the 2010-2011 school year, according to the latest data from National Center for Education Statistics, but in 2013 fully 83 percent of the eighth graders in these schools were not "proficient" in reading and 81 percent were not "proficient" in math.

These are the government schools in our nation's capital city — where for decades politicians of both parties have obstreperously pushed for more federal involvement in education and more federal spending on education.

Government has manifestly failed the families who must send their children to these schools, and the children who must attend them.

Under the auspices of the National Center for Education Statistics, the federal government periodically tests elementary and high school students in various subjects, including reading and math. These National Assessment of Educational Progress tests are scored on a scale of 500, and student achievement levels are rated as "basic," "proficient" and "advanced."

In 2013, students nationwide took NAEP reading and math tests. When the NCES listed the scores of public-school eighth graders in the 50 states and the District of Columbia, D.C. came in last in both subjects.

D.C. eighth graders scored an average of 248 out of 500 in reading, and Mississippi finished next to last with an average of 253.

Only 17 percent of D.C. 8th graders rated "proficient" or better in reading. In Mississippi, it was 20 percent.

In math, D.C. public-school eighth graders scored an average of 265 out of 500, and only 19 percent were rated "proficient" or better. Alabama placed next to last with an average math score of 269, with 20 percent rated "proficient" or better.

Some might argue it is unfair to compare, Washington, D.C., a single city, with an entire state. However, D.C. also does not compete well against other big cities.

The Department of Education's Trial Urban District Assessments program compares the test results in 21 large-city school districts, including Washington, D.C.

In these assessments, the scores of students from charter schools were removed and the average reading score for D.C. public school eighth-graders dropped to 245. That was below the national large-city average of 258, and tied D.C. with Fresno for seventeenth place among the 21 big cities in the TUDA.

Continued in article

XBRL Update

May 16, 2014 message from Neal Hannon

What Kind of Firms Hold Level 3 Instruments and Recognize Mark-to-Market Adjustments in Earnings?

Guest blog post by Robson Glasscock, CPA and Ph.D Candidate. Robson uses Calcbench data in his dissertation project and is sharing some of his findings here.

One of the benefits of using XBRL data from Calcbench is the ability quickly obtain data that would otherwise only be available via manual searches of EDGAR filings. As accounting rules and disclosures evolve other database services may eventually be updated to include the new information, but real-time access to machine-readable data from fillings is advantageous for a variety of reasons.

The current example is related to firms that hold Level 3 instruments per Accounting Standards Codification (ASC) 820, and recognize valuation changes in instruments still held at the balance sheet date (i.e., mark-to-market adjustments) in earnings. ASC 820 defines Level 3 assets and liabilities as being valued using “unobservable” inputs. The standard goes on to say that unobservable inputs, “… reflect the assumptions market participants would use when pricing the asset or liability.” This post explores whether these assets and liabilities are typically held by financial services firms and, if not, which non-financial services industries tend to hold more Level 3 instruments.

Article continued here: 


Bob Jensen's threads on XBRL ---


From the CPA Newsletter on May 22, 201

U.S. Supreme Court to hear challenge on Md.'s out-of-state tax-collection process
The U.S. Supreme Court has agreed to hear a challenge to a ruling by the Maryland Supreme Court that the way the state collects tax on out-of-state income leads to some income being unconstitutionally taxed twice. The case could affect how states across the country collect taxes. The Baltimore Sun (5/27)

From the CPA Newsletter on May 22, 2014

Audits of internal controls improving
The Public Company Accounting Oversight Board will soon start publishing its 2013 inspection reports, and they will reveal that while audit firms have improved internal-controls audits, there is still progress to be made, says PCAOB member Jay Hanson. Compliance Week/Accounting & Auditing blog (5/20)

From the CFO Journal's Morning Ledger on April 11, 2014

Mark-to-market (fair value) accounting and testing of corporate internal controls challenge auditors
A review of audit inspections by 30 regulators around the world found key trouble spots for auditors,
CFOJ’s Emily Chasan reports. Auditors of public firms were most likely to be cited for improperly auditing fair-value measurement, troubles in testing internal controls and evaluating the adequacy of financial statements and disclosures, according to the International Forum of Independent Audit Regulators. Audit deficiencies also rose last year to 1,260, an 18% increase from 2012.

Bob Jensen's threads on fair value accounting ---

Bob Jensen's threads on audit firm professionalism ---

From the CPA Newsletter on May 22, 2014

CFOs ocus on misaligned marketing ROIs with eye on greater accuracy
CFOs are stepping up their attention on their companies' marketing spend with the goals of gaining a more accurate return-on-investment figure. One example is VF Corp., which is matching marketing spend in certain regions with revenue growth in those areas. CoreBrand estimates that about 10% of companies match their marketing spend to their return-on-investment targets. The Wall Street Journal (tiered subscription model)/CFO Journal blog (5/20)

Bob Jensen's threads on ROIs ---

From the CPA Newsletter on May 16, 2014

Credit Suisse pleads guilty to aiding Americans' tax evasion
Credit Suisse has become the first major bank in about 20 years to plead guilty to a criminal charge. The Swiss bank agreed to pay about $2.6 billion in fines as it acknowledged that it helped American clients evade taxes. Reuters (5/19), The New York Times (tiered subscription model)/DealBook blog (5/19), Financial Times (tiered subscription model) (5/19)

Bob Jensen's Fraud Updates ---

From the CPA Newsletter on May 16, 2014

U.K. boasts most billionaires per capita in the world
The U.K. has one billionaire for every 607,692 residents, the highest per-capita level in the world. The U.S. is second with one billionaire for every 1,022,475 residents. One reason for Britain's ascendency may be that it doesn't tax non-domicile residents on their global wealth.
The Daily Mail (London) (5/12)

Jensen Comment
The United Kingdom's corporate tax rate is half the corporate tax rate in the USA. Roger Collins pointed out that this was a huge factor in the decision by Phizer to move its headquarters to England.

"Pfizer admitted that moving to the UK would also give it "substantial tax benefits" at the expense of US taxpayers. The company will save millions by spending its £40bn cash pile it has built up overseas on buying AstraZeneca rather than bringing the money back to America, where it would be taxed.

The tax plans have been attacked by prominent US senators Carl Levin and Roy Wyden, who are working to urgently to close the loophole.

Pfizer said the UK's 20% corporate tax rate from next year compared with 40% in the US was "very attractive".

Read praised the UK government's "very clever" tax breaks strategy and said it was crucial to Pfizer's decision to make an offer for AstraZeneca. "We would change the price we are offering if we didn't have the advantage of the tax," he said.

He highlighted the UK's "patent box" tax - introduced by George Osborne - which allows companies to pay just 10% tax on profits derived from UK research."

For more, see.. 


John Doty is the current Chair of the PCAOB ---

Developments in the Relationships Between Audit Committees and Auditors  ---

DATE May 2, 2014 
SPEAKER(S): James R. Doty, Chairman 
EVENT: Northwestern University School of Law 34th Annual Ray Garrett Jr. Corporate and Securities Law Institute 
LOCATION: Chicago, IL 


FASB proposes an optional pushdown accounting model (a significant change)
EY Commentary ---

What you need to know

• The FASB proposed allowing acquired entities to choose to apply pushdown accounting (i.e., reflect the acquirer ’ s basis of accounting for the acquired entity ’ s assets and liabilities ) when an acquirer obtains control of the m.

• The proposal would appl y to all entities.

• The proposal would not include certain concepts that exist in current SEC guidance such as “ substantially wholly owned ” and “ collaborative group.”

• Comments are due by 3 1 July 2014

"KKR Error Raises Question: What Cash Should Go to Investors? Private-Equity Firm KKR Isn't Sharing Certain Fees Because It Doesn't See Unit as an Affiliate," by Mark Maremount, The Wall Street Journal, May 21, 2014 ---

KKR KKR +2.41% & Co. has made several erroneous disclosures about its ties to an in-house consulting unit, a lapse that highlights a broader issue of private-equity firms' duties to pass along fee income to investors.

The investing giant said it incorrectly listed the unit, KKR Capstone, as a subsidiary in a 2011 annual report. Several KKR-controlled public companies erroneously described Capstone as a KKR "affiliate" in regulatory filings. And statements on investor calls identifying Capstone's top executive as a KKR partner weren't "technically correct," an official of the private-equity firm says. Similar mentions of the Capstone executive as a partner by KKR co-founder Henry R. Kravis, KKR said, were a "collegial reference."

Behind the admissions of mistakes—in response to inquiries from The Wall Street Journal—is a ticklish legal situation that hasn't before come to public light.

KKR is required to share with investors in its largest buyout fund 80% of any "consulting fees" collected by any KKR "affiliate," under a confidential pact struck with public pension funds and other investors in that 2006 fund. Terms of that deal were reviewed by the Journal. The private-equity firm manages other funds, but terms governing them couldn't be determined.

Capstone earns consulting fees, which constitute the bulk of the roughly $170 million in such fees KKR reported as revenue over the past three years. But KKR says the group is owned by Capstone's management, not KKR, and isn't an affiliate. As a result, KKR—which is required by accounting rules to include Capstone's financial results with its own—has told investors it doesn't share the firm's fees with them.

A KKR official says the firm in some cases has "corrected" miscues and in another instance didn't change a regulatory filing because it considered the error "immaterial." A Capstone representative declined to comment Wednesday.

The KKR fee-sharing issue comes as the Securities and Exchange Commission ramps up scrutiny of fees and disclosures in the private-equity industry. Andrew Bowden, a senior SEC official, said in a speech earlier this month that the agency has found "broad, imprecise language" in firms' limited-partnership agreements struck with investors, which in some cases creates an "enormous gray area" when it comes to fees.

Mr. Bowden didn't mention KKR in his remarks, and the SEC declined to comment on KKR for this article.

An affiliate, legal experts said, is an entity controlled by, or under common control with, another.

Some legal experts note that KKR directs Capstone's services and holds significant sway over its executives' pay. "There is a very strong case to be made that it is an affiliate, and KKR ought to be sharing some of these fees from Capstone," said James D. Cox, a Duke University securities-law professor.

Big investors now routinely demand a share of fees private-equity firms charge their portfolio companies—often 80% to 100%—arguing that the charges drain companies bought with their money. Investors generally don't collect fees directly, but use them to offset a portion of annual management fees they would otherwise owe private-equity firms.

When raising $17.6 billion for its 2006 fund, KKR agreed to share 80% of a range of fees collected by its management company or any "KKR affiliate."

KKR declined to say how much Capstone has collected in fees from companies bought through the 2006 fund. One such company, First Data Corp., an Atlanta-based provider of credit-card-processing services, paid Capstone $35.4 million from 2011 through 2013, according to its regulatory filings.

Capstone Consulting LLC—which licenses the name KKR Capstone from the private-equity firm—was founded in 2000 to help KKR improve operations at the companies it was buying. Filings show it has grown to employ more than 50 operating consultants; its leader sits on KKR's key portfolio-management committee, and its top executives participate in KKR's share of its deal-making profits.

"I can't think of any other group that is probably as important to the success of each of our businesses," Mr. Kravis said in a 2012 investor meeting.

In 2011, KKR began including Capstone's results in its own financial statements, under accounting rules mandating such consolidation if one company has a "controlling financial interest" in another.

Continued in article


From the PwC Newsletter on May 16, 2014

In brief: Consolidation - changes may affect all industries
The FASB's consolidation project nears completion with more decisions made at last week's meeting. Significant changes have been made by the Board to the principal versus agent proposal that was exposed in 2011, making the potential impacts more broad than initially anticipated. The FASB's initial goal was to make a surgical fix to one aspect of the consolidation guidance (adding a new principal versus agent step in the VIE model) to avoid asset managers needing to consolidate the funds they manage. Since then, the Board has made decisions that will impact several aspects of the consolidation guidance with applicability to all companies.


From the CPA Newsletter on May 6, 2014

Aging America will put pressure on Social Security, Medicare
America is aging, with the number of people 65 and older expected to nearly double by 2050, putting pressure on programs such as Social Security and Medicare. The Census Bureau reports the number of older U.S. residents will grow from 43 million in 2012 to nearly 84 million in 2050. Reuters (5/6)

Bob Jensen's threads on the entitlements disasters ---

From the CPA Newsletter on May 6, 2014

Taxpayer who won't provide cost basis owes large tax bill
A taxpayer who refused to provide cost-basis information for securities he sold must pay over $5 million in tax after the 11th Circuit Court of Appeals agreed with the Tax Court that he must treat the entire sales price as capital gain. The taxpayer failed to establish his basis in the securities, despite many attempts by the Internal Revenue Service to obtain the information from him.
Journal of Accountancy online (5/5)

Cash Flow and Motive for Fraud
RGL Forensics
Thank you M. Raza for the heads up.

Cash Flow and Motive for Fraud

A company’s statement of cash flows offers an invaluable view into the sources and uses of cash in the organization’s operations. At the same time, the cash flow statement can provide important clues about the operation’s financial stability and solvency (ability to meet obligations as they are due or sufficient assets to meet ongoing liabilities). For example, poor cash flow and the likelihood of insolvency can represent a critical set of numerical red flags for uncovering the motives for committing accounting or insurance fraud.
Moreover, investigative analysis of a company’s cash flow numbers can uncover incentives to commit fraud in two key categories--motive out of desperation (to stave off insolvency, for instance), and motive out of intentional calculation.1



Publication of the statement of cash flows is required by Generally Accepted Accounting Principles (GAAP) in the United States.2  Essentially, the cash flow statement provides for the sources and uses of cash within three categories of activities within each entity—operating, investing and financing operations.  The combined net cash provided or used for each of the three groupings of activity equals the company’s overall increase or decrease in the cash balance during the year. 

Example: The operating activities for a cash flow statement using the indirect method:


Cash Flow from Operating Activities

Net Income                                                               $500,000

Adjustments to Reconcile Net Income 

to Net Cash from Operating Activities:

Depreciation (Non-Cash Expense)                               $100,000

(Increase) / Decrease Receivables                             ($400,000)

(Increase) / Decrease in Inventories                          ($200,000)

Increase / (Decrease) Payables                                 ($200,000)

Increase / (Decrease) in Taxes Payable                     ($200,000)

Net Cash Provided by Operating Activities          ($400,000)

As you can see, this particular entity earned $500,000 in net profit for the year while operations actually resulted in a $400,000 decline in cash due to the ways in which cash was generated and used for operations.  The change in accounts receivable provides important insight into the difficulty the entity has had in converting sales to cash. 

Key: If the accounts receivable balance increases during a year it means that cash receipts were less than sales for the year.  This is often symptomatic of a strain on available cash for operating activities, which in turn could be caused by other problems such as the following:

    • Financial difficulties at one or more customers. In today’s economic times, many companies are facing financial difficulty that often translates into slower payment of suppliers and vendors.  This could be a widespread problem or one that is isolated to few customers. 

Accounts receivable aging reports will help to shed light on the specific accounts that are slow in paying. 

    • Customer service or billing difficulties. Another possible explanation for the increase in the receivables balance is that the entity is not providing quality customer service (including sub-par product quality) and customers are refusing to pay the amount owed on account or are demanding an allowance as compensation.  These problems may or may not be properly accounted for through the establishment of a reserve for doubtful accounts.  And, of course, these types of problems may be indicative of a larger more systemic customer service problem. 

Helpful: Speaking with selected customers about the reasons for delay in payment is often very valuable in this regard.  Confirmation of receivable balances could also include an opportunity for the customer to provide feedback on the customer service received.

    • Artificial overstatement of sales and accounts receivable. The cash strain described above could also be the result of fictitious entries to the ledger. This results in artificial overstatement of sales and accounts receivable.  This is a common form of financial statement fraud designed to misrepresent the financial condition of the entity for a fraudulent purpose.  The result is to overstate assets – primarily accounts receivable-- and sales, thus artificially inflating profitability and equity balance of the operation. 

Tracing these transactions to the underlying sales invoices and other supporting documentation as well as to specific confirmations of the receivable balance with the customer is essential to this analysis. 

Of course, there could be other explanations for the increase in the receivables balance that may suggest that it is a normal, temporary increase.  To determine if this is the case, analyze and understand the trends and cycles of the receivables to discover whether the correlation of sales to receivables balance is seriously eroding or simply fluctuates over time.

 For illustration, in the example above, it is possible that the previous year experienced a dramatic decrease in the receivable balance, which translated to a dramatic increase in cash on hand.

Key: The timing and history of transactions are important to the investigation and understanding of the financial situation in the context of financial motive to commit fraud.

Bottom line: Getting to the true facts about this entity’s financial activities requires an understanding of the “why” and not simply the transactions and account balances. 

As mentioned, an important factor is the timing of changes and their correlation —or lack thereof— to the approach to insolvency.  The question that must be asked in order to determine if there is a motive to commit fraud is whether there is a trend towards insolvency.  If there is, the pressure on management to falsify its financial reports may be great enough to push them to commit fraud. If, on the other hand, you determine that legitimate forces are behind the entities cash flow problems, you must assess the ability of the operation to survive through alternative financing or investment with a plan to turn it around.  This is the nature of structured turnarounds; rethinking the financial model and business concept with the goal of returning the operation to solvency. 



Another section of the Statement of Cash Flows that is of particular significance to the analysis of financial motive for fraud is that relating to cash flow from financing activities. 

In this situation, the motive investigation should always include an analysis of the ability of the business entity to meet its debt obligations (and preferred stock dividends if applicable) as they come due.  And, while there is important information provided in the cash flows statement relevant to this issue, more investigation is required to unravel the real story behind the numbers. 


Cash Flow from Financing Activities

Payments of Loan Principal                                 ($500,000)

Loan Proceeds                                                      200,000

Net Cash Provided by Financing Activities            ($300,000)

A quick glance of this abbreviated section of the cash flow statement tells you that payments toward the principal balance of the entity’s debt made during the year totaled $500,000 and the loan proceeds from new debt were $200,000.  The result is a further $300,000 decline in the cash balance.  While this is valuable information, it does not give us sufficient understanding of the cash flow and financing of the operation. 

For example, while $500,000 in payments were made towards the principal on the entity’s debt, the statement does not reveal the amount of debt principal that was due and owing during the year.  It could be that the principal portion of loan payments scheduled for remittance totaled more than $1 million, but the entity lacked sufficient cash or additional financing to meet that obligation.  As such, the entity may have been forced to pursue restructuring of its debt -- by, for example, having the principal amount due in the current year pushed to the following. This would help to ease the entity’s current cash flow problem, but it  would increase the risk of being unable to meet its obligations in the subsequent period.

The notes to the financial statements often will provide some additional insight to the loan balances, due dates, amounts due during the year, refinances, liquidations and new loans.  There may also be information on the collateral or security pledged for the loans and even compliance with loan covenants and other requirements.   These covenants and requirements are designed to assist the lending institution in managing its financial interest in the underlying security protecting its investment. 

Where this information is not disclosed on the financial statements or notes, the analyst must seek the details in order to completely understand the nature and complexity of the entity’s debt financing.  This is critical to understanding the financial implications to negative cash flow and its relationship to the approach of insolvency. 

And perhaps most importantly, the ability of an entity to finance its operation is critical in understanding the potential motive for fraud.  In the case of the desperate entity, for example, current debt payments due may outweigh the entity’s ability to generate cash from other sources.  Thus, among the main ways for such an organization to obtain the desperately needed cash are refinancing or borrowing additional funds.  An investigation of the cash flow from financing activities provides insight into whether management has misrepresented its financial records to facilitate such borrowing potential. 



Often, the most important source for this information is directly from the company’s financial institution itself. 

Important: Whenever you request information about a specific entity from its bank, be sure to ask for complete copies of loan files, loan underwriting files, loan agreements including covenants, loan payment history, as well as collateral and security interests, procedures for loan approval and covenant violation as well as financial information files, etc. 


Continued in article

Which is More Value-Relevant: Earnings or Cash Flows?
Go to

This is the worst article that I've read in a long, long time.

"Let's All Stop Worrying About Grade Inflation," by David Goobler, Chronicle of Higher Education, May 21, 2014 ---

Jensen Comments

Grade Inflation is the Number 1 Disgrace in Higher Education ---

  1. The article by Goobler provides no evidence for its speculations that grades don't matter.
    Grades do matter. If all graduates have nearly an A average then prospective employers and graduate schools adapt by either using other measures of quality or by raising standards.

    For example, graduate schools may adapt to relying more on admission test scores like the MCAT, LSAT, GRE, and GMAT when grades can no longer be meaningfully evaluated (all graduates had high grades).

    For example, prospective employers adapt by keeping secret books of standards for different colleges. The large CPA firms, for example, keep such books such that College A graduates are interviewed only if their gpa exceeds 3.5 since nearly all accounting graduates of College A have a higher gpa than 3.0. The firms may set the target for interviewing at 3.0 for College B where most accounting graduates have a gpa lower than 3.0 in college B.
  2. There's a lot of anecdotal evidence that students don't put in as much effort if grading is not competitive.  
    Why put in blood, sweat, and tears if you are assured of getting an A with minimal effort?

    Students have to make tough decisions of where to allocate their study time. The courses with high grade competition will get more of their study time allocation than the gut courses where top grades for little effort are assured (because the teachers in those courses are paranoid over getting poor teaching evaluations).
  3. Do you want a physician who shed blood, sweat, and tears to for an A average or a physician who spent most of his time in the pub while getting an A average in medical school?

  4. There's some anecdotal evidence that students are tempted to game the assignments of the course.
    For example, some students may cooperate with each other by dividing up assignments and then copying each others' answers. Exhibit A is a political science course at Harvard where over 60 students were expelled for doing this type of plagiarism of each otherss' assignments.


"Cheating Scandal at Harvard," Inside Higher Ed, August 31, 2012 ---

Harvard University is investigating about 125 students -- nearly 2 percent of all undergraduates -- who are suspected of cheating on a take-home final during the spring semester, The Boston Globe reported Thursday. The students will appear before the college’s disciplinary board over the coming weeks, seem to have copied each other’s work, the dean of undergraduate education said. Those found guilty could face up to a one-year suspension. The dean would not comment on whether students who had already graduated would have their degrees revoked but he did tell the Globe, “this is something we take really, really seriously.” Harvard administrators said they are considering new ways to educate students about cheating and academic ethics. While the university has no honor code, the Globe noted, its official handbook says students should “assume that collaboration in the completion of assignments is prohibited unless explicitly permitted by the instructor.”

"The Typo That Unfurled Harvard’s Cheating Scandal," Chronicle of Higher Education, September 12, 2012 ---

"Facing Cheating Inquiry, Harvard Basketball Co-Captains Withdraw," Inside Higher Ed, September 12, 2012 ---

Jensen Comment
The main issue is whether students plagiarized work of other students.

Ironically the course involved is "Government 1310: Introduction to Congress." So why is does cheating in this course come as a surprise?

"Harvard Students in Cheating Scandal Say Collaboration Was Accepted," by Richard Perez-Pena, The New York Times, August 31, 2012 ---

. . .

 In years past, the course, Introduction to Congress, had a reputation as one of the easiest at Harvard College. Some of the 279 students who took it in the spring semester said that the teacher, Matthew B. Platt, an assistant professor of government, told them at the outset that he gave high grades and that neither attending his lectures nor the discussion sessions with graduate teaching fellows was mandatory.

¶ “He said, ‘I gave out 120 A’s last year, and I’ll give out 120 more,’ ” one accused student said.

¶ But evaluations posted online by students after finals — before the cheating charges were made — in Harvard’s Q Guide were filled with seething assessments, and made clear that the class was no longer easy. Many students, who posted anonymously, described Dr. Platt as a great lecturer, but the guide included far more comments like “I felt that many of the exam questions were designed to trick you rather than test your understanding of the material,” “the exams are absolutely absurd and don’t match the material covered in the lecture at all,” “went from being easy last year to just being plain old confusing,” and “this was perhaps the worst class I have ever taken.”

¶ Harvard University revealed on Wednesday that nearly half of the undergraduates in the spring class were under investigation for suspected cheating, for working together or for plagiarizing on a take-home final exam. Jay Harris, the dean of undergraduate education, called the episode “unprecedented in its scope and magnitude.”

¶ The university would not name the class, but it was identified by students facing cheating allegations. They were granted anonymity because they said they feared that open criticism could influence the outcome of their disciplinary cases.

¶ “They’re threatening people’s futures,” said a student who graduated in May. “Having my degree revoked now would mean I lose my job.”

¶ The students said they do not doubt that some people in the class did things that were obviously prohibited, like working together in writing test answers. But they said that some of the conduct now being condemned was taken for granted in the course, on previous tests and in previous years.

¶ Dr. Platt and his teaching assistants did not respond to messages requesting comment that were left on Friday. In response to calls to Mr. Harris and Michael D. Smith, the dean and chief academic officer of the Faculty of Arts and Sciences, the university released a statement saying that the university’s administrative board still must meet with each accused student and that it has not reached any conclusions.

¶ “We expect to learn more about the way the course was organized and how work was approached in class and on the take-home final,” the statement said. “That is the type of information that the process is designed to bring forward, and we will review all of the facts as they arise.”

¶ The class met three times a week, and each student in the class was assigned to one of 10 discussion sections, each of which held weekly sessions with graduate teaching fellows. The course grade was based entirely on four take-home tests, which students had several days to complete and which were graded by the teaching fellows.

¶ Students complained that teaching fellows varied widely in how tough they were in grading, how helpful they were, and which terms and references to sources they expected to see in answers. As a result, they said, students routinely shared notes from Dr. Pratt’s lectures, notes from discussion sessions, and reading materials, which they believed was allowed.

¶ “I was just someone who shared notes, and now I’m implicated in this,” said a senior who faces a cheating allegation. “Everyone in this class had shared notes. You’d expect similar answers.”

¶ Instructions on the final exam said, “students may not discuss the exam with others.” Students said that consulting with the fellows on exams was commonplace, that the fellows generally did not turn students away, and that the fellows did not always understand the questions, either.

¶ One student recalled going to a teaching fellow while working on the final exam and finding a crowd of others there, asking about a test question that hinged on an unfamiliar term. The student said the fellow defined the term for them.

¶ An accused sophomore said that in working on exams, “everybody went to the T.F.’s and begged for help. Some of the T.F.’s really laid it out for you, as explicit as you need, so of course the answers were the same.”

¶ He said that he also discussed test questions with other students, which he acknowledged was prohibited, but he maintained that the practice was widespread and accepted.

2012 Harvard Cheating Scandal ---

"Half of students in Harvard cheating scandal required to withdraw from the college," by Katherin Landergan,, February 1, 2013 ---

In an apparent disclosure about the Harvard cheating scandal, a top university official said Friday that more than half of the Harvard students investigated by a college board have been ordered to withdraw from the school.

In an e-mail to the Harvard community, Dean of the Faculty of Arts and Sciences Michael D. Smith wrote that more than half of the students who were brought before the university's Administration Board this fall were required to withdraw from for a period of time.

Of the remaining cases, approximately half the students received disciplinary probation, while the rest of the cases were dismissed.

Smith's e-mail does not explicitly address the cheating scandal that implicated about 125 Harvard students. But a Harvard official confirmed Friday that the cases in the email solely referred to one course.

In August, Harvard disclosed the cheating scandal in a Spring 2012 class. It was widely reported to be "Government 1310: Introduction to Congress."

“Consistent with the Faculty’s rules and our obligations to our students, we do not report individual outcomes of Administrative Board cases, but only report aggregate statistics,” the e-mail said. "In that tradition, the College reports that somewhat more than half of the Administrative Board cases this past fall required a student to withdraw from the College for a period of time. Of the remaining cases, roughly half the students received disciplinary probation, while the balance ended in no disciplinary action.''

Smith wrote that the first set of cases were decided in late September, and the remainder were resolved in December.

The e-mail said that "The time span of the resolutions in this set had an undesirable interaction with our established schedule for tuition refunds. To create a greater amount of financial equity for all students who ultimately withdrew sometime in this period, we are treating, for the purpose of calculating tuition refunds, all these students as having received a requirement to withdraw on September 30, 2012."

In a statement released when the cheating scandal became public, Harvard president Drew Faust said that the allegations, “if proven, represent totally unacceptable behavior that betrays the trust upon which intellectual inquiry at Harvard depends. . . . There is work to be done to ensure that every student at Harvard understands and embraces the values that are fundamental to its community of scholars.”

As Harvard students returned to classes for the current semester, professsors included explicit instructions about collaboration on the class syllabus.

On campus Friday afternoon, students reacted to the news.

Michael Constant, 19, said he thinks the college wanted to make a statement with its decision. But when over half of the students in a class cheat, not punishing them is the same as condoning the behavior.

“I think it’s fair,” Constant said of the board’s disciplinary action. “They made the choice to cheat.”

Georgina Parfitt, 22, said the punishment for these students was too harsh, and that many students in the class could have been confused about the policy.

Parfitt said she does not know what the college is trying to achieve by forcing students to leave.

Continued in article

Jensen Question
The question is why cheat at Harvard since almost everybody who tries in a Harvard course receives an A. We're left with the feeling that those 125 or so students who cheated just did not want to try?

The investigation revealed that 91 percent of Harvard's students graduated cum laude.
Thomas Bartlett and Paula Wasley, "Just Say 'A': Grade Inflation Undergoes Reality Check:  The notion of a decline in standards draws crusaders and skeptics," Chronicle of Higher Education, September 5, 2008 ---


Grade Inflation is the Number 1 Disgrace in Higher Education ---


From 24/7 Wall Street newsletter on May 12, 2014

The U.S. Postal Service on Friday reported a net loss of $1.9 billion in the second quarter of its 2014 fiscal year.
The total is equal to almost half the USPS’s reported loss for the first nine months of the 2013 fiscal year, and marks the 20th loss in the past 22 quarters. Revenue rose and expenses fell -- the results should perhaps have been better. And they were in one area -- package delivery service where revenue rose by $252 million or 8% to $3.38 billion and volume rose 7.3% to 986 million packages. The USPS may have hit upon a way to improve its fortunes, and the key may be in a deal it has with
Can Amazon save the U.S. Postal Service?

This must really complicate FX hedging decisions and accounting for FX speculation and hedging

From the CFO Journal's Morning Ledger on May 27, 2014

Good morning. The highest inflation rate in the Americas and at least five currency devaluations in the past decade have turned Venezuela into a guessing game for multinational firms, and that may force them to take write-downs, report WSJ’s Maxwell Murphy and Kejal Vyas on the front page of today’s Marketplace. The country now has three exchange rates for its currency, plus a sizable black market which accounts for about 10% of currency transactions.

Venezuela’s foreign-exchange system puts companies on an uneven playing field, depending on their business. Some firms can import goods at 6.3 bolivars to a U.S. dollar, but for others a dollar can cost as much as 50 bolivars. And without access to official channels, a dollar can cost 70 bolivars on the black market.

The president of the Venezuelan legislature’s finance commission said authorities are working to unify the rates, but until they do, companies must decide which exchange rate to use, so investors should brace for more write-downs. Avon Products Inc. switched to the newest government-sanctioned rate in the first quarter and took a $42 million charge, and Estée Lauder Cos. took a $38 million hit. Most companies are still using more-favorable exchange rates in their accounting.

From the CFO Journal's Morning Ledger on May 27, 2014

Employee fraud is often an unrecoverable bite
A growing percentage of companies can’t get their money back when employees steal,
CFOJ’s John Kester reports. In a survey late last year by the Association of Certified Fraud Examiners, 58% of companies said they failed to recover any money lost through employee fraud in 2012 and 2013, up nine percentage points from the previous study released in 2012.

Jensen Comment
Firms can obtain bonding insurance for those employees confronted with the greatest moral hazard such as those that handle cash, payrolls, precious inventory, etc. But this is expensive for smaller firms and government agencies on tight budgets. Deep pockets auditors sometimes take the hit like the audit firm that overlooked Dixon, Illinois Comptroller Rita Crundwell's theft of nearly $54 million over two decades. That auditing firm repaid about 80% of the loss to the Town of Dixon.

From CFO Journal's Morning Ledger on May 30, 2014

China hacking is deep and diverse
China’s Internet espionage capabilities are deeper and more widely dispersed than believed, the 
WSJ reports, underscoring the challenge the U.S. faces in addressing what Washington considers economic espionage. Some of the most sophisticated intruders observed by U.S. officials and private-sector security firms work as hackers for hire. Sometimes freelancers appear to take orders from the military, at other times from state-owned firms seeking a competitive advantage.

That would make KPMG the largest auditor of hedge funds based on client numbers, up from fifth currently

From CFO Journal's Morning Ledger on May 30, 2014

KPMG to buy New Jersey accounting firm Rothstein Kass
agreed Thursday to buy Rothstein Kass, a firm that caters to hedge funds and other alternative investment firms, the
WSJ’s Michael Rapoport reports. That would make KPMG the largest auditor of hedge funds based on client numbers, up from fifth currently. Ernst & Young LLP currently holds the top spot.

From the CFO Journal's Morning Ledger on May 27, 2014

Health-law costs snarl union contract talks
Labor talks nationwide are becoming more challenging as unions and employers butt heads over who should pick up the tab for new costs associated with the Affordable Care Act
, the WSJ reports. Coverage for dependent children up to age 26 is already an issue, but future costs, like a tax on premium health plans that starts in 2018, are also coming up. Labor experts say the law doesn’t take into account that health benefits have been negotiated over decades, and that rewriting plans to meet end requirements can affect wages and other labor terms.

Jensen Comment
Many firms like Walgreen have already dropped employee health insurance plans.

On a separate matter, the Obama Administration recently ruled that salary increases to replace employer-funded  medical insurance contributions with ACA private exchange plans will not be tax deductible.  This complicates payroll and tax accounting for business firms.  Of course this will not matter to government agencies and other non-profit organizations since they do not seek tax deductions..

From the CPA Newsletter on May 27, 2014

IRS sets high penalties for companies that send employees to ACA health exchanges
According to an Internal Revenue Service ruling, employers that move employees to health insurance exchanges by reimbursing them for their premiums do not satisfy the requirements of the Affordable Care Act. Companies that send workers to the exchanges face a tax penalty of $100 a day, or $36,500 a year, per employee. The New York Times (tiered subscription model) (5/

Bob Jensen's universal health care messaging ---

From the CFO Journal's Morning Ledger on May 20, 2014

Is your in-house consulting unit an “affiliate,” or a “variable-interest entity (VIE)?”
Private-equity firm KKR & Co. is learning that it’s critical to apply specific language to such matters across all of its regulatory filings, because the distinction has a big impact on whether the fees that the unit collects need to be shared with investors.

The investing giant listed KKR Capstone as a subsidiary in its 2011 annual report, something it now describes as a mistake, the WSJ’s Mark Maremont reports. And several KKR-controlled companies erroneously described Capstone as a KKR “affiliate” in regulatory filings. KKR is required to share with investors in its largest buyout fund 80% of any “consulting fees” collected by any KKR “affiliate,” under a confidential pact struck with investors. But KKR says the unit is owned by Capstone’s management, not KKR, and isn’t an affiliate, so it hasn’t shared the firm’s fees with investors. And the fees are considerable—Capstone’s consulting fees constitute the bulk of the roughly $170 million in such fees KKR reported as revenue over the past three years.

A KKR official says the firm in some cases has “corrected” misstatements, though in another instance it didn’t change a filing because it considered the error “immaterial.” But this is news to some KKR investors. “I always thought Capstone was part of the firm,” said Christopher Wagner, a private-equity officer with the Los Angeles County Employees Retirement Association, which is an investor in the fund.

What's Right and What's Wrong With (SPEs), SPVs, and VIEs ---

From the CFO Journal's Morning Ledger on May 20, 2014

Mortgage, home-equity woes linger
Nearly 10 million U.S. households remain stuck in homes worth less than their mortgage, and a similar number have so little equity they can’t meet the expenses of selling a home, the
WSJ’s Conor Dougherty reports. In addition to the homeowners who are underwater, roughly 10 million households have 20% or less equity in their homes, which makes it difficult to sell without dipping into savings.

Jensen Comment
If a lender forgives the difference between the mortgage debt owing and the lesser value of the property, the homeowner may have been better off from a tax standpoint to have the debt forgiven in 2013 versus after 2013.

May 13, 2014 message from Elliot Kamlet

Hi Bob

You were not the only one concerned about riots in the streets over taxation of cancellation of home mortgage debt.  Congress came to the rescue.  From 2007-2013 (it has expired now) there was a provision of the code excluding home mortgage debt cancellation from income.

Sec. 108  (a) Exclusion from gross income
(1) In general
Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer —
(A) the discharge occurs in a title 11 case,
(B) the discharge occurs when the taxpayer is insolvent,
(C) the indebtedness discharged is qualified farm indebtedness,
(D) in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness, or
(E) the indebtedness discharged is qualified principal residence indebtedness which is discharged before January 1, 2014.

As far as the woman in the disability case goes, I would think she is a good candidate for an "offer in compromise", an IRS program meant to relieve taxpayers of their past due tax burden if their future prospects for earnings are minimal.


Conflict Minerals Regulation and Accounting Confusion

From the CFO Journal's Morning Ledger on May 20, 2014

Good morning. The June 2 regulatory deadline for corporate disclosures on so-called conflict minerals is fast approaching, but most companies are still struggling to determine how much to reveal about their suppliers and audit trails, CFOJ’s Emily Chasan and Joel Schectman report. Some 6,000 U.S.-listed companies are expected to release details about their supply chains in the next few weeks, but few conclusions are likely to appear in the reports.

The disclosures are mandated by a part of the Dodd-Frank Act of 2010, and were intended to stop the flow of money to violent militia groups in and around the Democratic Republic of Congo. But business groups have insisted that the requirement is too burdensome.

Even after a court ruling that struck down part of the regulation, companies are still required to prove that they’ve investigated their supply chains. AMD Inc., for example, has spent years investigating the manufacture of its computer chips, and yet it still can’t say whether its suppliers used any tin, tungsten, gold or tantalum sold by armed groups in the Congo region.


From the CFO Journal's Morning Ledger on May 16, 2014

GE Capital insider case is a new test for SEC
Fresh off a major courtroom victory, the Securities and Exchange Commission will test its insider-trading theories in another long-running case set for Monday, the
WSJ’s Joe Palazzolo reports. Regulators say Nelson J. Obus, a principal at hedge fund Wynnefield Capital Inc., traded on an inside tip about an acquisition he received from one of his analysts, who got the tip from a college friend at General Electric Co.’s GE Capital unit. The SEC sued Mr. Obus in 2006 and a federal trial judge threw out the case, but an appeals court reinstated it in 2012.

Wal-Mart will not oppose an increase in the federal minimum wage

From the CFO Journal's Morning Ledger on May 16, 2014

Wal-Mart sales decline, again
For the fifth quarter in a row, Wal-Mart Stores Inc. reported a decline in U.S. sales, the WSJ reports, and the company sees further weakness ahead. The results underscore ongoing softness in the economy, particularly for Americans at the lower end of the income scale. The retailer also said that it would not oppose an increase in the federal minimum wage, the WSJ’s Shelly Banjo reports. It is the most explicit remark the company has made on the matter, though a spokeswoman added that its position has not changed, and that it remains neutral on whether the minimum wage should be raised or not.

Why isn't this surprising?

From the CFO Journal's Morning Ledger on May 8, 2014

Judge criticizes Nortel legal fees
A Canadian judge blasted the lawyers involved in the fight over $7.3 billion raised in the sale of Nortel Networks Inc.’s businesses, calling their tactics “a huge waste of money” and their fees shocking,” the
WSJ’s Peg Brickley reports. The trial is set to run for six weeks in the U.S. and Canada at an expected cost of at least $1 million a day. It will determine how to split the proceeds of the sale of Nortel’s businesses among its creditors.

From the CFO Journal's Morning Ledger on May 13, 2014

Restatements pack less of a punch.
The average financial restatement cost companies $3.2 million last year, less than half of the average $6.5 million they cost in each of the previous six years,
CFOJ’s John Kester reports. Regulators at the SEC have been filing fewer accounting-fraud cases, reducing companies’ restatement risks, though that could change in light of new investigations under way, SEC Chairwoman Mary Jo White said last month.

From the CFO Journal's Morning Ledger on May 8, 2014

Good morning. Increases in business hiring and consumer spending have convinced the Federal Reserve of the arrival finally of green shoots of economic growth this springtime.  But as The Wall Street Journal’s Jon Hilsenrath and Nick Timiraos report, that optimism is tainted by concerns that the housing sector isn’t part of that growth. Fed Chairwoman Janet Yellen, testified before Congress’s Joint Economic Committee Wednesday that the economy was on track for “solid growth” in the current quarter, but she flagged that housing was potentially still in a slump. Existing home sales in March fell for the seventh time in eight months and were 7.5% below the seasonally adjusted annual rate of a year earlier.

New building permits for single-family homes stood below the year-earlier level for the second straight month in March. Sales of new homes during the first quarter were 1.8% below the year-earlier level, punctuated by a 13% decline in March. On the record for the first time about fears for the housing market, Ms. Yellen warned lawmakers: “The recent flattening out in housing activity could prove more protracted than currently expected, rather than resuming its earlier pace of recovery.” A slow recovery in the housing sector could make the Fed’s decision on interest-rate increases even more protracted.

From the CFO Journal's Morning Ledger on May 8, 2014

FASB Proposes Clean Up For Newly Acquired Entities
The Financial Accounting Standards Board has proposed changes to the way newly acquired companies apply existing accounting rules, in a bid to streamline the variation currently in practice.
Compliance Week reports that the FASB has issued an exposure draft to spell out some new requirements for “pushdown accounting,” or the establishment of a new accounting basis for a target company after an acquisition when the acquired company will continue to publish its own financial statements. The FASB said companies following existing accounting guidance have developed different practices because the guidance is limited. The update is intended to spell out when and where an acquired business would apply pushdown accounting in its separate financial statements.

From the CFO Journal's Morning Ledger on May 6, 2014

Corporate pension plans reverse recent gains (after a good 2013 year)
Rising interest rates and stagnant stock prices are taking a toll on corporate pension plans,
CFOJ’s Vipal Monga reports. Companies that had been plotting buybacks or dividends instead of pension contributions may be forced to revisit those plans. The funding deficit for S&P 1500 defined-obligation pension plans totaled about $360.3 billion in April, the largest funding gap since April last year and almost four times the $102.9 billion recorded at the end of 2013.

From the CFO Journal's Morning Ledger on May 2, 2014

FASB's New Guidance to Amend Discontinued-operations Reporting ---

FASB's Accounting Standards Update No. 2014-08 aims to elevate the threshold for a disposal transaction to qualify as a discontinued operation, as too many disposal transactions were qualifying as discontinued operations under existing guidance. It also amends the definition of a discontinued operation and requires entities to disclose more information about disposal transactions that do not meet the discontinued-operations criteria, as discussed in Deloitte's "Heads Up" newsletter.

From the CFO Journal's Morning Ledger on May 2, 2014

Securities Exchange Commission wonders, where are the accounting questions?
Companies have been asking fewer questions of the Securities and Exchange Commission’s accounting staff this year, and regulators aren’t sure why
, CFOJ’s Emily Chasan reports. “The drop-off is pretty significant at around 40%,” said Daniel Murdock of the SEC’s Office of the Chief Accountant. “It just makes me pause with respect to what it is [that’s causing the decline].”

Jensen Comment
When students don't ask questions it's usually because they know the answers or because they're so hopelessly lost it's a waste of time to listen to the answers.

"White-Collar World:  What the office has done to American life," by Nikil Saval, Chronicle of Higher Education's Chronicle Review, April 14, 2014 ---

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

That some bankers have ended up in prison is not a matter of scandal, but what is outrageous is the fact that all the others are free.
Honoré de Balzac

"Why Only One Top Banker Went to Jail for the Financial Crisis," by Jesse Eisinger, The New York Times, April 30, 2014 ---
Thank you Denny Beresford for the heads up!

This article is a collaboration between The Times and ProPublica, the independent nonprofit investigative organization.

On the evening of Jan. 27, Kareem Serageldin walked out of his Times Square apartment with his brother and an old Yale roommate and took off on the four-hour drive to Philipsburg, a small town smack in the middle of Pennsylvania. Despite once earning nearly $7 million a year as an executive at Credit Suisse, Serageldin, who is 41, had always lived fairly modestly. A previous apartment, overlooking Victoria Station in London, struck his friends as a grown-up dorm room; Serageldin lived with bachelor-pad furniture and little of it — his central piece was a night stand overflowing with economics books, prospectuses and earnings reports. In the years since, his apartments served as places where he would log five or six hours of sleep before going back to work, creating and trading complex financial instruments. One friend called him an “investment-banking monk.”

Serageldin’s life was about to become more ascetic. Two months earlier, he sat in a Lower Manhattan courtroom adjusting and readjusting his tie as he waited for a judge to deliver his prison sentence. During the worst of the financial crisis, according to prosecutors, Serageldin had approved the concealment of hundreds of millions in losses in Credit Suisse’s mortgage-backed securities portfolio. But on that November morning, the judge seemed almost torn. Serageldin lied about the value of his bank’s securities — that was a crime, of course — but other bankers behaved far worse. Serageldin’s former employer, for one, had revised its past financial statements to account for $2.7 billion that should have been reported. Lehman Brothers, AIG, Citigroup, Countrywide and many others had also admitted that they were in much worse shape than they initially allowed. Merrill Lynch, in particular, announced a loss of nearly $8 billion three weeks after claiming it was $4.5 billion. Serageldin’s conduct was, in the judge’s words, “a small piece of an overall evil climate within the bank and with many other banks.” Nevertheless, after a brief pause, he eased down his gavel and sentenced Serageldin, an Egyptian-born trader who grew up in the barren pinelands of Michigan’s Upper Peninsula, to 30 months in jail. Serageldin would begin serving his time at Moshannon Valley Correctional Center, in Philipsburg, where he would earn the distinction of being the only Wall Street executive sent to jail for his part in the financial crisis.

American financial history has generally unfolded as a series of booms followed by busts followed by crackdowns. After the crash of 1929, the Pecora Hearings seized upon public outrage, and the head of the New York Stock Exchange landed in prison. After the savings-and-loan scandals of the 1980s, 1,100 people were prosecuted, including top executives at many of the largest failed banks. In the ’90s and early aughts, when the bursting of the Nasdaq bubble revealed widespread corporate accounting scandals, top executives from WorldCom, Enron, Qwest and Tyco, among others, went to prison. Continue reading the main story

The credit crisis of 2008 dwarfed those busts, and it was only to be expected that a similar round of crackdowns would ensue. In 2009, the Obama administration appointed Lanny Breuer to lead the Justice Department’s criminal division. Breuer quickly focused on professionalizing the operation, introducing the rigor of a prestigious firm like Covington & Burling, where he had spent much of his career. He recruited elite lawyers from corporate firms and the Breu Crew, as they would later be known, were repeatedly urged by Breuer to “take it to the next level.”

But the crackdown never happened. Over the past year, I’ve interviewed Wall Street traders, bank executives, defense lawyers and dozens of current and former prosecutors to understand why the largest man-made economic catastrophe since the Depression resulted in the jailing of a single investment banker — one who happened to be several rungs from the corporate suite at a second-tier financial institution. Many assume that the federal authorities simply lacked the guts to go after powerful Wall Street bankers, but that obscures a far more complicated dynamic. During the past decade, the Justice Department suffered a series of corporate prosecutorial fiascos, which led to critical changes in how it approached white-collar crime. The department began to focus on reaching settlements rather than seeking prison sentences, which over time unintentionally deprived its ranks of the experience needed to win trials against the most formidable law firms. By the time Serageldin committed his crime, Justice Department leadership, as well as prosecutors in integral United States attorney’s offices, were de-emphasizing complicated financial cases — even neglecting clues that suggested that Lehman executives knew more than they were letting on about their bank’s liquidity problem. In the mid-’90s, white-collar prosecutions represented an average of 17.6 percent of all federal cases. In the three years ending in 2012, the share was 9.4 percent.

After the evening drive to Philipsburg, Serageldin checked into a motel. He didn’t need to report to Moshannon Valley until 2 p.m. the next day, but he was advised to show up early to get a head start on his processing. Moshannon is a low-security facility, with controlled prisoner movements, a bit tougher than the one portrayed on “Orange Is the New Black.” Friends of Serageldin’s worried about the violence; he was counseled to keep his head down and never change the channel on the TV no matter who seemed to be watching. Serageldin, who is tall and thin with a regal bearing, was largely preoccupied with how, after a decade of 18-hour trading days, he would pass the time. He was planning on doing math-problem sets and studying economics. He had delayed marrying his longtime girlfriend, a private-equity executive in London, but the plan was for her to visit him frequently.

Other bankers have spoken out about feeling unfairly maligned by the financial crisis, pegged as “banksters” by politicians and commentators. But Serageldin was contrite. “I don’t feel angry,” he told me in early winter. “I made a mistake. I take responsibility. I’m ready to pay my debt to society.” Still, the fact that the only top banker to go to jail for his role in the crisis was neither a mortgage executive (who created toxic products) nor the C.E.O. of a bank (who peddled them) is something of a paradox, but it’s one that reflects the many paradoxes that got us here in the first place. Continue reading the main story

Part of the Justice Department’s futility can be traced to the rise of its own ambition. Until the 1980s, government prosecutors generally focused on going after individual corporate criminals. But after watching their fellow prosecutors successfully take down entire mafia families, like the Gambino and Bonanno clans, many felt that they should also be going after more high-profile convictions and that the best way to root out corruption was to take on the whole organization. A long-ignored Supreme Court ruling, from 1909, conveniently opened the door for criminal charges against entire corporations. And in 2001, Michael Chertoff, George W. Bush’s new criminal division chief, arrived at the Justice Department ready to put it to use.

Chertoff, who worked at the U.S. Attorney’s office under Rudolph W. Giuliani, the godfather of the Wall Street perp walk, seemed like just the guy to jump-start the initiative — and he arrived at an opportune moment. Prosecutors were beginning their investigation of Enron and probe into Arthur Andersen, the accounting firm that had blessed the energy-trading giant’s phony balance sheets and shredded documents shortly after it detonated. Early in his tenure, Chertoff found himself sitting in a conference room at Justice Department headquarters on Pennsylvania Avenue, listening with growing irritation as lawyers for Arthur Andersen tried to dispose of the Enron case with yet another settlement. The company previously oversaw the fraudulent books of Waste Management and Sunbeam, and it dealt with those previous scrapes by reaching settlements and a consent decree with regulators, vowing never to commit such a crime again. For its Waste Management infractions, the firm paid $7 million. Then, it was the largest civil penalty ever paid.

Andersen was expecting the same kind of wrist-slap. As Chertoff recalls, one high-ranking executive noted brazenly that such settlements were merely “a cost of doing business” — the routine surcharges applied to the nation’s largest corporations. That comment enraged Chertoff, and soon after, his prosecutors indicted the firm. “Destroy documents?” he told me. “It’s hard to view that as a stumble outside of its core business.” In June 2002, Arthur Andersen was convicted by a jury, and within months, the firm closed down, costing tens of thousands of people their jobs.

The Andersen case was supposed to embolden the Justice Department, but it quickly backfired. Chertoff’s chutzpah shocked much of the corporate world and even many prosecutors, who thought the department had abused its powers at the cost of thousands of innocent workers. Almost immediately, the Andersen verdict resulted not in more boldness but in more caution on the part of federal prosecutors, including Chertoff himself. In 2003, his investigators were digging into questionable off-balance-sheet deals between the Pittsburgh-based PNC Bank and AIG Financial Products. They contemplated indicting the bank, which spurred Herbert Biern, at the time a top banking-supervision official at the Fed, to demand a meeting with Chertoff to warn him against it. Chertoff told Biern, according to attendees, that if the Justice Department “can’t bring these cases because it may bring harm, then maybe these banks are too big.” In the end, though, Chertoff and the Justice Department blinked. They didn’t indict, and PNC entered into a deferred prosecution agreement. No bank executives were prosecuted. Two years later, the Supreme Court overturned the Arthur Andersen conviction. Continue reading the main story

From 2004 to 2012, the Justice Department reached 242 deferred and nonprosecution agreements with corporations, compared with 26 in the previous 12 years, according to a study by David M. Uhlmann, a former prosecutor and law professor at the University of Michigan. And while companies paid large sums in the settlements — the days of $7 million cost-of-doing-business fees were over — several veteran Justice Department officials told me that these settlements emboldened defense lawyers. More crucial, they allowed the Justice Department’s lawyers to “succeed” without learning how to develop important prosecutorial skills. Investigations of individuals are more time-consuming and require a different approach than those of a corporation. Indeed, the department now effectively outsources many of its investigations of corporate executives to outside firms, which invariably produce reports that exculpate those at the top. Jed Rakoff, the U.S. District Court judge and former federal prosecutor who has become the most prominent legal critic of the Justice Department, explained the process to me this way: “The report says: ‘Mistakes were made. We are here to take our lumps’ ” — in other words, settlements and, if the transgressions are particularly bad, further oversight. “Lost in that whole thing,” Rakoff said, “was anyone trying to investigate whether the individuals did something wrong.”

The Bush administration may have earned a reputation as being friendly to business interests, but it wasn’t always that way. Around the time of the Andersen investigation, Larry Thompson, the deputy attorney general, was summoned to the White House to defend his department. He and Robert Mueller, the director of the F.B.I., met with the president in the Roosevelt Room of the White House, where they decided not to present legal theory but to show evidence that prosecutors had amassed in matters like the Enron case, demonstrating that executives had made up numbers and lied to the public. Bush seemed stunned. He turned to Mueller and Thompson and said, “Bobby and L.T., continue what you are doing.”

If Chertoff had signaled a green light for going after entire companies, Thompson drafted a memo in 2003 that offered a post-Andersen playbook that went right at the heart of how large corporations protected themselves. For years, big businesses, like tobacco companies, shielded questionable conduct by invoking attorney-client privilege, which could render details of troubling executive dealings inadmissible in court. If a company came under federal scrutiny, it typically paid its executives’ legal bills, hiring some of the nation’s best firms, those who could slow or derail any inquiries. And when multiple executives fell under suspicion, their lawyers would often sign joint defense agreements allowing them to share with one another what they learned about the feds’ case.

Thompson’s memo declared that prosecutors could, in essence, offer a deal, but it wasn’t a very generous one. Companies could win Brownie points for being cooperative only if they eschewed privileges like joint defense agreements. Almost immediately, members of the white-collar bar asserted that this overreach eroded a fundamental right, but they didn’t have to argue incessantly; once again, the Justice Department’s ambition backfired. In the summer of 2006, the government’s once-promising prosecution of executives from KPMG, an accounting and consulting firm suspected of selling illegal tax shelters to wealthy clients, started going bad. (The U.S. attorney’s office in Manhattan felt so confident that it indicted 17 KPMG executives.) The case fell apart when the judge ruled that those prosecutors had violated constitutional rights by pressuring the firm to waive attorney-client privilege and stop paying employees’ legal fees; the government’s zeal, he noted, had gotten “in the way of its judgment.” With the “greatest reluctance,” he threw out the cases against 13 of the executives. (Two others were convicted.)

Soon after, the counteroffensive to the Justice Department’s overreach peaked, led by the white-collar bar and corporate lobbies and aided by The Wall Street Journal’s editorial page, the U.S. Chamber of Commerce and even the American Civil Liberties Union. Senator Patrick Leahy, Democrat of Vermont, contended that the department was abusing corporations; his colleague Arlen Specter, then a Republican from Pennsylvania, readied a bill to prevent the Justice Department from receiving attorney-client privilege waivers. To cut that off, Paul McNulty, the deputy attorney general, released a revised set of rules stating, among other things, that no federal prosecutor could ask a company to waive attorney-client privilege without permission from higher-ups. Continue reading the main story

Over the years, the KPMG debacle and the corporate revolt would lead the Justice Department to roll back the Thompson memo to nearly the point of reversal. Today prosecutors are prohibited from even asking companies to waive their attorney-client privilege. They are also prohibited from pushing a company to cut off the legal fees for indicted executives or pressuring it to forgo joint defense agreements. “It was very much a game-changer in the business of investigating and defending in those cases,” says Michael Bromwich, a top white-collar lawyer and former inspector general of the Department of Justice.

In the decade since, the courts dulled other prosecutorial tools. A Supreme Court ruling allowed sentences to be set below previously determined mandatory minimums (which made executives less likely to “flip”). Another narrowed an often-used legal theory that said employees were guilty of fraud if they deprived their companies of “honest services” (which helped nab Enron’s former C.E.O., Jeffrey Skilling, among others). No change was momentous on its own — and some may have legitimately restored the rights of defendants — but taken together they marked a significant, if almost unnoted, shift toward the defense. After Lanny Breuer entered the Department of Justice, he testified in front of Congress to restore the honest-services charge for corrupt government officials. But he didn’t even try to broach the topic of a private-sector fix.

Life on Wall Street is often portrayed as hours of kinetic fury with billions on the line, but the work is more often suited to wonks who are comfortable digesting Excel spreadsheets. Serageldin, who joined Credit Suisse’s information-technology department right out of Yale in 1994, was assigned the late-night job of “cracking tapes” — transferring magnetic tape reels of data, decoding them and running analyses. Senior bankers quickly identified his talent and brought him over to the moneymaking side, where he was soon working in the bank’s catastrophe-bonds business, or securities that transfer the risk of earthquakes and hurricanes from seller to investor. It required mastering geology, fault lines and property-damage projections. In order to achieve the kind of informational advantages that Wall Street requires to make money, Serageldin had to put the statistical runs on a personal computer, waking up in the middle of the night for days at a time to reset it. By 2007, he oversaw about 70 people and generated $1.3 billion in trading revenue.

Serageldin’s group made so much money that some colleagues believed his bosses gave him a pass on risk controls. But by disposition, and by practice, he was anything but a swashbuckler. When the value of mortgage securities began to crater, on what became known as the Valentine’s Day Massacre of February 2007, most traders kept trading, pumping out securities, boosting their personal earnings while endangering — and in some cases destroying — their institutions. Serageldin, however, began ordering his traders to get out of their riskiest positions. The bank’s head of fixed income at the time, James Healy, would later note that Serageldin’s decisions “took courage and personal conviction, in the face of immense pressure” from the sales force. Continue reading the main story

Yet Serageldin’s caution failed him in one crucial moment. Later that summer, traders in one of his portfolios began to avoid taking the necessary losses on their mortgage-backed securities. Traders are required to hold securities at their current value, known as marking to market, determining how much the portfolio made or lost that day. At one desperate point, one of Serageldin’s traders approached a friend at a small regional bank to give him a so-called independent price that happened to be nearly identical to the prices in the portfolio, enabling them to conceal the size of the losses. In early December, that spreadsheet tallying the losses made its way to Serageldin, who would later admit to recognizing that the prices should have been lower. He had assumed the positions were hedged, a friend of his told me, but instead of saying anything, he tried to protect his reputation. By early 2008, he was out at Credit Suisse. The bank reported him to the U.S. attorney’s office in the Southern District of New York.

In a matter of months, the markets plummeted in a financial crisis that made Enron look like small-time pilfering. And as tens of millions of Americans lost their jobs or homes, an inchoate but palpable demand for justice — for a crackdown — emerged. Breuer may have come with the right pedigree, but he now faced troubles that hurt as much as the debacles of Arthur Andersen and KPMG, or the retreat from the Thompson memo: austerity. The department faced periodic hiring freezes. The F.B.I., which assigned dozens of agents to Enron, had shifted resources to terrorism. The Postal Service wound down an elite unit that had specialized in complex financial investigations. President Obama’s Fraud Enforcement and Recovery Act, which was designed to give hundreds of millions to prosecute financial criminals, was able to deliver only $65 million in 2010 and 2011. Prosecutors reporting to Breuer proposed setting up a mortgage-fraud initiative, a “Prosecutorial Strike Force,” as one July 2009 memo put it, but the Justice Department dithered. Finally it set up the Financial Fraud Enforcement Task Force, an enormous coordinating committee with essentially no investigative operation. One former Justice Department official derided it as “the turtle.”

Resources aside, the erosion of the department’s actual trial skills would soon become apparent. In November 2009, the U.S. attorney’s office in Brooklyn lost the first criminal case of the crisis against two Bear Stearns executives accused of misleading investors. The prosecutors rushed into trial, failing to prepare for the exculpatory emails uncovered by the defense team. After two days, the jury acquitted the two money managers. “For sure,” one former federal prosecutor told me, “it put a chill” on investigations. “Politicos care about winning and losing.” Continue reading the main story Recent Comments Fernando 9 hours ago

Extremely easy question: The rich normally do not go to jail in the US. Norm 9 hours ago

Once Corzine didn't go to the pen, it was pretty hard to prosecute anyone else. SG 9 hours ago

If you want to change behavior, you lock people up. Folks get the message. Simple as that. As an example, everyone working in banking in...

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The fear first wrought by the Andersen case, meanwhile, ossified around financial firms. In early 2009, the Obama administration deliberated over serious tax misconduct by UBS, the Swiss bank, but top Treasury and Justice department officials worried about the effects criminal charges could have on the financial system. UBS settled with the government. Breuer had another shot, in 2012, when the department was moving toward a resolution of a six-year investigation into HSBC, which had become the preferred bank for Mexican and Colombian drug cartels and conducted transactions with countries under American sanctions, including Iran and Libya. Breuer surveyed Washington and London regulators and policy hands and sought assurance that the system could weather an indictment. A top Treasury Department official told Breuer, in carefully couched language, that an indictment could cause broader problems in the financial system. Breuer even went as far as discussing whether banks were too big to indict with H. Rodgin Cohen, a partner at Sullivan & Cromwell, who was representing HSBC in his very own case. Cohen told Breuer that while the Justice Department can’t have a rule not to indict a large bank, prosecutors should, well, take into account how the target has cooperated and what changes it has made to fix the problems. Of course, HSBC happened to have taken those very measures. The Justice Department blinked again. That December, the bank was fined $650 million and forfeited almost $1.3 billion in profits. No one went to jail.

Continued in article

PBS Frontline:  Why don't some of biggest fraudsters in history go to prison?
"The Untouchables," Frontline, January 22, 2013 ---

March 4, 2013 message from Roger Collins


Some quotes

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

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

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

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

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

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

More in article.

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


Jensen Comment
This forthcoming Jesse Eisinger piece is a long article that pointed out things I did not know before. However, the author overlooked some of the real villains of Wall Street that and chronicled in the timeline at

Sometimes the dividing line is fuzzy between "bankers" versus "investment bankers" versus "hedge fund managers" versus "brokers" versus "analysts" versus Wall Street lawyers versus etc. For example
Matthew Taylor, Ex-Goldman Trader, Sentenced To Prison  (nine months joke sentence) ---
Was this case an oversight by Eisinger or did Taylor just not fit his definition of a "banker," To me Taylor's duties did not seem a whole lot different than those of Kareem Serageldin.

New York attorney Marc Dreier went to prison for stealing over $380 million from investors.
"Feds Now Say Dreier Bilked Investors Of $380 Million," Liz Moyer, Forbes, December 12, 2008 ---
I guess he, like Bernie Madoff, was left out of the article for not being a "banker."

. . .

Dreier led an opulent, jet-setting life by most reports, with several homes and a 120-foot yacht. Now he sits in a maximum security wing of the federal prison in Manhattan, where he has no books, no television and no visitors. His lawyer asked the judge Thursday to at least have him moved to a more suitable part of the prison. "You could lose your mind in there," Shargel argued.

"Billionaire among 6 nabbed in inside trading case Wall Street wake-up call: Hedge fund boss, 5 others charged in $25M-plus insider trading case," by Larry Neumeister and Candice Choi,  Yahoo News, October 16, 2009 --- Click Here

One of America's wealthiest men was among six hedge fund managers and corporate executives arrested Friday in a hedge fund insider trading case that authorities say generated more than $25 million in illegal profits and was a wake-up call for Wall Street.

Raj Rajaratnam, a portfolio manager for Galleon Group, a hedge fund with up to $7 billion in assets under management, was accused of conspiring with others to use insider information to trade securities in several publicly traded companies, including Google Inc.

U.S. Magistrate Judge Douglas F. Eaton set bail at $100 million to be secured by $20 million in collateral despite a request by prosecutors to deny bail. He also ordered Rajaratnam, who has both U.S. and Sri Lankan citizenship, to stay within 110 miles of New York City.

U.S. Attorney Preet Bharara told a news conference it was the largest hedge fund case ever prosecuted and marked the first use of court-authorized wiretaps to capture conversations by suspects in an insider trading case.

He said the case should cause financial professionals considering insider trades in the future to wonder whether law enforcement is listening.

"Greed is not good," Bharara said. "This case should be a wake-up call for Wall Street."

Joseph Demarest Jr., the head of the New York FBI office, said it was clear that "the $20 million in illicit profits come at the expense of the average public investor."

The Securities and Exchange Commission, which brought separate civil charges, said the scheme generated more than $25 million in illegal profits.

Robert Khuzami, director of enforcement at the SEC, said the charges show Rajaratnam's "secret of success was not genius trading strategies."

"He is not the master of the universe. He is a master of the Rolodex," Khuzami said.

Galleon Group LLP said in a statement it was shocked to learn of Rajaratnam's arrest at his apartment. "We had no knowledge of the investigation before it was made public and we intend to cooperate fully with the relevant authorities," the statement said.

The firm added that Galleon "continues to operate and is highly liquid."

Rajaratnam, 52, was ranked No. 559 by Forbes magazine this year among the world's wealthiest billionaires, with a $1.3 billion net worth.

According to the Federal Election Commission, he is a generous contributor to Democratic candidates and causes. The FEC said he made over $87,000 in contributions to President Barack Obama's campaign, the Democratic National Committee and various campaigns on behalf of Hillary Rodham Clinton, U.S. Sen. Charles Schumer and New Jersey U.S. Sen. Robert Menendez in the past five years. The Center for Responsive Politics, a watchdog group, said he has given a total of $118,000 since 2004 -- all but one contribution, for $5,000, to Democrats.

The Associated Press has learned that even before his arrest, Rajaratnam was under scrutiny for helping bankroll Sri Lankan militants notorious for suicide bombings.

Papers filed in U.S. District Court in Brooklyn allege that Rajaratnam worked closely with a phony charity that channeled funds to the Tamil Tiger terrorist organization. Those papers refer to him only as "Individual B." But U.S. law enforcement and government officials familiar with the case have confirmed that the individual is Rajaratnam.

At an initial court appearance in U.S. District Court in Manhattan, Assistant U.S. Attorney Josh Klein sought detention for Rajaratnam, saying there was "a grave concern about flight risk" given Rajaratnam's wealth and his frequent travels around the world.

His lawyer, Jim Walden, called his client a "citizen of the world," who has made more than $20 million in charitable donations in the last five years and had risen from humble beginnings in the finance profession to oversee hedge funds responsible for nearly $8 billion.

Walden promised "there's a lot more to this case" and his client was ready to prepare for it from home. Rajaratnam lives in a $10 million condominium with his wife of 20 years, their three children and two elderly parents. Walden noted that many of his employees were in court ready to sign a bail package on his behalf.

Rajaratnam -- born in Sri Lanka and a graduate of University of Pennsylvania's Wharton School of Business -- has been described as a savvy manager of billions of dollars in technology and health care hedge funds at Galleon, which he started in 1996. The firm is based in New York City with offices in California, China, Taiwan and India. He lives in New York.

According to a criminal complaint filed in U.S. District Court in Manhattan, Rajaratnam obtained insider information and then caused the Galleon Technology Funds to execute trades that earned a profit of more than $12.7 million between January 2006 and July 2007. Other schemes garnered millions more and continued into this year, authorities said.

Bharara said the defendants benefited from tips about the earnings, earnings guidance and acquisition plans of various companies. Sometimes, those who provided tips received financial benefits and sometimes they just traded tips for more inside information, he added.

The timing of the arrests might be explained by a footnote in the complaint against Rajaratnam. In it, an FBI agent said he had learned that Rajaratnam had been warned to be careful and that Rajaratnam, in response, had said that a former employee of the Galleon Group was likely to be wearing a "wire."

The agent said he learned from federal authorities that Rajaratnam had a ticket to fly from Kennedy International Airport to London on Friday and to return to New York from Geneva, Switzerland next Thursday.

Also charged in the scheme are Rajiv Goel, 51, of Los Altos, Calif., a director of strategic investments at Intel Capital, the investment arm of Intel Corp., Anil Kumar, 51, of Santa Clara, Calif., a director at McKinsey & Co. Inc., a global management consulting firm, and Robert Moffat, 53, of Ridgefield, Conn., senior vice president and group executive at International Business Machines Corp.'s Systems and Technology Group.

The others charged in the case were identified as Danielle Chiesi, 43, of New York City, and Mark Kurland, 60, also of New York City.

According to court papers, Chiesi worked for New Castle, the equity hedge fund group of Bear Stearns Asset Management Inc. that had assets worth about $1 billion under management. Kurland is a top executive at New Castle.

Kumar's lawyer, Isabelle Kirshner, said of her client: "He's distraught." He was freed on $5 million bail, secured in part by his $2.5 million California home.

Kerry Lawrence, an attorney representing Moffat, said: "He's shocked by the charges."

Bail for Kurland was set at $3 million while bail for Moffat and Chiesi was set at $2 million each. Lawyers for Moffat and Chiesi said their clients will plead not guilty. The law firm representing Kurland did not immediately return a phone call for comment.

A message left at Goel's residence was not immediately returned. He was released on bail after an appearance in California.

A criminal complaint filed in the case shows that an unidentified person involved in the insider trading scheme began cooperating and authorities obtained wiretaps of conversations between the defendants.

In one conversation about a pending deal that was described in a criminal complaint, Chiesi is quoted as saying: "I'm dead if this leaks. I really am. ... and my career is over. I'll be like Martha (expletive) Stewart."

Stewart, the homemaking maven, was convicted in 2004 of lying to the government about the sale of her shares in a friend's company whose stock plummeted after a negative public announcement. She served five months in prison and five months of home confinement.

Prosecutors charged those arrested Friday with conspiracy and securities fraud.

A separate criminal complaint in the case said Chiesi and Moffat conspired to engage in insider trading in the securities of International Business Machines Corp.

According to another criminal complaint in the case, Chiesi and Rajaratnam were heard on a government wiretap of a Sept. 26, 2008, phone conversation discussing whether Chiesi's friend Moffat should move from IBM to a different technology company to aid the scheme.

"Put him in some company where we can trade well," Rajaratnam was quoted in the court papers as saying.

The complaint said Chiesi replied: "I know, I know. I'm thinking that too. Or just keep him at IBM, you know, because this guy is giving me more information. ... I'd like to keep him at IBM right now because that's a very powerful place for him. For us, too."

According to the court papers, Rajaratnam replied: "Only if he becomes CEO." And Chiesi was quoted as replying: "Well, not really. I mean, come on. ... you know, we nailed it."

Continued in article

A federal judge on Friday sentenced Joseph P. Nacchio, the former chief executive of Qwest Communications International, to six years in prison in what prosecutors called the largest insider-trading case in history.
Dan Frosch, The New York Times, July 28, 2007 ---

"The Stanford Sentence SEC examiners first flagged Stanford way back in the 1990s," The Wall Street Journal, June 15, 2012 ---

Convicted Ponzi schemer R. Allen Stanford was sentenced Thursday to 110 years in federal prison for his $7 billion fraud. Stanford victimized thousands of individual investors to fund a lifestyle of private jets and island vacation homes. Now the question is whether there will be anything left at all for these victims once authorities in jurisdictions around the world finish sifting through the wreckage.

Stanford "stole more than millions. He stole our lives as we knew them," said victim Angela Shaw, according to Reuters. Certificates of deposit issued by a Stanford bank in Antigua promised sky-high returns but succeeded only in destroying the savings of middle-class retirees. More than three years after U.S. law enforcement shut down the Stanford outfit, victims have recovered nothing.

A receiver appointed by a federal court, Ralph Janvey, has collected $220 million from the remains of Stanford's businesses but has already used up close to $60 million in fees for himself and other lawyers, accountants and professionals, plus another $52 million to wind down the Stanford operation.

And then there's the Securities and Exchange Commission, which didn't charge Stanford for years even after its own examiners raised red flags as early as the 1990s. The SEC has lately pursued a bizarre attempt at blame-shifting, trying to get the Securities Investor Protection Corporation to cover investor losses. Even the SEC must know that SIPC doesn't guarantee paper issued by banks in Antigua—or anywhere else for that matter.

SEC enforcers should instead focus on catching the next Allen Stanford. Careful investors should expect that they won't.

The Queen's Bank, Barings Bank, in the United Kingdom ---

A federal judge in Houston gave two former Merrill Lynch & Co. officials substantially shorter prison sentences than the government was seeking in a high-profile case that grew out of the Enron Corp. scandal. In a separate decision yesterday, another Houston federal judge said that bank-fraud charges against Enron former chairman Kenneth Lay would be tried next year, immediately following the conspiracy trial against Mr. Lay, which is set for January. Judge Sim Lake had previously separated the bank-fraud charges from the conspiracy case against Mr. Lay and his co-defendants, Enron former president Jeffrey Skilling and former chief accounting officer Richard Causey. The government had been seeking to try Mr. Lay on the bank-fraud charges within about the next two months . . . Judge Ewing Werlein, Jr. sentenced former Merrill investment banking chief Daniel Bayly to 30 months in federal prison and James Brown, who headed the brokerage giant's structured-finance group, to a 46-month term. The federal probation office, with backing from Justice Department prosecutors, had recommended sentences for Messrs. Bayly and Brown of about 15 and 33 years, respectively. Mr. Brown had been convicted on more counts than Mr. Bayly.

John Emshwiller and Kara Scannell, "Merrill Ex-Officials' Sentences Fall Short of Recommendation," The Wall Street Journal, April 22, 2005, Page C3 ---,,SB111410393680013424,00.html?mod=todays_us_money_and_investing
Jensen Comment:  I double dare you to go to the top of this document and search for every instance of "Merrill" ---

Matthew Taylor, Ex-Goldman Trader, Sentenced To Prison  (nine months joke sentence) ---
"Former Diebold Sales Rep Settles Inside Trading Charges," Securities Law Prof Blog, November 26, 2008 --- 

n late 2007, with a seven-figure bonus and his reputation at Goldman Sachs Group Inc. GS -2.28% on the line, Matthew Taylor placed an $8.3 billion futures bet and hid it from his bosses. Now, he faces a possible long prison sentence.

On Wednesday, Mr. Taylor pleaded guilty to a single count of wire fraud for concealing the trades, which cost Goldman $118.4 million to unwind. He told a federal judge he made the big bets to boost his reputation and bonus at the bank.

"I accumulated this trading position and concealed it for the purpose of augmenting my reputation at Goldman and increasing my performance-based compensation," Mr. Taylor said at a hearing in Manhattan federal court on Wednesday. "I am truly sorry for my actions." Related

U.S. Attorney's Case Against Taylor Plea Agreement CFTC Complaint Against Trader Taylor's Response to CFTC Complaint Ex-Trader's Gambit Bites Goldman CFTC Charges Trader With Concealing $8.3 Billion Trade

Prosecutors recommended a sentencing-guidelines range of two years and nine months to three years and five months in prison. The range was based in part on Mr. Taylor's compensation for 2007—$150,000 in salary and an expected $1.6 million bonus—rather than the loss suffered by Goldman.

But the judge in the case sent a signal that the ex-trader might face an even stiffer sentence. U.S. District Judge William Pauley III questioned why prosecutors, in negotiating a plea agreement, didn't seek a longer potential sentence. "He cooked the books," the judge said.

Sentencing is set for July 26.

Wednesday's plea is the latest twist in the case of a young trader whose career went off track in the final days of 2007, just as the securities industry was bracing for the looming crisis.

It also comes as time is running out for prosecutors and regulators to bring actions related to the events that occurred in the months leading up to and during the downturn.

Mr. Taylor attended high school in suburban Boston, where his guidance counselor, Adelaide Greco, remembers him as the class valedictorian once named "most likely to succeed." While enrolled at the Massachusetts Institute of Technology, he returned to his high school to talk to students about achieving one's dreams, Ms. Greco said. "Kids looked up to him," she said.

From MIT, Mr. Taylor headed to Wall Street. He worked for Morgan Stanley MS -2.72% from 2001 until 2005, then landed at Goldman.

By November 2007, Mr. Taylor was an equity-derivatives trader on Goldman's Capital Structure Franchise Trading desk and had lost a "significant portion" of the trading profits he had accumulated earlier that year, according to criminal charging documents filed by prosecutors Wednesday.

Because of his lost profits and the general market conditions, his supervisors ordered him to rein in the risks he was taking. By December, they had told him his annual bonus would decline "significantly," according to the document.

In mid-December, Mr. Taylor ratcheted up the size of his bet on electronic futures contracts tied to the Standard & Poor's 500-Stock Index, accumulating a position with a face value of $8.3 billion.

That figure, court records show, exceeded the risk limits for his entire desk at Goldman, a group of about 10 traders.

At the same time, Mr. Taylor also made false trade entries that appeared to take the opposite side of that bet. The purpose, according to court records: "to conceal and understate the true size" of his long position on so-called S&P 500 E-mini futures.

Goldman fired Mr. Taylor on Dec. 21, 2007, for "alleged conduct related to inappropriately large proprietary futures positions in a firm trading account," the bank wrote in a filing submitted to the Financial Industry Regulatory Authority, which oversees broker-dealers.

Goldman agreed to pay $1.5 million in December to settle civil charges by the CFTC that it failed to supervise Mr. Taylor. The agency also said in its complaint against the bank that it wasn't fully forthcoming with regulators when Mr. Taylor was fired. Goldman settled the charges without admitting or denying wrongdoing.

The bank cooperated in the probe, according to a person familiar with the investigation. "We are very disappointed by Mr. Taylor's unauthorized conduct and betrayal of the firm's trust in him," a Goldman spokeswoman said Wednesday.

The episode didn't bring an immediate end to Mr. Taylor's Wall Street career. In March 2008, he returned to Morgan Stanley as trader in the firm's equities division. He left Morgan Stanley a second time last August, according to Finra.

Continued in article

If Jesse Eisinger had kept on digging he would find various other derivatives traders and sellers employed by Wall Street investment banks who went to prison. Some of these are chronicled in my derivatives frauds timeline that reviews books by insiders Frank Partnoy, Michael Lewis, and others at

But certainly not enough went to prison to discourage droves of fraudsters that followed.

White Collar Crime Pays Big Even If You Get Caught ---

Is it impossible to audit, as the GAO used to insist, the fraud-infested finances of the Pentagon?

"Pentagon Backtracks on Goals for First Audit, GAO Says,"  by Tony Capaccio, Bloomberg, May 13, 2014 ---

The Pentagon has backtracked from a pledge to have all budgetary accounts ready by Sept. 30 for the initial step toward its first-ever full financial audit.

Then-Defense Secretary Leon Panetta pledged an “all-hands effort” in 2011 to prepare for evaluation a “Statement of Budgetary Resources” -- covering funds received, unspent, obligated or put under contract over several years -- by the end of this fiscal year so that an audit could begin in 2015.

Instead the Defense Department has decided to “narrow the scope” of the initial budgetary data to a one-year snapshot of spending and accounts covering about 77 percent of those funds, according to a report by the U.S. Government Accountability Office scheduled for release today.

The delay may further undercut public confidence in the department’s ability to manage billions of dollars effectively even as the military seeks permanent relief from the automatic budget cuts known as sequestration. The current efforts are focused on having the initial set of budget books ready to start an audit in fiscal 2015 and the rest by 2017.

“The Pentagon’s accounting system is a broken mess,” a new advocacy group, Audit The Pentagon, said in a posting on Facebook. “The Defense Department is the only major federal agency that cannot pass an audit -- and DoD has no serious target date to do so.”

The GAO, the watchdog agency for Congress, has criticized the department for its inability to properly account for an inventory that makes up 33 percent of the federal government and includes $1.3 trillion in property, plants and equipment. The Pentagon’s budget accounts for almost half of the discretionary spending that Congress approves annually. Hagel’s Pledge

The new GAO report praised the Pentagon for committing “significant resources to improving funds controls for achieving sound financial management operations and audit readiness” and increasing the training of its workforce. Defense Secretary Chuck Hagel said on assuming office in 2013 that he was committed to Panetta’s initiative.

The narrowed scope of the initial data excludes all unspent funds previously appropriated by Congress “as well as information on the status and use of such funding in subsequent years,” the GAO said in its report for Senator Tom Carper, a Delaware Democrat who’s chairman of the Senate Homeland Security and Governmental Affairs committee. Carper’s Criticism

“Federal agencies have been required to produce auditable financial statements since the mid-1990s,” Carper said in an opening statement prepared for a committee hearing today. “Unfortunately, nearly two decades later, the Department of Defense -- which spends more than $2 billion every day -- has yet to meet this obligation. In fact, its books are so bad that auditors cannot even attempt to perform a complete audit.”

Navy Commander William Urban, a spokesman for the Defense Department comptroller, said in an e-mail that the Pentagon “is not backing off the goal for a full audit of the Statement of Budgetary Resources.”

“About a year ago, we did modify our audit plan in order to pursue a cost-effective strategy as required by law,” Urban said. “Congress was informed of the change shortly after it was put in place.”

Jensen Comment
The GAO also claimed that it would be impossible to audit the IRS. I don't think there's anybody to date that argues that it's possible to audit the IRS.

Meet Maria Contreras-Sweet, The New Head Of The U.S. Small Business Administration ---

"Hawaii's Top Marginal Tax Rate: 367,100%," by Paul Caron, TaxProf Blog, May 9, 2014 ---

Jensen Comment
Hawaii is still a pretty good place to retire if you're on welfare. If you make under $200,000 the high cost of living will suck up your savings. Willie Nelson and Chris Kristofferson pay a heavy price in terms of taxes for residencies in Hawaii ---

The last time I was on Maui I looked out at what used to be pineapple plantations. Taxes did not drive those plantations to further out in the Pacific. We can thank differential labor costs for the elimination of jobs on former plantations --- conditions Hawaii.pdf

Dole still raises some pineapple in Hawaii, but not what used to be the case.

Hawaii Pineapple: The Rise and Fall of an Industry ---

Hedging Fair Value versus Hedging Cash Flows at Starbucks

This is a possible illustration for showing students how it's impossible to hedge fair value of inventory and future cash flow of inventory purchases simultaneously. If Starbucks buys puts 40% of its coffee in physical inventory it has fair value risk but no cash flow risk. If it hedges the fair value of this inventory it takes on cash flow risk while at the same time eliminating fair value risk to the extent that the hedging is effective.

If it locks hedges with futures price or a strike price fore forecasted purchase transactions it also has no cash flow risk but it has fair value risk.  If it subsequently hedges that future fair value it must take on cash flow risk.

FAS 133 accounting rules are different between fair value hedges versus cash flow hedges ---  
Other tutorials on accounting for derivative financial instruments and hedging activities

Superimposed on all of this is the possible accounting for hedging of foreign currency transactions.

FAS 133 does not have a lot to say about hedging profits because business firms seldom if ever hedge the aggregated bottom line. Companies hedge the components of the net profit but this entails hedging different types of risks.

It's important for students to learn why firms seldom hedge the bottom line of their income statements.

"Why Rising Coffee Prices Are Great For Starbucks," by Celan Bryant, Business Insider, May 5, 2014 ---!INwMy 
Also see

2013 was a rough year for Dunkin' Brands (NASDAQ: DNKN ) . Same-store sales growth stalled in every segment. On the first-quarter earnings call, CEO Nigel Travis reported another poor quarter but reminded investors about the volatile weather that had a strong effect on peak morning business.

When our guests' normal morning routine gets disrupted by store closings as a result of snow and bad storms, we lose their visit on that particular day. That visit, in most cases, is not recoverable.

Then on April 24 Starbucks (NASDAQ: SBUX ) made Travis look stupid by reporting record financial results for the quarter ended March 30. Global same-store sales were up 6%, net sales increased 9%, and operating income rose 18%. By all accounts the trend was positive, despite Starbucks having to deal with the same headwinds as Dunkin'. If you believe most headlines, however, that trend is about to change due to the rising price of coffee. Don't be fooled. Historically, an increase in the price of coffee has benefited same-store sales growth for Starbucks, just like it did last quarter. Historical coffee prices

At year-end 2010 coffee futures were at the same level they are at today; the trend is up due to Brazil's drought. Volcafe cut its forecast for coffee supply by 11% due to the drought, but the full impact won't be known until the end of May.

As you can see from the chart below, a similar increase in coffee prices began in mid-2010 and ended in mid-2011. The question for major sellers of coffee products is whether or not they're prepared to weather the upcoming price storm if the drought continues.

According to The Wall Street Journal, Craig Russell, Starbucks' head of coffee, has already purchased 40% of next year's supply needs. Dunkin' has prices locked in through the end of this fiscal year but may decide to make purchases in the fourth quarter. "Eventually, you have to buy coffee," said Russell. It is this eventuality that is Starbucks' secret weapon, and opportunity, against competitors. High coffee prices present an opportunity for Starbucks

As Russell said, at some point coffeehouses will have to buy more coffee.

These may be smaller stores or independent coffee shops that don't sell enough coffee to make forward purchases of the commodity at locked-in prices like Starbucks and Dunkin'.

As a result, these smaller coffeehouses are forced to either eat the costs or pass them on to customers. By around the third price increase, even the most loyal customers begin migrating to Starbucks; it feels more like an independent coffeehouse than Dunkin Donuts does, but the prices are affordable. It's a survival-of-the-fittest customer-acquisition strategy that fuels growth for Starbucks in times of rising coffee prices. Indeed, Starbucks' same-store sales peaked in 2011, and earnings per share grew more than 100% from 2009 to 2011. Takeaway

People go to Starbucks for more than the insanely addictive commodity it sells -- there's something about the place that makes you feel like you're "cool." Maybe it's the music or the heavy conservationism theme that permeates the stores; perhaps it's the hip, multicultural baristas who write your name on every cup. It has all the feel and charm of a cozy coffee shop; and when one independent coffeehouse is closed, there's usually a Starbucks around the corner.

In all appearances, there's no difference between Starbucks and the independent coffeehouse, but Starbucks is really a large, multinational conglomerate with a slick business model that thrives when coffee prices rise. Look for increases, not decreases, in same-store sales growth over the next year, as increases in coffee prices tend to add value to this company.

Read more:

Bob Jensen's tutorials on accounting for derivative transactions and hedging activities ---!IN44j

Jensen Comment
Starbucks also actively lobbies for an increase in the minimum wage. Even if this is more costly for Starbucks in some instances, especially for some part-time workers, raising the minimum wage for Starbucks is a huge profit booster. The reason is that many of the mom and pop coffee shop and restaurant competitors operating on the edge will be pushed off the cliff by increases in the minimum wage.

From the CFO Journal's Morning Ledger on May 6, 2014

Good morning. Currencies in at least 20 countries have fallen 6% to 37% against the U.S. dollar over the past year, and that is forcing CFOs to look beyond traditional hedging strategies, CFOJ’s Maxwell Murphy reports. Relationships with suppliers and distributors, corporate structures and sometimes prices are getting fresh scrutiny as companies seek to enhance their hedging programs.

Smaller companies and even startups are selling abroad, and larger companies are penetrating deeper into emerging markets. Those trends mean that companies are more exposed to currency swings than they have been in the past.

Some firms, like Air Tractor Inc. in Olney, Texas, demand payment in U.S. dollars to protect against currency swings. But that strategy carries the risk of lost sales, when a foreign company’s local currency plummets and makes dollar-based products too expensive. Strategically placed subsidiaries overseas can also allow a country to leave money in countries with weaker currencies. But sometimes, firms have little choice but to raise prices, at which point they can only hope their competitors face the same pressures.


"Two Carbon-Trapping Plants Offer Hope of Cleaner Coal: Coal power plants in Saskatchewan and Mississippi will produce fewer emissions, but rely on special circumstances," by Peter Fairley, MIT's Technology Review, May 5, 2014 ---

Two of the world’s first coal-fired power plants with integrated carbon capture are nearing completion in Saskatchewan and Mississippi, providing a rare lift for a technology that has languished in recent years.

Carbon capture and sequestration (CCS) remains expensive, but the cost of stabilizing the climate could be much higher without it, according to the Intergovernmental Panel on Climate Change (see The Cost of Limiting Climate Change Could Double without Carbon Capture Technology”). In a report last month, the IPCC noted that CCS is the only way to cut the carbon emissions of existing power plants, and that CCS-equipped power plants burning biomass could help remove carbon dioxide from the atmosphere. The IPCC says both strategies may be essential to limit global warming.

A 110-megawatt plant in Saskatchewan, a refurbished coal-fired generator, is set to restart in a matter of weeks with carbon capture added, according to Robert Watson, CEO for provincial power utility SaskPower.

Under Canadian regulations, the Boundary Dam power station can release no more than 420 tons of carbon dioxide per megawatt-hour of power generation—the same as a state-of-the-art plant fired with natural gas. This is a tall order since the power station will burn lignite—the dirtiest form of coal. Yet SaskPower expects to release just 150 tons of carbon dioxide per day thanks to its new carbon dioxide scrubber, which will absorb and capture 90 percent of the carbon in the plant’s exhaust.

SaskPower could afford to build the $1.2 billion plant partly because lignite is so cheap, but also because Boundary Dam is adjacent to a lignite strip mine. Extra revenue will come from piping most of the 3,000 tons of carbon dioxide that the plant captures per day to Cenovus, a Calgary-based oil and gas firm. Leftover carbon dioxide will be stored in an aquifer 3.5 kilometers below the plant.

“If they couldn’t sell the CO2 for enhanced oil recovery, the project wouldn’t have been economic,” says Howard Herzog, an expert on carbon sequestration, and a senior research engineer with the MIT Energy Initiative.

SaskPower CEO Watson says that the cost of the power from Boundary Dam will be “comparable” to natural gas-fired generation providing the recent price increase in natural gas holds. He expects that natural gas prices will tend to rise over the next 30 years-plus that the Boundary Dam plant will operate.

The other coal plant with carbon capture, in Kemper, Mississippi, should start up later this year. Its owner, Mississippi Power, is counting on similar strategies to minimize operating costs. The plant is also adjacent to a lignite strip mine, and will boost revenues by selling its carbon dioxide to oilfield operators. The project also received $270 million from the U.S. Department of Energy.

However, at 565 megawatts, the Mississippi plant is five times bigger than the Saskatchewan plant, and it uses less conventional technology. It has also been far more controversial than the Boundary Dam project because it gasifies its coal, and because its price tag is now expected to be more than double Mississippi Power’s original projection of $2.4 billion.

The Mississippi plant uses a proprietary gasifier designed by Southern Company and Houston-based engineering firm KBR to turn lignite into a mix of carbon dioxide and hydrogen. The firms have also licensed the design for use in China (see Cleaning Up on Dirty Coal”). Another novel component is the plant’s carbon dioxide capture system, which will remove 65 percent of the carbon dioxide from its gas mix prior to firing the turbines. The carbon dioxide will be captured at the same time that the plant captures its sulfur dioxide, using the same solvent scrubber that conventional coal plants use to remove sulfur dioxide.

Despite the controversy, experts are not greatly concerned by the cost overruns. “The costs of a first-of-a-kind plant are always going to be higher than the cost of your nth plant,” says Sarah Forbes, a senior associate at the World Resources Institute in Washington, D.C.

Herzog agrees: “Kemper was a real first of a kind. You’ve got a lot of first-mover costs in there, and people tend to underestimate first mover costs drastically. By the time you do it half a dozen times, you’re knocking out a lot of cost.”

Continued in article

"Georgia Tech Professor Resigns After Allegedly Bilking Students," by Charles Huckabee, Chronicle of Higher Education, May 6, 2014 ---

Jensen Comment
This is an egregious extension of what is some times a problem when teachers maintain their own commercial Websites related to their courses or require their own textbooks in courses. One of my textbook author friends donated the profits of his courses as a contribution (of course a tax-deductible contribution to offset his incremental income taxation) to our department. Some might argue that that he was still bilking students. His argument was that they would have to pay for the textbooks even if he required a competitor's textbook.

Returning the profits to students can get messy like any other cash dealings with students.

Then there's the related problem of student labor. A professor might assign case writing to teams of students. Some of these cases might then be used, possibly with proper attribution, in his commercial casebook or commercial Website where he keeps all the profits or royalties. All good accountants know that attributing the profit of an entire case book with 40 cases to three of the cases written by students is possibly very complicated and controversial.

Life is often not as simple as we would like.

Bob Jensen's Fraud Updates ---

2006 Déjà Vu All Over Again
$30M Long Island Mortgage Fraud Scam Busted, Feds Say," by Timothy Bolger, Long Island Press, May 6, 2014 ---

Aaron Wider, 50, of Copiague, owner of Garden City-based mortgage company HTFC Corp., was described by authorities as the ringleader of the alleged scheme.

“Instead of using their skills in banking, the law and investing to assist individuals pursuing the American Dream, the defendants cooked up a sophisticated scheme that defrauded lenders and then fed toxic debt to the investigating public at large in the secondary mortgage market,” Loretta Lynch, U.S. Attorney for the Eastern District of New York, said in a statement.

Wider’s codefendants include 46-year-old Manjeet Bawa of Dix Hills, 54-year-old Joseph Mirando of Centereach, 68-year-old John Petiton of Garden City and 70-year-old Joseph Ferrara of Long Beach. Eric Finger, 48, of Miami, was also charged. Four were scheduled to appear at Central Islip federal court Tuesday and the other two Wednesday.

Prosecutors said that after the group obtained mortgages using artificially inflated prices of the properties in Nassau and Suffolk counties, they resold the loans in the secondary mortgage market, causing millions in losses when the loans went into foreclosure.

Lynch described the alleged schemed as “a prime example of the type of corrupt mortgage-lending practices that preceded the bursting of the real estate bubble, the loss of faith in securitized mortgage obligations, and the financial collapse of 2007 and 2008.”

Petiton, an attorney, allegedly orchestrated the inflated sales transactions. Mirando, a real estate appraiser, allegedly prepared false reports to justify the prices. And Finger, another attorney, allegedly concealed the true sales prices at closings, then shared the difference in price with the others.

Prosecutors are moving to seize 19 properties between the six men or restitution. They face up to 30 years in prison, if convicted.

Bob Jensen's Fraud Updates ---

Remember those phony "repos"
Ernst & Young Settles With CalPERS Over Lehman Audit," by Max Stendahl, Law 360, May 2, 2014 ---

"$99 Million Buys EY Ticket Out Of Private Lehman Litigation, Finally," by Francine McKenna, re:TheAuditors, October 21. 2013 ---

Last defendant standing. Not an enviable place for EY in the case, In re Lehman Brothers Securities and Erisa Litigation.

Everyone else had folded their tent, paid the price to cross this dog off the list. Lehman underwriters agreed in 2011 to a $426.2 million settlement. UBS, one of the underwriters, held out and settled last August for another $120 million. Even before the UBS and EY settlements, Bernstein Litowitz Berger & Grossmann, attorneys for the plaintiffs, claimed the combined recovery of $516,218,000 is the third largest recovery to date in a case arising from the financial crisis.

The $99 million EY will pay is more than Lehman’s officers and directors, who settled for $90 million. That’s a big deal considering the executives typically say, “The auditors said it was ok,” and the auditors say, “Management duped us.” But it’s not that much considering that EY agreed to pay C$117 million ($117.6 million) last December to settle claims in a Canadian class action suit against Sino-Forest Corp, a Chinese reverse merger fraud. That settlement is the largest by an auditor in Canadian history, according to the the law firms.

And it’s not as much as some thought EY would pay for Lehman. In fact, many thought Lehman would finish off EY for good.

John Carney, now of CNBC, writing for Business Insider at the time:

“The Examiner concludes that sufficient evidence exists to support colorable  claims against Ernst & Young LLP (“Ernst & Young”) for professional malpractice arising from Ernst & Young’s failure to follow professional standards of care with respect to communications with Lehman’s Audit Committee, investigation of a whistleblower claim, and audits and reviews of Lehman’s public filings.”

That may not sound like a mortal threat against Ernst & Young. But the damages here could be enormous. A successful lawsuit against E&Y could result in a court finding that the failure to properly advise the audit committee prevented Lehman from taking genuine steps to substantially reduce its leverage, which may have saved the firm from bankruptcy. Which is to say, E&Y could find itself blamed for all the losses to Lehman shareholders. That would be a stretch—such a claim would be speculative—but it still should be scaring the heck out of the partners.

When the bankruptcy examiner’s report on Enron came out, the language about Arthur Andersen was quite mild. It merely noted there was “sufficient evidence from which a fact-finder could conclude that Andersen: (1) committed professional negligence in the rendering of accounting services to Enron…” It went on to note that Andersen likely had a strong defense against liability since so many Enron executives were implicated.

“Enron brought down Arthur Andersen,” Felix Salmon notes. “Will Lehman do the same for E&Y?”

In July of 2011, New York Federal Court Judge Lewis Kaplan decided to allow substantially all of the allegations against Lehman executives and at least one of the allegations against Ernst & Young to move forward to discovery and trial. One month later Lehman Brothers executives, including its former chief executive Richard S. Fuld Jr., agreed to pay $90 million to settle. Insurance proceeds paid for their settlement.

What was the remaining allegation against Ernst & Young? That the auditor had reason to know Lehman’s 2Q 2008 financial statements could be materially misstated because of the extensive use of Repo 105 transactions.

Continued in article

Bob Jensen's threads on Ernst & Young ---


"Demystify the Lehman Shell Game," by Floyd Norris, The New York Times, April 1, 2010 ---

Making unattractive assets disappear from corporate balance sheets was one of the great magical tricks performed by accountants over the last few decades.

Whoosh went assets into off-balance-sheet vehicles that seemed to be owned by no one. Zip went assets into securitizations that turned mortgage loans for poor credit risks into complicated pieces of paper that somehow earned AAA ratings.

As impressive as those accomplishments were, they did not make the assets vanish altogether. If you dug deep enough, you could find the structured investment vehicle or the underlying assets of that strange securitization.

Now there is another possibility in the world of accounting magic. Did accountants find a way to make some assets disappear altogether? Was it possible for everybody with an interest in them to disclaim ownership?

Until recently, it never would have occurred to me that companies would want to do that — particularly if the assets in question were perfectly respectable ones. But now that we have learned Lehman Brothers did it, the question arises of how far the practice went.

Lehman’s reasons for doing it were simple: to mislead investors into thinking the company was not overleveraged. Were other firms doing that? Are they still? Lehman thought not, but no one really knows.

Now the Securities and Exchange Commission is demanding that other firms disclose whether they did the same. If it finds they did, the commission ought to go further and examine whether there were conspiracies to make the assets vanish, thus making Wall Street appear to be less leveraged than it was.

Lehman’s practices, outlined in a bankruptcy examiner’s report released last month, showed the creative use of accounting for repos.

Don’t let your eyes glaze over. I’ll try to keep it simple.

A repo is simply a “sale” of a financial asset to someone else, with an agreement to repurchase it at a fixed price and date. That amounts to borrowing secured by the asset, often a Treasury bond, with the added security that the lender has the bond, and so can sell it quickly if need be.

Normally, such transactions are accounted for as loans, as they should be. They are often the cheapest way for a brokerage firm to borrow money.

I had taken for granted that repos were always accounted for as loans, but it turns out there was a loophole. The Financial Accounting Standards Board had accepted that under some conditions a repo could be treated as a sale. One condition: if the securities securing the transaction were worth significantly more than the loan, that could be a sale.

In the examples the board provided, it concluded that securing the loan with assets worth 102 percent of the amount borrowed did not produce a sale, but that 110 percent would push the deal over the line. In between was a gray area.

Lehman appears to have concluded that 105 percent was enough if the assets being borrowed against were bonds. If they were equities, it set the bar at 108 percent.

By doing such sales repos at the end of each quarter, and reversing them a few days later, the firm could seem to have less debt than it really did.

It started the practice in 2001 but really accelerated it in 2007 and early 2008, when investors belatedly discovered there were risks to high leverage ratios. At the end of 2007, the bankruptcy examiner concluded, Lehman’s real leverage ratio was 17.8 — meaning it had $17.80 in assets for every dollar of equity. It reported a ratio of 16.1.

By the end of June 2008 — Lehman’s last public balance sheet — it was hiding $50 billion of debt that way, enabling it to appear to be reducing its leverage far more than it was. When investors asked how it was doing that, Lehman officials chose not to explain what was actually happening.

Lehman’s collapse is history, but after it was allowed to collapse other firms were rescued. We don’t know whether those firms used the same tricks, although we do know that Lehman thought they were not doing so.

The questions sent to financial companies by the S.E.C. this week should provide answers to that question. Companies that classified repos as sales are going to have to provide specifics and explain exactly why the accounting was justified. The reports will go back three years, so we can see history as well as current practices.

It would be nice if the commission found that other firms did not choose to hide borrowing this way.

But if that is not what is found, then the commission should dig deeper into actual transactions. It should find out how the firm on the other side of each repo accounted for it.

There are at least two abuses that might have happened.

The first would stem from differing reporting periods. One firm could hide debt with another when its quarter ended. Then, when the other firm’s quarter ended, that firm could hide debt with the first firm.

The second method would reflect the fact that two companies involved in a transaction do not have to use the same accounting. Lehman could treat the repo as a sale, but the other firm could call it a financing. Presto: Nobody reports owning the assets in question.

That could even be legal. The second firm could conclude that an asset-to-loan ratio of 105 percent was not high enough to qualify for sales treatment, while the first firm thought 105 percent was high enough.

But legal or not, it would be misleading.

Wall Street leverage remains an important issue. The S.E.C. should discover if it was, or is, being concealed, and then get to the bottom of how that was done.

Floyd Norris comments on finance and economics in his blog at

The Financial Accounting Standards Board moved last year to close the loophole that Lehman is accused of using, Bushee says. A new rule, FAS 166, replaces the 98%-102% test with one designed to get at the intent behind a repurchase agreement. The new rule, just taking effect now, looks at whether a transaction truly involves a transfer of risk and reward. If it does not, the agreement is deemed a loan and the assets stay on the borrower's balance sheet.
"Lehman's Demise and Repo 105: No Accounting for Deception," Knowledge@Wharton, March 31, 2010 ---

More on the repo sales gimmicks (other companies, other audit firms) ---

"Three Book Reviews: Naked Bankers, Mute Watchdogs, And Youthful Luchre," by Francine McKenna, re:TheAuditors, May 12, 2014 ---

Jensen Comment
These books are mostly about bad behavior in Wall Street firms. But in the end of this article Francine equates Big Four scandals to Wall Street scandals. She thinks they're all a bunch of crooks.


Educating the Net Generation
Diana G. Oblinger and James L. Oblinger, Editors
ISBN 0-9672853-2-1 (free online)

Educating the Net Generation Diana G. Oblinger and James L. Oblinger, Editors

Chapter 1: Introduction by Diana Oblinger, EDUCAUSE, and James Oblinger, North Carolina State University

Chapter 2: Is It Age or IT: First Steps Toward Understanding the Net Generation by Diana Oblinger, EDUCAUSE, and James Oblinger, North Carolina State University

Chapter 3: Technology and Learning Expectations of the Net Generation by Greg Roberts, University of Pittsburgh–Johnstown

Chapter 4: Using Technology as a Learning Tool, Not Just the Cool New Thing by Ben McNeely, North Carolina State University

Chapter 5: The Student’s Perspective by Carie Windham, North Carolina State University

Chapter 6: Preparing the Academy of Today for the Learner of Tomorrow by Joel Hartman, Patsy Moskal, and Chuck Dziuban, University of Central Florida

• Introduction • Generations and Technology
• Emerging Pattern s
• Assessing the Generations in Online Learning
• Learning Engagement, Interaction Value, and Enhanced Learning in the Generation s
• Responding to Result s
• Excellent Teaching
• Conclusion • Endnote s
• Further Reading
• About the Authors

Chapter 7: Convenience, Communications, and Control: How Students Use Technology by Robert Kvavik, ECAR and University of Minnesota

Bob Jensen's threads on education technology ---

It might be an interesting case study for managerial accountants to debate the pros and cons of the GE purchase of Alstom of France for $13.5 billion.

It might also be an interesting case in the setting of teaching about the Sustainability Accounting Standards Board and speculating how the SASB might set disclosure rules for the global Alstrom.

"GE Crushes Obama's War on Coal," by Charles Payne, Townhall, May 3, 2014 --- 

"Probably for the next decade, the most dominate technology around the world will be coal..."
-Jeff Immelt

The fastest growing source of energy in the world last year was coal, and it is going to stay that way for a very long time. With that in mind, one has to wonder why President Obama has insisted on the gut-wrenching destruction of the coal industry that has costs thousands of jobs, and has sent electricity costs to all-time highs. This, combined with last month's report from the International Energy Agency, state that reaching the goal of carbon emission reduction would cost $45 trillion; which means that any notion of a global deal to stop using coal would be folly.

The fact of the matter is that President Obama's Jobs Czar just crushed his domestic opposition to fossil fuels in general, but coal in particular.

General Electric (GE) is purchasing Alstom of France for $13.5 billion, so that they can be more competitive in the rapid growth of coal-fired power plants around the world.

. . .

It's no mystery that China and India will not sign deals to reduce their use of coal, and make no mistake, outside of the most jaded and aging developed nations the rest of the world is lining up to power with coal, and to take their shot at the good life.

While Alstom has struggled for more than a decade, it does have serious product offerings, including mills capable of crushing anywhere from 15 to 200 tons of coal per hour: that generates serious heat to steam turbines. The company has 20% of the world's installed base, and this has been a great year in the coal power plant business, outside of America:

  • February 4, 2014: Alstom awarded contracts for two of five units in what will be Poland's largest coal power plant at €1.2 billion construction, which will power 2 million homes by 2019.
  • February 7, 2014: First Northeast Electric Power Engineering, unit of China Engineering Group awards Alstom a contract to supply the parts for the coal power plant that should come online by 2016.
  • April 9, 2014: James River Coal announces it is filing for bankruptcy protection, citing a sharp decline in production and revenue, largely caused by new regulations that have decimated the industry. The company's share price tumbled to $0.30 from a recent high in 2007 of $29.00.
  • April 18, 2014: Bharat Heavy Electrical awards Alstom a contract to supply equipment for construction of a coal power plant in Jharsaguda, Orissa.

Moreover, it has been a very good year; coal is making money all over the world and GE wants in on the action. Alstom has 65,000 employees, but only 14% are in France, as 80% of its business is outside that nation, and 85% of its business is outside the United States.

Continued in article

Jensen Comment
It might be an interesting case study for managerial accountants to debate the pros and cons of the GE purchase of Alstom of France for $13.5 billion.

Personally I think we should not give up on coal, but I think we should give up as soon as possible the cutting off of mountain tops in West Virginia to avoid traditional and more costly mining for coal. Two things really depress me. One is the deforestation of rain forests uselessly since these forests have terrible soil for farming. The other is the cutting off of mountain tops that can never grow tall again. There are many other things that I favor in environmental protection.

Jesus' Wife Hoax:  This is not about Christianity per se. It's about cheating and hoaxes in academe.

"How the 'Jesus' Wife' Hoax Fell Apart The media loved the 2012 tale from Harvard Divinity School," by Jerry Pattengale, The Wall Street Journal, May 1, 2014 ---

In September 2012, Harvard Divinity School professor Karen King announced the discovery of a Coptic (ancient Egyptian) gospel text on a papyrus fragment that contained the phrase "Jesus said to them, 'My wife . . .' " The world took notice. The possibility that Jesus was married would prompt a radical reconsideration of the New Testament and biblical scholarship.

Yet now it appears almost certain that the Jesus-was-married story line was divorced from reality. On April 24, Christian Askeland—a Coptic specialist at Indiana Wesleyan University and my colleague at the Green Scholars Initiative—revealed that the "Gospel of Jesus' Wife," as the fragment is known, was a match for a papyrus fragment that is clearly a forgery.

Almost from the moment Ms. King made her announcement two years ago, critics attacked the Gospel of Jesus' Wife as a forgery. One line of criticism said that the fragment had been sloppily reworked from a 2002 online PDF of the Coptic Gospel of Thomas and even repeated a typographical error.

But Ms. King had defenders. The Harvard Theological Review recently published a group of articles that attest to the papyrus's authenticity. Although the scholars involved signed nondisclosure agreements preventing them from sharing the data with the wider scholarly community, the New York Times NYT +0.76% was given access to the studies ahead of publication. The newspaper summarized the findings last month, saying "the ink and papyrus are very likely ancient, and not a modern forgery." The article prompted a tide of similar pieces, appearing shortly before Easter, asserting that the Gospel of Jesus' Wife was genuine.

Then last week the story began to crumble faster than an ancient papyrus exposed in the windy Sudan. Mr. Askeland found, among the online links that Harvard used as part of its publicity push, images of another fragment, of the Gospel of John, that turned out to share many similarities—including the handwriting, ink and writing instrument used—with the "wife" fragment. The Gospel of John text, he discovered, had been directly copied from a 1924 publication.

"Two factors immediately indicated that this was a forgery," Mr. Askeland tells me. "First, the fragment shared the same line breaks as the 1924 publication. Second, the fragment contained a peculiar dialect of Coptic called Lycopolitan, which fell out of use during or before the sixth century." Ms. King had done two radiometric tests, he noted, and "concluded that the papyrus plants used for this fragment had been harvested in the seventh to ninth centuries." In other words, the fragment that came from the same material as the "Jesus' wife" fragment was written in a dialect that didn't exist when the papyrus it appears on was made.

Mark Goodacre, a New Testament professor and Coptic expert at Duke University, wrote on his NT Blog on April 25 about the Gospel of John discovery: "It is beyond reasonable doubt that this is a fake, and this conclusion means that the Jesus' Wife Fragment is a fake too." Alin Suciu, a research associate at the University of Hamburg and a Coptic manuscript specialist, wrote online on April 26: "Given that the evidence of the forgery is now overwhelming, I consider the polemic surrounding the Gospel of Jesus' Wife papyrus over."

Having evaluated the evidence, many specialists in ancient manuscripts and Christian origins think Karen King and the Harvard Divinity School were the victims of an elaborate ruse. Scholars had assumed that radiometric tests would return an early date (at least in antiquity), because the Gospel of Jesus' Wife fragment had been cut from a genuinely ancient piece of material. Likewise, those familiar with papyri had identified the ink used as soot-based—preferred by forgers because the Raman spectroscopy tests used to test for age would be inconclusive.

Continued in article

Bob Jensen's threads on cheating ---

"What 'Hard Work U' Can Teach Elite Schools:  'We don't do debt here,' says College of the Ozarks President Jerry C. Davis." by Stephen Moore, The Wall Street Journal, May 16, 2014 ---

Looking for the biggest bargain in higher education? I think I found it in this rural Missouri town, 40 miles south of Springfield, nestled in the foothills of the Ozark Mountains. The school is College of the Ozarks, and it operates on an education model that could overturn the perverse method of financing college education that is turning this generation of young adults into a permanent debtor class.

At this college the tuition is nowhere near the $150,000 to $200,000 for a four-year degree that the elite top-tier universities are charging. At College of the Ozarks, tuition is free. That's right. The school's nearly 1,400 students don't pay a dime in tuition during their time there.

So what's the catch? All the college's students—without exception—pay for their education by working 15 hours a week on campus. The jobs are plentiful because this school—just a few miles from Branson, a popular tourist destination—operates its own mill, a power plant, fire station, four-star restaurant and lodge, museum and dairy farm.

Some students from low-income homes also spend 12 weeks of summer on campus working to cover their room and board. Part of the students' grade point average is determined by how they do on the job and those who shirk their work duties are tossed out. The jobs range from campus security to cooking and cleaning hotel rooms, tending the hundreds of cattle, building new dorms and buildings, to operating the power plant.

The college was founded in 1906 as the "School of the Ozarks" atop local Mount Huggins, named for brothers Louis and William Huggins from St. Joseph, Mo., who gave the school its first endowment. From the start, the school was run on the same work-for-education principle as it is today.

Just over 40 years ago, this newspaper made College of the Ozarks famous with a 1973 front-page story that nicknamed the school "Hard Work U." In 1988, when he became the school's president, Jerry C. Davis, started plastering the moniker "Hard Work U" on nearly every structure and piece of promotional material printed at the college. "We saw this as a huge marketing coup because it sets us apart from nearly every other school in the country," explains the colorful Mr. Davis, who in 26 years as head of the school has brought to campus such luminaries as President George W. Bush, Margaret Thatcher, Tom Brokaw and Norman Schwarzkopf.

"We don't do debt here," Mr. Davis says. "The kids graduate debt free and the school is debt free too." Operating expenses are paid out of a $400 million endowment. Seeing the success of College of the Ozarks, one wonders why presidents of schools with far bigger endowments don't use them to make their colleges more affordable. This is one of the great derelictions of duty of college trustees as they allow universities to become massive storehouses of wealth as tuitions rise year after year.

In an era when patriotism on progressive college campuses is uncool or even denigrated as endorsing American imperialism, College of the Ozarks actually offers what it calls a "patriotic education." "There's value in teaching kids about the sacrifices previous generations have made," Mr. Davis says. "Kids should know there are things worth fighting for."

He says a dozen or so students will be taking a pilgrimage to Normandy in June to commemorate the 70-year anniversary of D-Day and the former College of the Ozarks students buried there. Amazingly, four of the school's graduates served as generals in the U.S. military during the Vietnam War.

The emphasis on work in exchange for learning doesn't mean the classroom experience is second rate. The college has a renowned nursing program, business school and agriculture program. As one who has lectured at many universities, I can attest that the many students I met on the campus are refreshingly respectful, inquisitive and grateful for the opportunity to learn.

These aren't the highest academic status kids (the average ACT score is 21), but there is an unmistakable quest to succeed. To gain admittance, each student must demonstrate "financial need, academic ability, sound character, and a willingness to work." Elizabeth Hughes, the public-relations director, says: "We don't have a lot of rich kids . . . they have plenty of other schools they can choose from."

That doesn't mean the school is not in high demand. Unlike many small liberal-arts schools that are suffering a steep decline in applications, last year College of the Ozarks had 4,000 applicants for about 400 freshman slots, which makes this remote little school among the nation's most selective.

All of this raises the question: To bring down tuition costs elsewhere, is it so unthinkable that college students be required to engage in an occasional honest day's work? Many of the privileged class of kids who attend Dartmouth or Stanford or Wesleyan would no doubt call it a violation of their human rights. Others are too busy holding rallies for unisex bathrooms, reparations for slavery and an end to fossil fuels to work while in school. As the humorist P.J. O'Rourke once wrote: "Everyone wants to save the world, but no one wants to do the dishes."

At Hard Work U, the kids actually do the dishes and much more while working their way through a four-year degree. Nearly 90% of graduates land jobs—an impressive figure, given the economy's slow-motion recovery.

Continued in article

Jensen Comment
I hate to sound elitist here, but I have some questions about academic honesty here. The literature of the College of the Ozarks claims that there is an option to major in accounting and take a curriculum that qualifies graduates to sit for the uniform national CPA Examination.

However, the College only lists one accounting professor among five school of business faculty ---

Mr. Steven Flowler
Assistant Professor of Accounting

At another point it is stated that there are two "accounting faculty members" ---

The objectives of the accounting major are to (1) prepare students for placement in the competitive job market by teaching the basic accounting skills necessary to succeed, (2) prepare those students who are interested in and who qualify to pass the Certified Public Accountant (CPA) exam or other professional exams, and (3) prepare students who wish to further their education in graduate school with a strong foundation. The two faculty members currently teaching accounting courses have combined teaching experience of over 60 years.


The State of Missouri requires the following to sit for the CPA Examination according to NASBA:

Have 150 semester hours of general college education to include:


Even if there are two teachers for the accounting courses I cannot imagine those two teachers are superhuman enough to teach all the content areas required to sit for the CPA examination. I'm sure there are some disciplines outside accountancy that are probably covered well at the College of the Ozarks. And some areas of accounting and auditing may be covered very well by the two teachers who supposedly teach all the accounting courses, but I cannot imagine any two accounting teachers having such expertise and time to teach these 33 semester hours in accounting and auditing.

Chances are that graduates must go elsewhere to complete the requirements to sit for the CPA examination. It might be useful if the literature noted that accounting graduates at the College of the Ozarks are prepared for further studies to sit for the CPA examination.

Aside from that there is certainly a lot to say for a "free" college degree from the College of the Ozarks --- that has full accreditation from the North Central Association. I would hate to be an admissions officer for this college since it only has a capacity for around 1,400 students.

One stated goal of the College of the Ozarks is to foster the Christian faith. That narrows down the number of applicants.


From the CFO Journal's Morning Ledger on May 5, 2014

Good morning. 2014 hasn’t been a big year for stocks, with the Dow Jones Industrial Average down 0.4% so far and the S&P 500 up just 1.8%. Investors have recently shunned technology shares and newly minted stocks, but there has been a notable bright spot: deal activity. Shares of companies targeted for acquisition have jumped an average of 18% the day after a deal was announced, the WSJ’s Dan Strumpf and Matt Jarzemsky report. But oddly enough, the acquirers often get a boost too, with their stocks rising an average of 4.6% the next day.

U.S. companies have proposed or agreed to $627.95 billion worth of mergers or acquisitions this year, the most at this point since Dealogic started tracking figures in 1995. That takeover activity is providing a welcome boost to portfolios that have struggled to realize gains.

The lack of gains outside of the deal activity, however, points to a fearful environment for investment, despite some positive economic news, E.S. Browning reports. On Friday, a jobs report showed that U.S. unemployment had fallen sharply to 6.3% from 6.7%, with the highest job creation in April in more than a year. Stocks responded with across the board declines. The response underlines ongoing worries that stocks have risen too far, too fast.


"A Surprising Formula for Improved Supply Chain Performance," by Dale Miller, Stanford Graduate School of Business, May 1, 2014 ---

Gary Becker ---

"RIP:  Gary S. Becker He was a pioneer in applying economics to human behavior." Wall Street Journal, May 4, 2014 ---

Modern economics too often seems to devolve into statistics and mathematical formulas, which is only one of the reasons the world will miss Gary Becker, who died on Saturday at age 83. The Nobel laureate always put the study of humanity first and foremost, applying the principles of his discipline to human capital and how it can best be utilized for the common good.

Like so many other great free-market economists, Becker flourished in the second half of the 20th century at the University of Chicago, which rose as an alternative to the reigning orthodoxy of faith in government economic management. Milton Friedman was a teacher and colleague.

Gary Becker made his reputation in particular by applying economics to human behavior and problems not typically thought to be subject to economic analysis. His study of racial discrimination, for example, upended the view that bias benefits those who discriminate. He showed that an employer loses if he refuses to hire a productive worker for reasons of bias, and he demonstrated that discrimination is less likely in the most competitive industries that need to hire the best workers.

Becker also did ground-breaking work on the economics of crime and punishment, the family, and investments in human capital. He studied the allocation of time in the family unit, showing that rising wages increase the value of time and thus the cost of such work in the home as child-rearing. This combined with the need to provide more costly education for children tends to reduce fertility rates.

Americans now know this application of economics to human behavior as "Freakonomics," but Becker was a pioneer. He believed governments should invest in human capital through education in particular, but he also believed that humans flourish most when markets rather than governments allocate resources. His work graced these pages many times over the years, and we offer a sample nearby. Above all he believed in the ability of human beings to improve themselves if given the opportunity to exploit their talents.

Jensen Comment
I frequently quoted from the Becker-Posner Blog at
His final blog posting was entitled "The Embargo of Cuba: Time to Go" ---
Richard Posner's reply is at

"IAASB reconsiders auditors’ “other information” duties," by Ken Tysiac, Journal of Accountancy, April 24, 2014 ---

A new International Auditing and Assurance Standards Board (IAASB) reproposal is intended to clarify and strengthen auditors’ responsibilities related to “other information” that is included in organizations’ annual reports outside the audited financial statements.

The reproposed International Standard on Auditing 720 (Revised), The Auditor’s Responsibilities Relating to Other Information, would require the auditor to perform limited procedures to evaluate the consistency of the other information with the audited financial statements.

The reproposal, released last week, would require the auditor to consider whether there is a material inconsistency between the other information and information the auditor learned while conducting the audit. The auditor also would be required to remain alert for other indications that the other information appears to be materially misstated.

IAASB Chairman Arnold Schilder said in a news release that the importance financial statement users place on this other information has increased in recent years.

“Auditors have certain responsibilities relating to this other information as part of an audit of an entity’s financial statements,” he said. “And the IAASB is intending to appropriately strengthen them—and users need to know what those responsibilities are.”

The PCAOB also is gathering feedback on its own other information proposal, which would require audits to evaluate and report on information that is included in an annual report but is outside the financial statements.

Commenters on a previous IAASB other information proposal in 2012 said the proposal needed to be clarified to prevent divergent practices, according to the IAASB.

The IAASB also seeks comment on the current reproposal, which can be submitted through July 18 at the board’s website.

Jeopardy Television Game Show ---!

Jeopardy Edutainment for Accounting Students

Years ago quite a number of accounting professors wrote accounting Jeopardy games for their students. One such professor was David Fordham at James Madison University ---
I miss David on the AECM. Several years ago he revealed that for health reasons he would no longer be active on our listserv. Although he was an accounting professor, David had an expertise in physics and engineering, particularly in communications technology.

"Jeopardy-Style Game Show Helps Accounting Students,"\ by Deanna White, AccountingWeb, May 8, 2014 ---

On April 25, more than 60 college accounting students from Kentucky competed in PEAK, the Kentucky Society of Certified Public Accountants' (KyCPA) annual accounting competition. PEAK, which stands for Promote and Encourage Accounting in Kentucky, is an annual Jeopardy-style quiz show competition that tests participants' knowledge of the accounting profession, including questions that appear on the Uniform CPA Exam.

Thirteen teams from colleges and universities across Kentucky vied against each other for the title of PEAK champion at this year's fourth annual competition. Teams went head-to-head on accounting questions in five categories; four categories were directly related to the four sections of the Uniform CPA Exam, and the fifth included questions regarding material on the KyCPA and AICPA websites.

"Regardless of how the team places at PEAK, each participant walks away with a better understanding and preparedness of the CPA Exam, and PEAK exposes students to the many facets of accounting—camaraderie, knowledge, proficiency, pride in a job well done," said Lorri Malone, director of communications for the KyCPA.

. . .

The 2014 PEAK winners were:

The winning team earned a traveling trophy as well as a $1,000 KyCPA Educational Foundation Scholarship awarded to each member of the championship team. But the real payoff, KYCPA officials say, was the opportunity for students to prepare for the rigorous CPA Exam, and have some fun doing it through friendly competition.

Bob Jensen's threads on Edutainment 

"Statement by Data Transparency Coalition Executive Director Hudson Hollister on President Obama's Decision to Sign DATA Act," Data Coalition Blog, May 3, 2014 ---

On Monday, the House of Representatives unanimously passed the DATA Act, following unanimous approval three weeks ago by the Senate. On Tuesday, the White House announced that President Obama will sign it.

The DATA Act's enactment will revolutionize federal spending. The federal government's antiquated document-based reporting apparatus will be transformed into an efficient flow of standardized, open data. Open spending data will become a public resource for citizens, watchdogs, and the tech industry.

Our nation leads the world in technological innovation. We will finally be able to apply our technical ingenuity to the inefficiencies of the federal government. The Data Transparency Coalition's members have demonstrated their ability to republish, analyze, and automate private-sector financial data. Now their solutions can transform the public sector too.

Open federal spending data will bring democratic accountability by expanding access to vital information about our government's actions and priorities. Open federal spending data will allow agencies and Congressional appropriators to deploy electronic management tools. Open federal spending data will automate compliance for grantees and contractors.

The DATA Act's chief champion in the House, Rep. Darrell Issa, estimates that one-third of the federal deficit is waste and fraud. The DATA Act will enable our government to deploy data analytics to illuminate and eliminate waste and fraud.

The federal government is already constitutionally obliged to report its expenditures. Under the DATA Act, technology will make sense of them.

Tuesday's Data Transparency Summit brought together all stakeholders to start transforming the largest, most complex organization in human history. Our Coalition will continue to light the way forward for the federal government. We will encourage the Treasury Department and the White House OMB to follow the intent of the DATA Act by adopting and implementing robust, nonproprietary, government-wide data standards.

President Obama's May 2013 Open Data Policy provides crucial context for the DATA Act's implementation by defining the essential characteristics of open data and by bringing together a community of practice that is now ready to focus its energies on federal spending data. The DATA Act builds on the President's earlier work, too: the new law amends and amplifies the Federal Funding Accountability and Transparency Act of 2006, a collaboration between Sens. Tom Coburn and Barack Obama.

We applaud the President's decision to sign the DATA Act. For both government transparency and the growing open data tech industry, the DATA Act will be President Obama's enduring legacy.

IFRS Updates

From an EY newsletter on May 22, 2014

IASB publishes amendments to IAS 16 and IAS 38

The IASB published
amendments to IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets. The IASB has clarified that the use of revenue-based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset.

The IASB also clarified that revenue is generally presumed to be an inappropriate basis for measuring the consumption of the economic benefits embodied in an intangible asset. This presumption, however, can be rebutted in certain limited circumstances.

Starting Salary for 2014 Accounting Grads Is $52,900: Report ---

Jensen Comment
I hope this is adjusted for cost of living. This is certainly not enough for a good start in San Francisco but adequate for a start in San Antonio or Des Moines. I always told my students the starting salary is not nearly as important as the opportunity in terms of client exposure and training and, if necessary, the time and money needed to pass the CPA examination.

Times have changed greatly since when I started out with a Big 8 firm. It seemed like a tougher financial ordeal for the men (they were all men in our Denver office of Ernst & Ernst) at the lower end of the pay ladder who had both wives and children. Mothers tended not to work in those days such that the salary earned from the firm had to cover all living expenses. There were incentives to put off marriage and children, but more often than not it did not happen for staff accountants in my day who were also fathers (except for me).

In the 21st century the couples (often unmarried) both have careers and combined household incomes that exceed $125,000. This provides more income flexibility even when a child comes along. More women are hired by the Big Six than men these days. There are more incentives for them to put off having children until they are further along in their careers, and when they do have children they are less likely to give up their careers. The large CPA firms tend to be much more tolerant of working at home for distant clients, an option caused mainly by technology that did not exist when I was young. However, the burden of lingering student debt can put a damper on finances.

Sadly, it's also more common in the 21st Century for parents to split up later in life, often when their children are teenagers. Life is almost always hard for single parents, especially at a time when children need to be driven everywhere for extracurricular activities. But more often than not things manage to work out for career accountants and/or educators.

Last night on television I watched a segment about a divorced mother of two or three small children who managed to go back to college to finish both her undergraduate and masters degrees. Life would now perhaps be tolerable even as a single parent if she had not amassed a $65,000 student debt burden at an 8% fixed and non-negotiable rate. This huge student debt that helped give her hope (college degrees) also gave her Hell in life.

I do hope Senator Warren's bill to allow refinancing of  student debt to lower rates passes Congress in record time. It's long overdue!

Teaching Case
From The Wall Street Journal Accounting Weekly Review on June 2, 2014

Gap Earnings Decline 22%, Hurt by Foreign Currencies
by: Maria Armental
May 23, 2014
Click here to view the full article on

TOPICS: Foreign Currency Exchange Rates

SUMMARY: "As reported May 8, total [Gap] sales rose 1% as growth in Europe, Asia and other regions offset drops in the U.S. and Canada." However, Gap's profit was down in the quarter. Foreign currency fluctuations "lowered earnings by about 5 percentage points." In addition, the comparison is difficult because last year's profit was favorably impacted by a tax adjustment.

CLASSROOM APPLICATION: The article may be used to discussed general financial statement terms about performance or, with later questions, the more advanced topic of foreign currency impact on financial performance.

1. (Introductory) How well did Gap generate sales during the first quarter of 2014?

2. (Advanced) Define the term gross margin. What changed in the Gap's gross margin in the first quarter of 2014 as compared to the first quarter of 2013?

3. (Introductory) What happened to Gap's profit in the first quarter of 2014?

4. (Advanced) How did the location of Gap's sales affect the resulting profitability? Clearly state how foreign currency fluctuations caused this effect on profitability.

Reviewed By: Judy Beckman, University of Rhode Island

"Gap Earnings Decline 22%, Hurt by Foreign Currencies,"  by: Maria Armental, The Wall Street Journal, May 23, 2014 ---

Gap Inc. GPS +0.91% reaffirmed its full-year outlook Thursday as the apparel retailer reported a 22% decline in first-quarter earnings, hurt by weakening foreign currencies.

For the quarter ended May 3, Gap reported a profit of $260 million, or 58 cents a share, down from $333 million, or 71 cents a share, a year earlier. Foreign-currency fluctuations, the company noted, lowered earnings by about 5 percentage points while last year's figure included a four-cent benefit from a tax adjustment.

"After a disappointing start, I'm pleased with how the business performed toward the end of the quarter, especially at Old Navy," said Glenn Murphy, chairman and chief executive officer.

Earlier this month, Gap said sales at stores opened a year or more fell 1% in the first quarter, marking the retailer's first quarter of declining same-store sales in a couple of years. Still, the San Francisco retailer—which operates its namesake stores as well as the Old Navy and Banana Republic chains—has been considered a bright spot in an otherwise difficult retail industry because of its ability to tap into current fashions.

As reported May 8, total sales rose 1% to $3.77 billion, as growth in Europe, Asia and other regions offset drops in the U.S. and Canada. Same-store sales fell 5% at its Gap stores and 1% at Banana Republic, but grew 1% at Old Navy.

Net sales in the U.S., which accounts for the largest share of sales, edged down to $2.9 billion. In Canada, sales fell 4% while sales in Asia increased 12%. Sales in Europe rose 13%. Online net sales rose 13% to $575 million.

Gap, which continues to expand outside the U.S., in March opened its first company-operated Old Navy Store and e-commerce site in China and its first Old Navy franchise-operated store in the Philippines. The company said it plans to open five more Old Navy franchises in China this year.

The company also has been expanding its Athleta line of active wear.

The retailer's gross margin narrowed to 38.8% from 41.4% a year earlier.

Shares, up 5% for the year, were slightly down in after-hours trading to $40.56.

 Jensen Comment
To its credit Gap recently raised its minimum wage to $10 per hour  (as I dimly recall). However, Gap avoids paying benefits by hiring a lot of part-time workers.

Mr. Ravitch is the former lieutenant governor of New York and an adviser to the bankruptcy judge in Detroit.

Teaching Case
From The Wall Street Journal Accounting Weekly Review on May 23, 2014

More Detroits Are on the Way
by: Richard Ravitch
May 16, 2014
Click here to view the full article on

TOPICS: Generally accepted accounting principles, Governmental Accounting

SUMMARY: "The most significant step taken after New York City's near-bankruptcy in 1975 was to curb creative-accounting practices...accomplished...[t]hrough a state requirement that the city balance its budget in accordance with generally accepted accounting principles." So opines the "former lieutenant governor of New York [who is] an an adviser to the bankruptcy judge in Detroit." Various accounting and operating practice issues are raised in the article; Mr. Ravitch attributes choices in these reporting and operating activites to the fact that "no other local government chose to follow the example of New York City...." A recent report issued by the author and former Federal Reserve Chairman Paul Volcker entitled the Final Report of the State Budget Crisis Task Force" finds that most cities' and states' fiscal problems are structural, not cyclical (tied to economic cycles) and "the crisis is deepening."

CLASSROOM APPLICATION: The article may be used in a government accounting course.

1. (Introductory) What report has the author of this opinion-page article recently issued? Why was the report commissioned?

2. (Advanced) Cite one example of a way in which, according to the author, states and cities are practicing "creative accounting." In your answer, state whether you believe the accounting is in accordance with authoritative guidance and support your position.

3. (Advanced) The operating activities and reporting problems highlighted in the article include states borrowing to cover operating deficits. How is this done "indirectly" as described in the article?

Reviewed By: Judy Beckman, University of Rhode Island

Taking New York Back to the Bad Old Days
by Fred Siegel and Nicole Gelinas
May 20, 2014
Online Exclusive

"More Detroits Are on the Way," by Richard Ravitch, The Wall Street Journal, May 16, 2014 ---

The most significant step taken after New York City's near-bankruptcy in 1975 was to curb creative-accounting practices. How was that accomplished? Through a state requirement that the city balance its budget in accordance with generally accepted accounting principles. The city has not had a fiscal crisis since.

So it's not surprising that since the city's new mayor, Bill de Blasio, released his first budget last week, there's been intense public debate involving the comptrollers of both the city and the state about whether the deferral of payments contractually due city employees was properly accounted for. Between the scrutiny of the press, civic organizations and public officials, the city's record of 30 years without a fiscal crisis is likely to last.

Sadly, no other local government chose to follow the example of New York City, a choice that has led to chronic shortfalls. Earlier this year, former Federal Reserve Chairman Paul Volcker and I released the "Final Report of the State Budget Crisis Task Force" after nearly three years of study and analysis. The report sought to understand whether the states' current fiscal problems were cyclical—caused by the financial collapse of 2008 and likely to abate with economic recovery—or whether they were structural, the result of long-term revenue and spending imbalances. The report's main finding is that in most states and cities the problems are structural and the crisis is deepening.

The crisis has many elements but a few stand out. First, contributions to employee pension funds are often well below the levels needed to ensure the payment of the benefits that are contractually or constitutionally guaranteed, let alone those that past trustees and legislatures added on a discretionary basis. Sometimes the contributions are not made at all for years at a time. Everyone with a role in determining these contribution levels has an incentive to keep them as low as possible. Politicians don't like to raise taxes to meet future obligations, while public unions would rather take the long-term risk of underfunding rather than face immediate layoffs or benefit reductions.

The largest single expenditure in most state budgets is for Medicaid. Unfortunately, health-care costs have been rising faster than either inflation or state and local tax revenues, and most economists believe they will rise even faster in the next few years.

But the most critical piece of the states' fiscal dilemma is that they are borrowing to cover their operating deficits. They do this directly—by issuing debt securities—but also indirectly. Some states, like New York, make contributions to their pension systems in promissory notes rather than cash. States and cities also sell assets and treat the proceeds as operating revenues, in effect selling off the family silver to stay afloat.

In 2009 Arizona sold its capitol buildings for more than $700 million. In 2008 Chicago leased its parking meters for 75 years for nearly $1.2 billion. In 1991 New York sold Attica Prison for $200 million to itself through a bond issuance, providing a temporary revenue boost but costing taxpayers far more in the long run in interest. While state constitutions contain various balanced-budget clauses, they generally don't define revenues or prevent such creative accounting.

The consequences of our state and municipal fiscal crises are plain: We are drastically underinvesting in physical infrastructure—roads, bridges, ports, etc.—the necessary underpinning of future growth. Just as important, we are also underinvesting in human infrastructure, most notably our children's ability to compete. No one is satisfied with the output of our educational system, yet states spent over half a billion dollars less on prekindergarten education last year than they had the year before.

Permitting states and municipalities to continue these practices will result—indeed, has already begun to result—in harmful service cuts and a failure to fund promises made to creditors, public employees and the beneficiaries of essential public services, including elderly people without minimal levels of financial support. What this means is we can expect to see more Detroits. Last July the Motor City filed the country's largest municipal bankruptcy after racking up $18 billion in promises it could no longer afford to keep.

Meanwhile, the federal government is facing understandable pressure to rein in spending and reduce deficits. One proposal is to reduce health-care spending by raising the age of Medicare eligibility to 67 from 65. Yet this would greatly increase the spending burden on state and local governments currently obligated to fund health care for some 19 million retirees until they are eligible for Medicare. Worse, we can only guess the scale of such impact since there is currently no mechanism in the federal government that properly measures the effects of federal proposals on the states.

No one seriously argues that when credit markets won't allow more state or local government borrowing, Washington should write checks to get them through their crises. Even if an administration proposed such a Band-Aid, it would be politically impossible for Congress to approve it. Yet if the number of cities and states in extreme distress were to grow significantly, the political pressure to do something would increase inexorably. The ultimate cost would be staggering.

It is time for the federal government to take the steps needed to avoid the social and financial crisis that must be expected if nothing changes. Washington now provides almost 30% of what the states spend annually and already imposes many mandates on states and localities in return for its largess. The federal government could condition its continued financial support on states and local governments adopting budget systems that would require recurring expenses to be matched by current revenues.

Continued in article

Teaching Case
From The Wall Street Journal Weekly Accounting Review on May 16, 2014

Studying Philosophy is Good for Business
by: Marcelo Bucheli and R. Daniel Wadhwani
May 12, 2014
Click here to view the full article on

TOPICS: Accounting Education

SUMMARY: The article is written by two professors, one at the University of Illinoi, Urbana-Champaign and one at the University of the Pacific. The related article is the original report on changes in MBA programs to which these two professors have responded in this letter to the WSJ editors. The professors focus on market-related benefits of broad thinking capabilities. The related article describes employers' concerns about current teaching methods and focus in business programs.

CLASSROOM APPLICATION: While the articles focus on MBA programs, questions ask students to consider whether these issues apply in accounting programs. The article may be used in any accounting class.

1. (Advanced) What do you understand is the meaning of critical thinking?

2. (Introductory) What concerns are raised in the main and related articles about development of students' critical thinking skills in business programs?

3. (Advanced) While the two articles are focused on MBA programs, do you feel that your accounting curriculum helps to develop your critical thinking skills? Support your answer.

4. (Introductory) Refer to the related article. What do employers cite as a problem with the thinking skills of business school graduates?

5. (Advanced) Could this issue being raised by employers apply to accounting graduates as well as MBAs? Explain.

Reviewed By: Judy Beckman, University of Rhode Island

Why Some M.B.A.s Are Reading Plato, Kant
by Melissa Korn
May 01, 2014
Page: B6

"Studying Philosophy is Good for Business," Marcelo Bucheli and R. Daniel Wadhwani, The Wall Street Journal, May 12, 2014 ---

Most business-school students are gunning for jobs in banking, consulting or technology. So what are they doing reading Plato?

The philosophy department is invading the M.B.A. program—at least at a handful of schools where the legacy of the global financial crisis has sparked efforts to train business students to think beyond the bottom line. Courses like "Why Capitalism?" and "Thinking about Thinking," and readings by Marx and Kant, give students a break from Excel spreadsheets and push them to ponder business in a broader context, schools say.

The courses also address a common complaint of employers, who say recent graduates are trained to solve single problems but often miss the big picture.

"Nobel Thinking," a new elective at London Business School, explores the origins and influence of economic theories on topics like market efficiency and decision-making by some Nobel Prize winners. The 10-week course—taught by faculty from the school's economics, finance and organizational behavior departments—might not make students the next James Watson or Francis Crick, but it aims to give them a sense of how revolutionary ideas arise.

"It's important to know why we're doing what we're doing," says Ingrid Marchal-Gérez, a second-year M.B.A. who enrolled in Nobel Thinking to balance her finance and marketing classes. "You can start to understand what idea can have an impact, and how to communicate an idea."

Students write narrative essays to explain how ideas—such as adverse selection, or what happens when buyers and sellers have access to different information—gain currency. Joao Montez, the economics professor leading Nobel Thinking, says he wants students to reflect, if only for a short while, on world-changing thought.

Career advancement and salary outrank ideas about world peace and humanity's future for many M.B.A.s, but Dr. Montez says LBS students have requested more opportunities to step back and consider big-picture ideas.

"You can leave the classroom with these ideas in the back of your mind, and then maybe one day it will be useful," he says.

That's true to a point: Ms. Marchal-Gérez, 38 years old, says she is somewhat concerned she'll "have a good time, but then what?"

Abstract ideas remain a hard sell for many M.B.A.s.

Patricia Márquez, an associate professor of management at the University of San Diego's School of Business Administration and an anthropologist by training, has struggled for nearly 20 years to teach M.B.A.s to dream up business solutions for poverty, her area of scholarly focus. Students, she found, needed a great deal of coaching to apply theories from anthropology and ethnography to the business world.

She eventually replaced theory-based readings with traditional case studies, though she still tries to conduct discussions on abstract topics, such as how cultural stereotypes stymie innovation.

"I spent six years thinking about the definition of culture. At a business school, culture can be measured through a survey," she says. "It's so solution-oriented. We don't ask, and we don't let them have space to ask better questions."

To give students room for questions, Bentley University in Waltham, Mass., introduced "Thinking about Thinking" as a unit in its one-year M.B.A. program last year. Students spend two weeks studying art, reading fiction and even meditating.

"There's too much emphasis in leadership work on understanding followers," says Duncan Spelman, management department chair and co-instructor. "We're really trying to emphasize understanding the self" to make students effective leaders.

Mariia Potapkina, a 29-year-old Russia native who plans to work in consulting or strategy after graduation, says the class was "a nonstop, 14-day discovery of yourself." For example, she learned that she became more organized in the face of ambiguity.

But ambiguity can be unsettling for some. Esteban Hunt, an M.B.A. student who hails from Buenos Aires, recalled a class when an artist presented a piece of artwork and asked students to describe what they saw.

The variety of interpretations, and the realization that there was no single right answer, left him frustrated, Mr. Hunt says, and produced palpable anxiety among his classmates.

That's the point, says Dr. Spelman, adding that uncertainty is a reality in life and business.

Expect more abstract ideas in business schools soon.

To meet student demand, Copenhagen Business School is expanding its 15-year-old master of science in business administration and philosophy program this year, shifting to English-language instruction from Danish and taking in more international students.

"The tension between the two words business [and] philosophy appeals to quite a lot of young students," says Kurt Jacobsen, program director and a professor of business history. He says students want to better understand market and business dynamics after the extreme economic upheaval of recent years.

Continued in article

Critical Thinking:  Why's It So Hard to Teach
Go to

May 22, 2014 reply from M. Raza

Hi Bob, thanks for the heads up. One of the interesting books I read on critical thinking is by Roy Van den Brink-Budgen (2010) that looks into the concept from the "asking possible meaning and significance of the claim, be it predictive or evidential," point of view.

The one by Gary Kirby and Jeffery Goodpaster (2007) is also pretty good. Here is an interesting link on critical thinking 



Teaching Case
From The Wall Street Journal Weekly Accounting Review on May 16, 2014

When Hedging Isn't Enough
by: Maxwell Murphy
May 06, 2014
Click here to view the full article on

TOPICS: Foreign Currency Exchange Rates, Hedging

SUMMARY: "Currencies in at least 20 countries have fallen 6% to 37% against the U.S. dollar in the past year." The global nature of business operations for even small companies in today's environment means "'companies have never been as exposed as they are now to the violent movements of foreign currencies across the globe,' said Wolfgang Koester... [who] advises...on currency risk." With this high volatility, options can be costly as a long-term solution and companies are reacting by "rethinking their relationships with suppliers and distributors, their corporate structures, and their prices."

CLASSROOM APPLICATION: The article is an excellent one to introduce basic foreign currency issues and hedging strategies in an advanced financial accounting class.

1. (Introductory) What are the reasons for recent wide swings in currencies relative to the U.S. dollar? Where are these currencies' home countries?

2. (Advanced) How does a strong U.S. dollar typically affect U.S. export sales? State how the Olney, Texas, company Air Tractor, Inc. provides an example of this situation.

3. (Advanced) Consider the case of Infor Inc. How does its CFO decide whether to accept payment from customers in foreign currency? What happens to the amount of reported sales in those foreign currencies? How does the use of the currency for local operating expenses offset that effect?

Reviewed By: Judy Beckman, University of Rhode Island

"When Hedging Isn't Enough," by Maxwell Murphy, The Wall Street Journal, May 6, 2014 ---

Violent currency swings are the new normal for finance chiefs, forcing them to go beyond traditional hedging strategies.

Currencies in at least 20 countries have fallen 6% to 37% against the U.S. dollar over the past year. The economic turmoil in Argentina and Venezuela and the conflict between Russia and Ukraine have hit their currencies, as well as the first-quarter earnings of dozens of international companies, such as Avon Products Inc., AVP +0.44% Coca-Cola Co. KO +0.71% and Ford Motor Co. F +0.89%

To augment or replace hedging programs, more CFOs are rethinking their relationships with suppliers and distributors, their corporate structures and, when they can get away with it, their prices.

"Companies have never been as exposed as they are now to the violent movements of foreign currencies across the globe," said Wolfgang Koester, chief executive of FiREapps, which advises clients on currency risk.

That's partly because smaller companies and even startups are selling abroad, he said, and larger companies are penetrating faster and deeper into emerging markets. Roughly 98% of U.S. exporters are small and medium-size companies, according to the U.S. Department of Commerce, though they represent less than a third of the value of American exports.

Companies typically hedge to protect their profits by buying contracts for the option to buy or sell currencies at a fixed price in the future. But the more volatile a currency, the more costly the contract, making that a poor long-term solution.

The increasingly sophisticated approaches companies are taking to manage their currency exposures are why an April 2013 survey by the Bank for International Settlements showed that corporate foreign-exchange trading had fallen 50% from the bank's previous survey in 2010.

Of course, renegotiating business contracts or finding new suppliers takes time, and a currency swing can come suddenly.

Russia's ruble has tumbled 8% against the dollar since January and has been mentioned in more than 115 company conference calls, according to FactSet. The drop is a problem for McDonald's Corp. MCD +1.01% restaurants in Russia, which import almost half of their food and typically pay for it in dollars or euros.

"If you assume the ruble is going to stay at this depressed level, that's something we're going to be battling with for the rest of the year in our European margins," Chief Financial Officer Peter Bensen told investors recently on a conference call.

To help offset the ruble's decline against the dollar and euro, Alexey Kornya, CFO of Mobile TeleSystems MBT +1.45% OJSC, said the Moscow-based cellular carrier is asking certain foreign suppliers to accept payment in rubles.

By contrast, Air Tractor Inc., a closely held Olney, Texas, maker of crop-dusting and firefighting aircraft, has "lost sales" in places like South Africa recently, because it demands payment in dollars, said CFO David Ickert. In the past year, the rand has fallen 15% against the dollar.

Nicole Anasenes, CFO of Infor Inc., a New York-based business-software provider, said she might consider accepting payment in a foreign currency, but only "if it's an existing customer," and she could use the money locally for salaries and other operating costs.

Having strategically placed subsidiaries overseas can help insulate companies from currency swings.

When Northern Technologies International Corp. NTIC 0.00% expanded into nearly two dozen countries, including Russia, Malaysia and Indonesia, the Minneapolis-based maker of anti-corrosion packaging materials, took on local partners. The strategy initially was about growth, but CFO Matthew Wolsfeld said it helps to offset currency volatility. If need be, the company's joint ventures can leave cash in countries with weaker currencies and extract it from those with stronger currencies.

Mr. Wolsfeld said the firm is most affected by the euro's swings, and has used the euro's recent strength to pull dividends out of its German joint venture.

Sometimes, currency changes leave companies with little choice but to raise prices, which can be especially hard to do on discretionary products or those on which a local competitor isn't facing the same margin squeeze. A company's best hope is that its rivals will have to do so too.

That can happen with latex gloves, most of which are made in Malaysia, whose currency has weakened 7% in the past year. When currency swings prompt local vendors to raise prices, medical-products suppliers like Henry Schein Inc. HSIC +0.82% typically raise prices in lock step. Where Henry Schein can pass prices along, it does, said CFO Steve Paladino.

Continued in article

Bob Jensen's threads on hedging and hedge accounting ---

From The Wall Street Journal Weekly Accounting Review on May 6, 2014

Teaching Case
Ford Profit Falls on Warranty Costs

by: Mike Ramsey
Apr 26, 2014
Click here to view the full article on

TOPICS: Contingent Liabilities, Earning Announcements

SUMMARY: "Ford Motor Co., largely untainted by the big safety recalls affecting rivals, said its first quarter net income fell 39% in part because it expects to spend more to recall and fix defective vehicles....Ford's pretax profit fell 36% to $1.38 billion, or 25 cents a share, below analysts' 31-cent estimate. Despite lower earnings, Ford generated $2 billion in net cash in the quarter, in part because the higher warranty reserve isn't a cash expense."

CLASSROOM APPLICATION: The article describes factors considered in warranty liability accounting and, as noted above, mentions the difference that generates between net income and cash flows from operations.

1. (Advanced) Describe in general the accounting for warranty costs.

2. (Introductory) Relative to its first quarter net income, how large was the warranty expense recorded by Ford Motor Co.?

3. (Advanced) What factors led to Ford Motor Company to greatly increase its liability for warranty costs at this time?

Reviewed By: Judy Beckman, University of Rhode Island

"Ford Profit Falls on Warranty Costs," by Mike Ramsey, The Wall Street Journal, April 26, 2014 ---


From the CPA Newsletter on May 9, 2014

What's next in U.S. standard setting?
The Financial Accounting Foundation, the Financial Accounting Standards Board and the Governmental Accounting Standards Board described priorities for the future in their 2013 annual report, which was released Thursday.
Journal of Accountancy online (5/8)

From the CPA Newsletter on May 9, 2014

Many states watching tax revenues drop in 2014
Tax revenues have fallen in many states, especially compared with the windfalls many states experienced in the first half of 2013. This was because of the widespread expectation that tax rates would rise due to fiscal cliff talks, prompting corporations, money managers and high-net worth individuals to report income or sell stock at the end of 2012. For the first quarter of 2014, corporate tax revenue dropped in 20 states and personal income tax revenues decreased in 10. The Washington Post (tiered subscription model)/GovBeat blog (5/8)

The dog ate my alimony check

The IRS finds billions in the reporting gap between alimony paid and alimony received

America’s Most Unusual Public Companies
One company has fueling stations only for natural gas vehicles ---

Teaching Case
From The Wall Street Journal Accounting Weekly Review on May 9, 2014

Elite Colleges Don't Buy Happiness for Graduates
by: Douglas Belkin
May 06, 2014
Click here to view the full article on


SUMMARY: "A Gallup survey of 30,000 college graduates of all ages found that highly selective schools don't produce better workers or happier people, but really inspiring professors-no matter where they teach-just might....The poll is the brainchild of former Indiana Republican Governor Mitch Daniels who became president of Purdue University in January 2013." The data presented in tables also includes employment levels for graduates holding different broad categories of degrees: science, business, social sciences, and arts and humanities.

CLASSROOM APPLICATION: The article may be used in any class. It contains good suggestions for gleaning benefit from students' college education at any type of institution.

1. (Introductory) Who developed this survey of college graduates? What entity administered the survey? To whom and how many was it administered?

2. (Introductory) What is the measure of happiness that is used in this poll?

3. (Introductory) What factors in the survey provided "the strongest correlation" with well-being later in life?

4. (Advanced) What caveats exist in the ability to interpret the survey results? That is, do the associations found in this study truly explain factors leading to college graduates' happiness? Explain.

5. (Advanced) What points from this article can you take away to enhance your educational experience? Do you think these points will also help you later in life? Explain.

Reviewed By: Judy Beckman, University of Rhode Island

"Elite Colleges Don't Buy Happiness for Graduates, by Douglas Belkin, The Wall Street Journal, May 6, 2014 ---

A word to high-school seniors rejected by their first choice: A degree from that shiny, elite college on the hill may not matter nearly as much as you think.

A new Gallup survey of 30,000 college graduates of all ages in all 50 states has found that highly selective schools don't produce better workers or happier people, but inspiring professors—no matter where they teach—just might.

The poll, undertaken this spring, is part of a growing effort to measure how well colleges do their jobs. This survey adds an interesting twist, because it looked not only at graduates after college; it tried to determine what happens during college that leads to well-being and workplace engagement later in life.

The poll didn't measure graduates' earnings. Rather, it was rooted in 30 years of Gallup research that shows that people who feel happy and engaged in their jobs are the most productive. That relatively small group at the top didn't disproportionately attend the prestigious schools that Americans have long believed provided a golden ticket to success. Instead, they forged meaningful connections with professors or mentors, and made significant investments in long-term academic projects and extracurricular activities.

"It matters very little where you go; it's how you do it" that counts, said Brandon Busteed, executive director of Gallup Education. "Having a teacher who believes in a student makes a lifetime of difference."

Charts not shown here

The poll is the brainchild of former Indiana Republican Gov. Mitch Daniels, who became president of Purdue University in January 2013. As he prepared for the job, Mr. Daniels said he kept bumping into the same problem: a lack of benchmarked data to measure the value of a college degree. Last spring, during a trip to Gallup's D.C. offices, he seized on the idea of applying their engagement and well-being questions, which had been used in other contexts, to college graduates. The index will soon be broken down to the level of individual schools "for those that have the will, and frankly, the nerve," Mr. Daniels said.

"There is a lot we don't know about higher education, and there is a sense it's skating on its reputation," Mr. Daniels said. "We needed to know with more rigor how well the experience is serving people."

The poll found that just 39% of college graduates feel engaged at work—meaning, for instance, that they enjoyed what they did on a daily basis and are emotionally and intellectually connected to their jobs. And only 11% reported they were "thriving" in five different aspects of their lives, among which are financial stability, a strong social network and a sense of purpose.

That relatively small handful of graduates—who tend to be more productive—went to a variety of colleges, though they were slightly more likely to go to larger schools and less likely to have attended for-profits.

The strongest correlation for well-being emerged from a series of questions delving into whether graduates felt "emotionally supported" at school by a professor or mentor. Those who did were three times as likely to report they thrived as adults. Graduates who reported having "experiential and deep learning" were twice as likely to be engaged at work as those who didn't.

University of Pennsylvania Professor Martin Seligman, who has studied the psychology of happiness, said it was impossible to know whether the college experiences Gallup asked about were the cause of later success or simply coincidental to it.

"One hopeful possibility is that if college were changed to produce more emotional support, this would result in much more engagement later in life," he wrote in an email. "Another, less interesting possibility" is that people engaged at work who said they were emotionally supported in college are simply upbeat to begin with, and that rosy outlook colors their memories.

Other, less fuzzy correlations were between debt and entrepreneurship. About 26% of graduates with no undergraduate debt started their own business, compared with just 20% of those carrying debt from $20,000 to $40,000. Nearly three-quarters of U.S. college graduates leave school with debt; among those who do, the average is nearly $30,000. Graduates with that amount of debt were one-third as likely to report they were "thriving" as graduates without debt reported.

Continued in article

Teaching Case
From The Wall Street Journal Accounting Weekly Review on May 9, 2014

Lawmakers Struggle Over Web Tax
by: John D. McKinnon
May 07, 2014
Click here to view the full article on

TOPICS: Internet, Internet Commerce, sales tax, Tax Law

SUMMARY: The Internet Tax Freedom Act was enacted 15 years ago to prevent states and local governments from taxing access to the internet. It expires in November 2014. Lawmakers are trying to combine re-enacting this moratorium with a new law "to allow states to collect sales tax from out-of-state online merchants....Key lawmakers who support the online sales-tax legislation view the extension of the moratorium as a potential vehicle for their bill."

CLASSROOM APPLICATION: The article may be used when covering sales taxes in a financial accounting class or to cover current issues in a corporate or personal tax class.

1. (Advanced) How are sales taxes collected?

2. (Advanced) What moratorium on taxing is about to expire? Why do you think this moratorium was originally enacted?

3. (Introductory) Why do "some experts say that even if the moratorium expires, few if any states automatically would being taxing internet access...."? What do others say about the possibility of states taxing internet access?

4. (Advanced) Why are state sales taxes not collected on internet sales? How might that situation change in November?

Reviewed By: Judy Beckman, University of Rhode Island

"Lawmakers Struggle Over Web Tax," by John D. McKinnon, The Wall Street Journal, May 7, 2014 ---

Millions of Americans could be threatened with new state taxes on their Internet access this fall, as Congress struggles with how to extend an expiring moratorium on such levies.

The 15-year-old Internet Tax Freedom Act prevents most states and local governments from taxing access. The moratorium enjoys widespread bipartisan support in Congress.

The tax reprieve, however, is set to expire on Nov. 1, and so far, lawmakers have taken few concrete steps to re-enact it as they debate whether to combine it with a separate, more controversial bill. That measure would allow states to collect sales tax from out-of-state online merchants.

Proponents hope that combining the two bills will increase pressure on Congress to negotiate a compromise on the long-delayed online sales-tax legislation.

"I think enough interested parties would insist that if we're going to pass that [Internet-access tax moratorium], this other component might be attached to it," said Rep. Jason Chaffetz (R., Utah), who is leading a House effort to reach a compromise on the sales-tax bill. He added: "To think the first would move unattached is fantasy land at this point."

Combining the two issues, however, could create a legislative logjam. Anticipating the possibility of a standoff, many telecommunications companies already are preparing to send out notices to their customers in July or August, notifying them that they might have to start paying state taxes on their Internet access if the moratorium expires.

"Washington always likes to walk right up to the edge and look in the abyss," said Jot Carpenter, vice president for government affairs for CTIA-The Wireless Association, an industry trade group. "If they fail [to reach a compromise], then I think there is a risk" that Internet services would become subject to new taxes.

Some experts say that even if the moratorium expires, few if any states automatically would begin taxing Internet access, and many likely would need new authorizing legislation to do so.

"I would not expect there to be a great rush to immediately start imposing tax on Internet access," said Gale Garriott, executive director of the Federation of Tax Administrators.

Others contend that many states simply could modify their rules to impose a tax, without new legislation.

"I would say there is an unknown but significant number of states where…the tax department could write a new rule" applying the tax, said Scott Mackey, a wireless-industry consultant. A few states have legislation that specifically prohibits taxation of the Internet, while some other states were grandfathered under the moratorium and collect taxes now.

An average household could face an additional $50 to $75 a year if states decide to apply their sales or telecommunications taxes to Internet access, Mr. Mackey estimates.

Many firms in the wireless industry say their voice services already are subject to high state and local taxes, while some new Internet-based communications technologies aren't subject to state taxation. That leaves today's big players worried they will be at an increasing disadvantage.

While the potential total take from taxing Internet access is hard to gauge, industry experts say it could run to several billion dollars annually—up to $2 billion for wireless alone, even more for cable-based Internet customers. There are about 262 million Internet connections in the U.S., according to federal data.

Telecommunications providers have begun seeking guidance from states on whether they would seek to tax Internet access if the moratorium expires. One group that tries to harmonize state tax rules, the Streamlined Sales Tax governing board, is surveying its 24 member states to find out whether they expect providers to start collecting taxes.

It is "entirely possible" that some states have laws that would allow them to seek the tax, said executive director Craig Johnson.

Continued in article


From The Wall Street Journal Accounting Weekly Review on May 6, 2014

Teaching Case
Error by BofA Scuttles Buyback

by: Christina Rexrode, Dan Fitzpatrick and Ryan Tracy
Apr 29, 2014
Click here to view the full article on

TOPICS: Debt, Fair Value Accounting

SUMMARY: As described by David Reilly in the first related article, the "The issue that led BofA to unveil Monday a more-than-$4 billion capital hole revolved around how it classified changes in the value of what had become its own debt. (Technically, the debt, or so-called structured notes, was issued by Merrill Lynch, but it became BofA's when the bank acquired the broker back during the financial crisis.)" BofA had elected the fair value option to account for these structured notes and therefore included realized and unrealized gains and losses on the debt in its earnings. However, unrealized gains and losses must be excluded from regulatory capital but BofA had not been separating the realized and unrealized gains for this adjustment. BofA found the error, reported to the Fed, and now must submit a revised plan to be authorized to issue any dividends or undertake a planned stock buyback. The amounts previously planned will certainly be reduced.

CLASSROOM APPLICATION: The article may be used when covering fair value reporting or simply to focus on varying accounting requirements between U.S. GAAP and, in this case, bank capital requirements.

1. (Advanced) When are banks allowed to use the fair value option in accounting for long term debt?

2. (Introductory) According to the article, with what type of debt do banks typically choose to use the fair value option?

3. (Advanced) When do banks earn unrealized gains on debt valued at market value? In your answer comment on how this accounting result is counterintuitive when dealing with the bank's own debt.

4. (Introductory) What is the difference between realized and unrealized losses? According to the article, how are these different types of gains and losses treated differently for bank regulatory capital purposes than under generally accepted accounting principles?

5. (Advanced) According to the main and related articles, what was the error that BofA made in reporting its regulatory capital?

6. (Introductory) What was the result of this error for investors holding the bank's common stock?

Reviewed By: Judy Beckman, University of Rhode Island

Heard on the Street: Bank of America's Capital Offense
by David Reilly
Apr 28, 2014
Online Exclusive

Explaining the BofA Error: Debt Accounting Rule Bites Again
by Michael Rapoport
Apr 28, 2014
Online Exclusive

"Error by BofA Scuttles Buyback," by Christina Rexrode, Dan Fitzpatrick and Ryan Tracy, The Wall Street Journal, April 29, 2014 ---



"Professor in Florida Is Accused of Forging His Doctoral Credentials," by Charles Huckabee, Chronicle of Higher Education, May 22, 2014 ---

David Scott Broxterman, a professor of business administration at Polk State College, in Florida, was arrested Wednesday on charges related to accusations that he forged the transcript and doctoral diploma he used to get the job, according to the Ledger Media Group.

Mr. Broxterman, who was placed on administrative leave at the end of the spring semester, has taught at the college since January 2009 and was hired as a full-time professor in January 2010. In his application, he had claimed to have received a doctorate in business organization and management from the University of South Florida in 2007. But state prosecutors say their investigation has determined that he was never a student there.

Rachel Pleasant, a spokeswoman for Polk State, said Mr. Broxterman’s transcripts had been verified by college personnel, which was college’s policy at the time he was hired. In response to this case, however, the college will now use a third party to verify academic degrees before employment.

All student credits from his courses will remain intact, Ms. Pleasant said. The college is cooperating with the state investigation and is conducting its own internal investigation, she said.

Bob Jensen's threads on professors who cheat ---


Humor May 1-31, 2014

KFC Corsage --- ttp://

Celeb Psychic Sally Morgan Embarrassed After 'Contacting' Spirit of Woman Sitting ALIVE in Audience ---
I'll bet the Q/A session was interesting

Dick Cavett’s Worst Show: Starring John Cassavetes, Peter Falk & Ben Gazzara (1970) ---

Johnny Cash Impersonates Elvis Presley: A Slapstick Version of “Heartbreak Hotel” (1959) ---

Advertising More: Madison Avenue Features Advertising Mad Men 'MAD MEN' vs. REALITY: Compare Don Draper's Ads With Those That Actually Ran In The 1960s ---

Peter Sellers Presents The Complete Guide To Accents of The British Isles ---

Yakov Smirnoff Remembers “The Soviet Department of Jokes” & Other Staples of Communist Comedy ---

Cute cats waking up owners - Funny cat compilation ---

Slavoj Žižek’s Jokes: A Sampling of the Theorist’s Philosophical, Political & Sexual Humor (NSFW) ---

Forwarded by Maureen

          As we Silver Surfers know, sometimes we have trouble with our

          Yesterday, I had a problem, so I called Georgie, the 11 year old
next door, whose bedroom looks like Mission Control, and asked him to come

          Georgie clicked a couple of buttons and solved the problem.

          As he was walking away, I called after him, 'So, what was wrong?

          He replied, 'It was an ID ten T error.'

          I didn't want to appear stupid, but nonetheless inquired, 'An,
ID ten T error? What's that? In case I need to fix it again.'

          Georgie grinned...'Haven't you ever heard of an ID ten T error

          'No,' I replied.

          'Write it down,' he said, 'and I think you'll figure it out.'

          So I wrote down:


          I used to like Georgie, the little shithead

Forwarded by Paula

A woman arrived at the Gates of Heaven. While she was waiting for Saint Peter to greet her, she peeked through the gates. She saw a beautiful banquet table. Sitting all around were her parents and all the other people she had loved and who had died before her.

They saw her and began calling greetings to her.

"Hello - How are you! We've been waiting for you! Good to see you."

When Saint Peter came by, the woman said to him, "This is such a wonderful place! How do I get in?"

"You have to spell a word," Saint Peter told her.

"Which word?" the woman asked.


The woman correctly spelled 'Love', and Saint Peter welcomed her into Heaven.

About a year later, Saint Peter came to the woman and asked her to watch the Gates of Heaven for him that day.

While the woman was guarding the Gates of Heaven, her husband arrived.

I'm surprised to see you," the woman said. "How have you been?"

"Oh, I've been doing pretty well since you died," her husband told her. I married the beautiful young nurse who took care of you while you were ill. And then I won the multi-state lottery. I sold the little house you and I lived in and bought a huge mansion. And my wife and I traveled all around the world. We were on vacation in Cancun and I went water skiing today. I fell and hit my head, and here I am. What a bummer! How do I get in?"

"You have to spell a word," the woman told him.

"Which word?" her husband asked.


Moral of the story: Never make a woman angry … There will be Hell to pay later!


Some New and Some Old
25 Jokes That Only Accountants Will Find Funny ---

Bob Jensen's threads on accounting humor ---
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Humor Between May 1-31, 2014, 2014 ---

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For an elaboration on the reasons you should join a ListServ (usually for free) go to

AECM (Accounting Educators)
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 ---

CPAS-L (Practitioners)  (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)
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.

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 
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)

“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?


Accountancy, Tax, IFRS, XBRL, and Accounting History News Sites  ---

Accounting Professors Who Blog ---

Cool Search Engines That Are Not Google ---

Free (updated) Basic Accounting Textbook --- search for Hoyle at

CPA Examination ---
Free CPA Examination Review Course Courtesy of Joe Hoyle ---

Bob Jensen's Pictures and Stories


Bob Jensen's Homepage ---



April 30, 2014

Bob Jensen's New Bookmarks April 1-30, 2014
Bob Jensen at Trinity University 

For earlier editions of Fraud Updates go to
For earlier editions of Tidbits go to
For earlier editions of New Bookmarks go to 

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

Bob Jensen's Blogs ---
Current and past editions of my newsletter called New Bookmarks ---
Current and past editions of my newsletter called Tidbits ---
Current and past editions of my newsletter called Fraud Updates ---


Bob Jensen's Pictures and Stories


All my online pictures ---

David Johnstone asked me to write a paper on the following:
"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics Science"
Bob Jensen
February 19, 2014
SSRN Download: 


FASB Accounting Standards Updates ---

Hasselback Accounting Faculty Directory ---

Blast from the Past With Hal and Rosie Wyman ---

Bob Jensen's threads on business, finance, and accounting glossaries --- 

2012 AAA Meeting Plenary Speakers and Response Panel Videos ---
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 ---

"CONVERSATION WITH DENNIS BERESFORD," by Joe Hoyle, Teaching Blog, March 26, 2013 ---

"CONVERSATION WITH BOB JENSEN," by Joe Hoyle, Teaching Blog, October 8, 2013 ---

List of FASB Pronouncements ---

2013 IFRS Blue Book (Not Free) ---

Links to IFRS Resources (including IFRS Cases) for Educators ---

Find comparison facts on most any Website ---
For example, enter "" without the http:\\

Find Accounting Software (commercial site) ---

Galt Travel Reviews and Guides ---

Quandl:  over 8 million demographic, economic, and financial datasets from 100s of global sources ---

David Giles Econometrics Beat Blog ---

Common Accountics Science and Econometric Science Statistical Mistakes ---

Citations: Two Selected Papers About Academic Accounting Research Subtopics (Topical Areas) and Research Methodologies 

Alliance for Financial Inclusion (financial literacy initiative funded by Bill and Melinda Gates) ---
Also see Bob Jensen's related helpers at

Find Real Estate for Sale ---

If my father had hugged me even once, I'd be an accountant right now.
Ray Romano, American comedian
As quoted in the CPA Newsletter on April 16, 2014

From the CPA Newsletter on April 25, 2014

Tax fraud hits health care providers in New England (including 150 physicians in Maine and NH)
More than 150 cases of tax fraud have affected doctors and health care providers in New Hampshire and Vermont. Hospitals and private providers were targeted. The theft involved Social Security numbers that were then used to file fraudulent tax returns. Other states have reported similar cases. Associated Press (4/24), Portland Press Herald (Maine) (4/24)

150 Doctors Targeted for Tax Fraud in NH, Vt. ---

CONCORD, N.H. (AP) — New Hampshire Sen. Jeanne Shaheen has asked the Secret Service and Internal Revenue Service to investigate reports of tax fraud affecting more than 150 doctors and health care providers in the state and in Vermont.

The medical societies in both states say Social Security numbers have been stolen and used to file fraudulent federal tax returns. At least several hospitals and some private providers have been targeted.

Rick Adams, a spokesman for Dartmouth-Hitchcock Medical Center, tells the Valley News about 50 doctors and other employees who work at the hospital have been affected.

Scott Colby of the New Hampshire Medical Society says similar cases have been reported in other states, such as Maine, Connecticut and Massachusetts.

Shaheen is asking for a joint investigation between the Secret service and IRS.

"IRS is overwhelmed by identity theft fraud:   Billions wrongly paid out as scammers find agency an easy target," by Michael Kranish, Boston Globe, February 16, 2014 ---



Jensen Comment

My family physician was a victim last year when somebody filed a fake tax return in his name and collected an illegal tax refund from the IRS. It sounds like a gang of insiders who perhaps work for the hospitals and health clinics. Each year the IRS pays out billions in phony refunds and is making little progress detecting and preventing such crimes.


Identity Theft Information and Tools from the AICPA and IRS ---

Tax practitioners and their clients are concerned about the growing epidemic of tax-related identity theft in America - both refund theft and employment theft. At the end of fiscal 2013, the IRS had almost 600,000 identity theft cases in its inventory, according tothe IRS National Taxpayer Advocate. 

The AICPA shares members' concerns about the impact of identity theft and offers the resources below to help them learn more about this issue and advise clients. We have provided recommendations to Congress and the IRS Oversight Board on ways to further protect taxpayers and preparers.

IRS Identity Protection Specialized Unit at 800-908-4490

Identity Theft Resource Center ---
Note the tab for State and Local Resources

The IRS has an Identity Theft Web Page at

"Devil's Advocate: The Most Incorrect Beliefs of Accounting Experts," by Sudipta Basu, SSRN, December 1, 2013 ---

This commentary reflects the views of a panel of six experts tasked with writing an essay on the most incorrect beliefs of accounting experts. The title provides ample motivation for this discussion – to document the views of some thought leaders in accounting research on a seldom-debated and mostly ignored issue – incorrect beliefs. While each essay offers a thoughtful message on its own, in combination they reflect an even stronger view, and offer sound advice for accountants of all stripes and persuasions.

Free Download ---

Accounting Horizons, Vol. 27, No. 4, 2013

The video of this presentation, as well as the presentations for the other commentaries in thisissue is available by clicking on the link below.

KPMG's Former Los Angeles Managing Partner Headed for Prison
Scott London Sentenced to 14 Months in the Can and a $100k Fine
PMG partner who gave tips to golf buddy sentenced for insider trading ---,0,3315282.story#axzz2zuM77Xjv

A former partner with accounting giant KPMG was sentenced to 14 months in federal prison for giving confidential information about his firm’s clients to a golfing buddy, who used it to make more than $1 million in profits trading stocks.

Scott London, 51, pleaded guilty to insider trading last year, admitting that he gave confidential information about KPMG clients, including Herbalife Ltd. and Skechers USA Inc., to his stock-trading friend several times from October 2010 to May 2012.

U.S. District Judge George Wu issued the sentence Thursday in Los Angeles. He also ordered London to pay a $100,000 fine.

Defense attorney Harland Braun had argued for a sentence of 6 to 12 months, noting that his client had already paid dearly for his crime: losing his $900,000-a-year job, his reputation and a host of KPMG friends who are not permitted to talk to him.

The prosecutor in the case, Assistant U.S. Atty. James A. Bowman, said three years was appropriate because of the significant violation of London’s duties to his clients and the damage it caused them. Herbalife and Skechers were required to hire new accounting firms and restate their earnings after learning of London’s actions.

London benefited from the crimes. As a reward for the tips, London’s friend, Bryan Shaw, gave him thousands of dollars in cash, concert tickets and jewelry, including a Rolex watch, prosecutors said.

London was a senior partner at KPMG in charge of the audit practice for clients in California, Arizona and Nevada. He also personally oversaw audits of Herbalife and Skechers.

He gave Shaw inside information at least 14 times, reading him news releases before they were issued, telling him about planned acquisitions and giving him advance word about company earnings, prosecutors said.

The tips enabled Shaw to make numerous profitable trades.

Shaw snapped up thousands of Herbalife shares in the weeks before a May 2011 announcement of the company's record sales, prosecutors said. The news drove Herbalife shares up 13%. Shaw sold his shares within days, netting about $450,000 in profit.

In February 2012, London told Shaw that KPMG client Pacific Capital Bancorp was about to be acquired by Union Bank, prosecutors said. Pacific Capital's shares soared 57% when the news was announced in March 2012. Shaw made $365,000.

The scheme unraveled after regulators became suspicious of Shaw’s well-timed trades. He later agreed to cooperate in an investigation of London, secretly recording their conversations and handing him an envelope stuffed with cash while FBI agents snapped photographs.

Shaw, who has also pleaded guilty, is scheduled to be sentenced May 19.

In April 2012, KPMG shocked the financial world by announcing it had fired London and withdrawn several past audits of Herbalife and Skechers. The criminal case was filed a few days later.

Continued in article

Bob Jensen's threads on KPMG are at

Barry Minkow (who became a preacher after his first conviction) ---

Barry Minkow is headed back to prison for his third conviction --- why doesn't California's Three Strikes Law apply to him for life?
"Barry Minkow gets 5 years for embezzling from San Diego church The former whiz kid whose ZZZZ Best carpet-cleaning firm turned out to be a scam is sentenced for embezzling $3 million from his congregation. It was his third fraud conviction," by E. Scott Reckard, Los Angeles Times, April 28, 2014 ---,0,4879604.story#axzz30Hn5lPRH

What a Neat Invention for the Blind
"Awesome FingerReader Gadget Lets the Blind Read Printed Text," Chris Smith, Yahoo Tech, April 18, 2014 ---

Jensen Comment
This could be especially helpful for sight-impaired online learners. It enables them to read email messages and printed online course materials. Online instructors should be especially careful in fully explaining charts, exhibits, and other visuals that are difficult to comprehend with the FingerReader.

Now if we could get a reader for Division 1 varsity athletes life would be even better.

"Apple’s AssistiveTouch Helps the Disabled Use a Smartphone," by David Pogue, The New York Times, November 10, 2011 ---

Bob Jensen's threads on education technology for disabled and otherwise handicapped learners (including the blind) ---

 "Rating My Professor," by Colleen Flaherty, Chronicle of Higher Education, April 21, 2014 ---

Students at the University of Minnesota have for years called for access to student course evaluations that they provide at the end of courses, saying they’ve got a right to know what peers have thought of the classes they’re considering. Now they might get their wish – at least part of it. The University Senate is considering a proposal to make student feedback about courses public. But student responses about questions specifically related to professors would remain private, in accordance with state privacy laws for employees.

The university hopes the data will help students make more informed class selections, and offer more comprehensive and relevant information than that which is currently available on student-driven feedback sites, such as (the Minnesota evaluations don’t have a question on instructor “hotness,” for example).

"We think this is an excellent step forward in providing students quality information,” said Robert McMaster, vice provost and dean of undergraduate education. “I’m not going to say anything negative about, but that’s a much different kind of thing than this rigorous, standardized approach.”

And while McMaster politely avoided the question of, faculty members and academic leaders at many campuses hate the site as much as some students love it. (Some students also dislike it, including Minnesota's own student government, which said third-party sites contain "polarized" and "unverifiable" data in a recent position statement asking for more transparency of official student feedback.) But at many campuses, the professors' and administrators' dislike for the site hasn't translated into giving students something more educationally meaningful to consider when evaluating potential courses.

In an email, Carlo DiMarco, senior vice president of strategic partnerships for MTV, which owns, defended the site's worth.

"What we love about RateMyProfessors is that it is 100 percent driven by college students," DiMarco said. "Each year, millions of students use the site to help plan their class schedules, making it a uniquely valuable resource for them. All of the praise and critiques that professors receive on the site come directly from students, which means our site does what students have been doing forever: checking in with each other — their friends, their brothers, their sisters — to figure out who’s a great professor." (DiMarco also noted that the website's "easiness" and "hotness" ratings do not factor into the overall quality rating, and that the site employs a third party to vet comments and ratings to ensure reliability.)
Under the Minnesota proposal, student evaluations would have 11 questions. The first half would elate to the professor specifically, such as whether he or she was clear, or prepared for class. Those would remain a private part of the instructor’s personnel file, in line with the Minnesota Data Practices Act, which prohibits the release of information about specific public employees. But the second half of the questions would relate to the course itself -- Was my interest in the subject matter stimulated by this course? Would I recommend this course to other students? – and go live in a university database starting this fall. Although the vast majority of courses are offered by one professor, McMaster said those with multiple sections would be coded by instructor.
One common criticism of student-driven feedback sites is their potential for low response rates, and that only students with something to complain about are driven to comment. And that's a fear that some professors have about even their own institutions' evaluations if they're only offered online. McMaster said the new system can't guarantee a high response rate but that professors may distribute the evaluation forms in paper in class or offer them online. Valkyrie Jensen, an officer in the Minnesota Student Association and co-author of the recent position statement, said everyone typically fills out student evaluations in her classes. "It's a chance to have your voice heard, regardless of a positive or negative impression, and most students appreciate the opportunity," she said.

The university previously created a way for professors to elect to make some evaluation data public to students (the Dartmouth University faculty is currently considering a similar "opt-in" release option), but less than 10 percent did – in part simply because it was an extra hurdle for them to cross, McMaster said. So Minnesota thought about changing the default status of evaluations to public, giving professors the opportunity to opt out, instead of in. But that didn’t pass muster with the university’s legal department, given state restrictions on releasing information about employee performance.

The proposal, which is up for a vote in the universitywide senate next month, is a kind of “compromise” between what students want and state law allows, and faculty members appear to generally be on board, said Joseph A. Konstan, chair of the department of computer science and engineering as well as the senate’s Faculty Affairs Committee.

“I think it’s a good compromise given the constraints that we’re under here,” he said. “I haven’t heard much in the way of complaints about it, much in the way of advance concerns, as with other proposals in the past.”

Konstan said he didn’t have a problem with faculty evaluations that evaluate faculty members by name, but, like McMaster, he said that the new process would still be a more reliable alternative to third-party feedback sites.

He added that “anything can happen when you get a large group of faculty together,” but that he believes the motion will pass. Konstan acknowledged general faculty fears about student evaluators – that students might translate an easy course to a good course, for example – but said that aggregate evaluative data, as would be included in the new student resource, tends to paint a reliable picture of a course.

Excluding inappropriate or discriminatory comments, Konstan said, “My experience has been that when student say things consistently, there’s usually something behind them.” (Interestingly, a 2011 study from the University of Wisconsin at Eau Claire suggested something similar, in relation to The study found that 10 reviews showed about the same consensus about a professor as did 50 reviews, a much larger sample size, or even more. The study also found that the site's users are "likely providing each other useful information about quality of instruction.")

Continued in article

Jensen Comment
Minnesota is certainly not the first university to make student evaluations known among the campus community. Some universities claim that doing so did not much change the grade inflation tendencies. Professors giving easy top grades did not tend to toughen up. Tough grading professors tended not to ease up. The reasons are fairly obvious. Teaching evaluations before and after this change in policy generally spread across campus by word of mouth from former students.

The campus community is more apt to take notice of internal course evaluations than was notice taken of the self-selecting sample responses on RateMyProfessor. Professors, however, may change their courses somewhat. Those who skate on the edge of unprofessional political bias (right or left) as defined by AAUP rules may become a bit more cautious about politics in the classroom. Those are known to miss quite a few classes (sometimes because of travel or family responsibilities) may be more responsible about meeting classes. Both biased and absentee professors may become concerned about their reputations among parents, alumni, and prospective students, especially in the case of private universities who are more dependent upon recruiting students. Even if outsiders cannot have easy access to teaching evaluations, word spreads in this era of networked messaging.

There are some myths about the RateMyProfessor site. The general feeling is that the self-selecting students tend to be disgruntled students. My opinion is that the opposite is the case where more of the raters are supportive rather than critical of the professors rate on that site. This to a certain extent is because the most popular professors on RateMyProfessor tend to be the easiest grading professors.

There's a marked shortage of responses from graduate students on RateMyProfessor. My opinion here is that most the graduate programs generally only give A or B grades where grades below a B are almost rare. This results in fewer disgruntled students in graduate programs.

My experience is that an easy grader is more apt to be a tenured professor than a non-tenured professor. The reason is that non-tenured professors often get rated down if they are perceived as having low academic standards. But there are wide variances in grading reputations among tenured and non-tenured faculty. A few professors like Harvey Mansfield at Harvard give two grades. One is the often higher grade that goes on the official transcript and the other arrives in a sealed envelope telling the student the grade he or she should have earned in the course. This does not make Harvey especially popular among his colleagues, although he quite popular among students.

The Panic of 1907 gave birth to modern financial forecasting. The tools back then were crude and unreliable. Are they much better today?
"The Dismal Art Economic forecasting has become much more sophisticated in the decades since its invention. So why are we still so bad at it?" by  James Surowiecki, Democracy Journal, Issue #32, Spring 2014 ---

We live in an age that’s drowning in economic forecasts. Banks, investment firms, government agencies: On a near-daily basis, these institutions are making public predictions about everything from the unemployment rate to GDP growth to where stock prices are headed this year. Big companies, meanwhile, employ sizable planning departments that are supposed to help them peer into the future. And the advent of what’s often called Big Data is only adding to the forecast boom, with the field of “predictive analytics” promising that it can reveal what we’ll click on and what we’ll buy.

At the dawn of the twentieth century, by contrast, none of this was true. While Wall Street has always been home to tipsters and shills, forecasting was at best a nascent art, and even the notion that you could systematically analyze the U.S. economy as a whole would have seemed strange to many. Economics, meanwhile, had only recently established a foothold in the academy (the American Economic Association, for instance, was founded in 1885), and was dominated by Progressive economists whose focus was more on reforming capitalism via smart regulation rather than on macroeconomic questions.

Walter Friedman’s Fortune Tellers is the story of how, over the course of two decades, this all changed. In a series of short biographical narratives of the first men to take up forecasting as a profession, Friedman shows how economic predictions became an integral part of the way businessmen and government officials made decisions, and how the foundations were laid for the kind of sophisticated economic modeling that we now rely on. Friedman, a historian at Harvard Business School, also shows how the advent of forecasting was coupled with (and fed on) a revolution in the way information about the economy was gathered and disseminated. Relative to today, of course, the forecasters Friedman writes about were operating in the dark, burdened with fragmentary data and unreliable numbers. But the work they did, flawed as it was, would eventually make it possible for decision-makers to get a much better picture of how the economy as a whole was doing. And even as it’s easy to see how the forecasts of today are much more rigorous and complex than those of Friedman’s pioneers, that only makes one question seem all the more salient: Why, if forecasting has come so far, did so many people fail to predict the crash of 2008 and the disastrous downturn that followed?

It’s fitting that Friedman’s book starts with a financial crisis, namely the Panic of 1907, which he argues in some sense gave birth to modern forecasting. That panic began with a failed attempt by the financier Heinze brothers, Otto and Augustus, to corner the copper market. The collapse of their scheme drove institutions that had lent money to the Heinzes into bankruptcy and created a climate of fear that led to massive runs on New York banks and a series of bank failures, even as the Dow fell by almost half. More important, the crisis on Wall Street spilled over into the real economy, with industrial production taking a major hit and economic growth falling sharply. The crisis was shocking both because major panics were thought to be a thing of the past, and because the economic consequences of the crash seemed out of all proportion to the causes. And while there had obviously always been people on Wall Street trying to predict the future, the panic fueled people’s appetite for any information that could insulate them from market turmoil.

That appetite was also growing because the capital markets were booming—stocks, for instance, went from a niche investment at the turn of the century to, by the 1920s, being a crucial part of the way companies raised money (and investors made money). And the upheaval in the real economy—which was benefiting from an explosion in innovation that brought Americans widespread electrification, the automobile, the telephone, the phonograph, the movie camera, and the airplane—gave people “an insatiable demand for information that could shed light on future economic conditions.”

The first person to really meet that demand, Friedman argues, was Roger Babson, who began putting out regular forecasts about the U.S. economy after 1907. Babson was the most obvious huckster of Friedman’s subjects. He was given to faddish beliefs. He was a serial entrepreneur who came up with a host of odd inventions, and he was peculiarly obsessed with Isaac Newton. And his view of the business cycle, which he saw as oscillating regularly between boom and bust, was both simplistic and informed by a highly moralistic notion of excess and punishment. But Babson did two important things, Friedman argues. First, he solidified the notion that there was something called the “U.S. economy” whose different parts were connected to one another in systematic ways. And he popularized the idea that economies were subject to business cycles, about which coherent prognostications could be made. These seem, today, like obvious insights. But at the time, Friedman argues, they were quite new. As he writes, “The economic booms and busts of the previous century were typically ascribed not to any sort of regular business cycle but to fate, the weather, political schemes, divine Providence, or unexpected shocks like new tariffs or earthquakes.”

Babson’s analysis of those cycles was dubious at best (though his emphasis on the way emotions affect economic activity anticipated, in a crude way, both Keynes and today’s behavioral economists). But Babson’s forecasts, which were built on the idea that historical patterns repeated themselves, reflected an enormous amount of data-gathering work. He collected and published statistics about industrial production, immigration, imports and exports, commodity prices, and so on, and eventually began constructing time-series charts that were meant to forecast the performance of the economy as a whole. This was both a conceptual advance and a practical one: Much of this information had never been collected in one place before.

The same can be said, only more so, of the data offered to subscribers by John Moody, founder of Moody’s Investors Service and Moody’s Analyses Publishing, a ratings agency. If Babson was ultimately interested in the macro-economy, Moody’s focus was much more on the micro-economy, because he believed that getting a real picture of what was happening required you to look in detail at what the country’s big companies were doing. The challenge was that companies at the time typically didn’t disclose all that much information about their performance, and certainly didn’t do so in any kind of systematic fashion. Most companies didn’t even issue annual reports, and investors were perennially left at sea, wondering just what was happening to their money. Moody played a key role in changing this state of affairs. He began by publishing a regular manual that contained detailed financial information about almost 2,000 industrial companies. Then he moved from statistics to prediction, starting a ratings agency in 1909 that advised investors about the creditworthiness of bond-issuing companies. One of Moody’s key ideas was that capitalism is all about future value, so that the value of an asset in the present really consists of how much income it can generate in the future (discounted by the relevant interest rate). The need to forecast is, in that sense, built into the system.

The problem, of course, is figuring out just what variables you have to take into account in order to make an accurate prediction. The crucial insight of the economist Irving Fisher, a contemporary of Babson and Moody, was that one of the most important variables was the supply of money. Fisher believed that there was a tight relation between changes in the money supply and what happened in the real economy, and while he overestimated and oversimplified the relationship between the two factors, you can see in his work the roots of what we now call monetarism (including the notion that having the Federal Reserve print money is a smart response to a recession). Fisher’s reputation as a forecaster was famously destroyed in 1929, when he said on the eve of the Great Crash that stocks had reached a “permanently high plateau.” (Babson, by contrast, called the crash in advance.) But of all the people Friedman writes about, Fisher is the most interesting thinker—his theories about the role of money and, later, his ideas about the relationship between debt and financial crises continue to seem relevant even today.

Fisher is also important because he learned from failure. One of the great perils of being a forecaster, particularly one who enjoys early success, is that it becomes difficult to recognize one’s blind spots and easy to stay fixed in one way of seeing the world. Philip Tetlock, a professor of psychology and management at Penn who conducted a 20-year study asking almost 300 experts to forecast political events, has shown that while experts in the political realm are not especially good at forecasting the future, those who did best were, in the terminology he borrowed from Isaiah Berlin, foxes as opposed to hedgehogs—that is, the best forecasters were those who knew lots of little things rather than one big thing. Yet forecasters are more likely to be hedgehogs, if only because it’s easier to get famous when you’re preaching a simple gospel. And hedgehogs are not good, in general, at adapting to changed conditions—think of those bearish commentators who correctly predicted the bursting of the housing bubble but then failed to see that the stock market was going to make a healthy recovery. Fisher, by contrast, reacted to his failure to see the 1929 crash coming by looking at what he had missed, and in doing so came to focus on the importance of debt, and the way an overhang of debt can hold back an economy as it tries to get out of recession, an idea that has gained new popularity as economists try to explain the relative weakness of our current recovery. (While Fisher was discredited as a forecaster, his reputation as an economist was eventually revived.)

What Fisher didn’t give up on, though, was the notion that a couple of key variables could really explain the business cycle. But as Friedman explains, that kind of formulaic approach was gradually eclipsed by one that relied on a more complicated blend of empirical data, historical analysis, and mathematical modeling, an approach pioneered by the economist Wesley Mitchell, founder of the National Bureau of Economic Research. (C.J. Bullock and Warren Persons, who founded an institution called the Harvard Economic Service and whom Friedman also discusses, relied on similar techniques.) Mitchell’s attitude, as Friedman puts it, was more “circumspect” than those of previous forecasters, more cognizant of the limitations of forecasting, and more aware that while history may rhyme, it does not repeat itself. Mitchell’s work was, in many ways, the forerunner of today’s best forecasts. And it was also important because it marked the entrance of the government into the forecasting business, since in the 1920s Mitchell worked closely with Herbert Hoover, who was then secretary of commerce. This may seem surprising, given Hoover’s reputation, but he was a fierce advocate for the idea that the government should collect and disseminate as much economic information as possible, believing that if businesspeople had access to accurate forecasts about the economy, they would make smarter decisions that would help mitigate the excesses of the boom-bust cycle.

Continued in article


The limits of mathematical and statistical analysis of big data
From the CFO Journal's Morning Ledger on April 18, 2014

The limits of social engineering
Writing in
 MIT Technology Review, tech reporter Nicholas Carr pulls from a new book by one of MIT’s noted data scientists to explain why he thinks Big Data has its limits, especially when applied to understanding society. Alex ‘Sandy’ Pentland, in his book “Social Physics: How Good Ideas Spread – The Lessons from a New Science,” sees a mathematical modeling of society made possible by new technologies and sensors and Big Data processing power. Once data measurement confirms “the innate tractability of human beings,” scientists may be able to develop models to predict a person’s behavior. Mr. Carr sees overreach on the part of Mr. Pentland. “Politics is messy because society is messy, not the other way around,” Mr. Carr writes, and any statistical model likely to come from such research would ignore the history, politics, class and messy parts associated with humanity. “What big data can’t account for is what’s most unpredictable, and most interesting, about us,” he concludes.

Jensen Comment
The sad state of accountancy and many doctoral programs in the 21st Century is that virtually all of them in North America only teach the methodology and technique of analyzing big data with statistical tools or the analytical modeling of artificial worlds based on dubious assumptions to simplify reality ---

The Pathways Commission sponsored by the American Accounting Association strongly proposes adding non-quantitative alternatives to doctoral programs but I see zero evidence of any progress in that direction. The main problem is that it's just much easier to avoid having to collect data by beating purchased databases with econometric sticks until something, usually an irrelevant something, falls out of the big data piñata.

"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics Science"
Bob Jensen Jensen
February 19, 2014
SSRN Download: 

From the CFO Journal's Morning Ledger on April 30, 2014

Accounting class actions were flat last year
Just 47 accounting class actions were filed against companies in 2013, nearly matching the 46 in 2012, according to a report from Cornerstone Research, but that could change as regulators increase their focus on accounting fraud,
CFOJ’s John Kester reports. The SEC is actively “looking for certain patterns that might be an indication of fraud,” said Laura Simmons, a senior adviser at Cornerstone.

Jensen Comment
The depth of Francine's depression is unknown at this point.

From the CFO Journal's Morning Ledger on April 30, 2014

EBay Inc. took the unusual step of bringing home the bulk of its foreign-held cash, and triggered a $3 billion tax bill in the process
That marks a sharp contrast from Apple Inc., which went
back to bond markets
for $12 billion to fund its buybacks and dividends even though it is sitting on $150 billion in cash, much of it overseas.

EBay’s chief financial officer, Bob Swan, said, “We are an acquisitive company and we need to ensure we have the resources available to capitalize on targets that become available,” though he was quick to add that no large U.S.-based acquisitions are currently being announced. Still, $3 billion is a considerable hit for M&A plans that are merely speculative. Other companies have successfully tapped foreign cash for acquisitions without triggering a U.S. tax bill by focusing on foreign targets.

For Apple, the bond sale was its second in a year, and most of it went for less than a percentage point above comparable Treasurys. Other companies this year that have sold debt with a mind to turn around and hand that cash to shareholders include Gilead Science Inc. and AutoZone Inc. The low yields on the Apple debt show that investors remain confident in the iPhone maker’s prospects, but not all investors jumped at the sale. Evercore Wealth Management portfolio manager Brian Pollak said his firm sat out the offering, as it expects rates on Treasurys to rise this year as the economy improves.


Only Three Companies Remain That Have AAA Credit Ratings

From the CFO Journal's Morning Ledger on April 24, 2014

Good morning. The top-notch triple-A credit rating has largely vanished from corporate America, but nobody seems to care. Only three companies—Microsoft Corp., Johnson & Johnson and Exxon Mobil Corp.—are still rated triple-A, compared with 60 companies in 1980, report CFOJ’s Vipal Monga and Mike Cherney.

Automatic Data Processing Inc. lost the top credit rating April 10, and since then its stock has risen 0.6%. “There was no fallout,” said ADP Chief Financial Officer Jan Siegmund. “We feel that double-A is a perfectly fine rating.”

ADP isn’t alone in holding that view. Historically low interest rates and economic growth have dulled investors’ fear of default, and many see little difference between double-A and triple-A. As a result, analysts and investors say shareholders of triple-A firms are paying for a privilege that offers little reward. Johnson & Johnson says it likes the highest rating because it gives it “greater flexibility in managing our business, virtually unlimited access to the capital markets and the most favorable interest rates to finance our business,” and there are certainly investors who believe that those companies remain the best bet in times of stress. But some analysts say that maintaining the highest ratings is a costly endeavor, and perhaps not worth the price.


From the CFO Journal's Morning Ledger on April 24, 2014

Wal-Mart outlines compliance reforms. Wal-Mart
Chief Compliance Officer Jay Jorgensen chose to split its compliance and legal operations into separate departments as part of its overhaul of compliance programs
, reports Compliance Week’s Matt Kelly. That change was one of many outlined in the company’s Global Compliance Program Report, which gives a detailed review of changes made so far. Mr. Jorgensen also sought to bring consistency to compliance efforts which often vary dramatically between regional divisions.

Jensen Comment
In his shortened lifetime Will Yancey had great vision on the future of compliance careers. To prove it he made a lot of money consulting in one aspect of compliance testing. He became an expert in stratified sampling as applied to a wide variety of compliance issues ---

Will also became my hero for his open sharing of knowledge.

From the CPA Newsletter on April 24, 2014

IAASB proposes requirements for auditors
The International Auditing and Assurance Standards Board has a proposal for an enhanced International Standard on Auditing. It clarifies what information should be included in corporate annual reports as well as introduces new auditor reporting responsibilities. Under the proposed standard, auditors would have to evaluate other information with the audited financial statements to ensure there are no material inconsistencies between the information and the auditor's knowledge of the company gathered during the audit. In general, an auditor has to be watchful for signs that the other information is materially misstated. Accounting Today (4/23)

Bob Jensen's threads on audit firm professionalism ---

College Textbook Inflation Is Out Of Control ---

Our friend David Albrecht is mentioned in the article below.

"For Professors, Online Presence Brings Promise (and Peril) Many say they must be careful about what they write on the unedited Internet," by Seth Zweifler, Chronicle of Higher Education, April 21, 2014 ---

Jensen Comment
Although I never post to social networks like LinkedIn, Facebook, or Twitter I do have a presence on the Web in my three blogs and my enormous two Websites. Some people might view it as a problem if their email increases with comments and requests for favors from strangers around the world. Because of legal liability for online consulting and my not wanting to answer homework of students, I generally beg off most requests for favors unless they are simple requests such as where to find something on the Web.

I did notice that a lot of my pictures get reproduced without attribution. But I don't get upset about this.
My pictures are free to the world at

I have found where portions of my writings get used without attribution. But I just won't let myself get upset over this --- certainly not to a point where I stop writing for the Web.

By the way I don't join in the social networks like LinkedIn, Facebook, or Twitter because in my busy world there are only 24 hours in each day. I let the Web crawlers like Google and Yahoo find the stuff I post to my Websites.

Harvard Business School professor Clayton Christensen has predicted that as many as half of the more than 4,000 universities and colleges in the U.S. may fail in the next 15 years. The growing acceptance of online learning means higher education is ripe for technological upheaval, he has said.
Clayton Christensen, Harvard Business School

"Small U.S. Colleges Battle Death Spiral as Enrollment Drops," by Michael McDonald, Bloomberg News, April 14, 2014 ---

Jensen Comment
It's not quite as bad when so many bookstores (e.g., Borders) were literally wiped out by online technology, but the outlook is not good for small private universities with small endowments and less than spectacular success in a niche market.

Having said this, the small private universities that have substantial endowments will probably carry on but with little or no growth and somewhat lowered admission standards. What they will continue to offer is maturation living and learning opportunities beyond the classroom. For example, the University of Texas has a dorm complex with two zip codes and a population bigger than most small towns in the USA. Nearby Trinity University with nearly a billion dollar endowment has wonderful dormitories for around 2,000 students that is much more appealing to parents concerned about college life for their children leaving the nest for the first time.

At Trinity there are many opportunities to participate in sports without having to be professional quality like is virtually required to participate in varsity athletics at the University of Texas. At Trinity there is a much greater likelihood of participating in the performing arts (like theatre and orchestras) relative to the University of Texas. And in the classrooms the basic courses will have less than 35 students whereas many lecture courses at the University of Texas will have 500 to over 1,000 in a lecture hall.

Heavily endowed small schools like Trinity can afford expensive faculty who teach very few students in wonderful facilities like science labs.

My point is that the endowed small colleges and universities will probably carry on in the face of competition from distance education and lower priced state-supported universities and colleges. And they will perhaps do so without having to offer distance education themselves except in cases where an occasional course is outsourced to cover gaps in curricula.

See below for outsourcing to Oplerno for such purposes.

If it grows, this may be a great opportunity for genuine experts who are good at online teaching and want to "own" and "promote"  their own courses
"New Adjunct-Focused Venture Wins Approval to Offer Courses," by Goldie Blumenstyk, Chronicle of Higher Education, April 16, 2014 ---

A new for-profit education organization, designed to give more academic and financial control to the adjunct instructors who teach its online courses, has just won approval from the state of Vermont to operate.

The Vermont State Board o