New Bookmarks
Year 2014 Quarter 3:  July 1 - September 30 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

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

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

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

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

 

Choose a Date Below for Additions to the Bookmarks File

2014

September 30

August 31

July 31

 

September 30, 2014

 

Bob Jensen's New Bookmarks for September 1-30, 2014

Bob Jensen at Trinity University 


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

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

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

 

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

 

All my online pictures --- http://www.cs.trinity.edu/~rjensen/PictureHistory/

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:  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2398296 




FASB YouTube Channel ---
https://www.youtube.com/channel/UC2F_Y5aSRjoo9cr1ALcDisg
Unless otherwise announced, all FASB meetings are held in the Board room at the FASB offices and are video or audio
webcast
on the FASB website and the FASB YouTube channel. If you have any questions, contact the FASB at 203 847-0700.


Here Are 10 Things That Are Right With America --- http://www.businessinsider.com/whats-right-with-america-2014-8?op=1


Johnston Reviews Kleinbard's We Are Better Than This --- http://taxprof.typepad.com/taxprof_blog/2014/09/johnston-reviews.html


Practice Questions in Finance ---
http://www.modeloff.com/questions/


"How U.S. Colleges Are Screwing Up Their Books, in Three Charts," by Ira Sager, Bloomberg Businessweek, September 24, 2014 ---
http://www.businessweek.com/articles/2014-09-24/us-colleges-and-universities-are-still-in-deep-financial-trouble

Video: Harvard’s High Pay Ruffles Feathers of Alumni ---
http://www.businessweek.com/videos/2014-08-28/harvard-s-high-pay-ruffles-feathers-of-alumni

A New Teaching Structure Could Make College More Affordable. Why Don't More Schools Adopt It? ---
http://www.businessweek.com/articles/2014-06-19/a-new-teaching-structure-could-make-college-more-affordable-dot-why-dont-more-schools-adopt-it

"Small U.S. Colleges Battle Death Spiral as Enrollment Drops," by Michael McDonald, Bloomberg News, April 14, 2014 ---
http://www.bloomberg.com/news/2014-04-14/small-u-s-colleges-battle-death-spiral-as-enrollment-drops.html?cmpid=yhoo.inline

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

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


From the Global CPA Newsletter on September 24, 2014

Begin preparing for the CGMA exam with an online practice test
http://r.smartbrief.com/resp/geasBYbWhBCJtWdgCidKtxCicNnKyJ
To help CGMA designation candidates prepare for the upcoming CGMA exam, a practice exam is now available. The practice exam illustrates the case study exam's key features, demonstrates the questions' format and allows candidates to gain familiarity of the exam's functionality. Visit CGMA.org to learn more, and download both pre-seen materials and exam answers.


From Two Former Presidents of the AAA
"Some Methodological Deficiencies in Empirical Research Articles in Accounting." by Thomas R. Dyckman and Stephen A. Zeff , Accounting Horizons: September 2014, Vol. 28, No. 3, pp. 695-712 ---
http://aaajournals.org/doi/full/10.2308/acch-50818   (not free)

This paper uses a sample of the regression and behavioral papers published in The Accounting Review and the Journal of Accounting Research from September 2012 through May 2013. We argue first that the current research results reported in empirical regression papers fail adequately to justify the time period adopted for the study. Second, we maintain that the statistical analyses used in these papers as well as in the behavioral papers have produced flawed results. We further maintain that their tests of statistical significance are not appropriate and, more importantly, that these studies do not—and cannot—properly address the economic significance of the work. In other words, significance tests are not tests of the economic meaningfulness of the results. We suggest ways to avoid some but not all of these problems. We also argue that replication studies, which have been essentially abandoned by accounting researchers, can contribute to our search for truth, but few will be forthcoming unless the academic reward system is modified.

This Dyckman and Zeff paper is indirectly related to the following technical econometrics research:
"The Econometrics of Temporal Aggregation - IV - Cointegration," by David Giles, Econometrics Blog, September 13, 2014 ---
http://davegiles.blogspot.com/2014/09/the-econometrics-of-temporal.html 

Common Accountics Science and Econometric Science Statistical Mistakes ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsScienceStatisticalMistakes.htm

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:  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2398296 


9 Cool Siri Tricks You Never Knew Existed ---
http://www.businessinsider.com/siri-tricks-you-never-knew-existed-2014-9


How to Mislead With Statistics
"Here's The Hamilton Project's chart of median lifetime earnings by college major, in millions of dollars," by Peter Jacobs, Business Insider, September 29, 2014 ---
http://www.businessinsider.com/college-majors-biggest-lifetime-earnings-2014-9 
Also at http://www.businessinsider.com/college-majors-biggest-lifetime-earnings-2014-9#ixzz3EnxrY7jG

Full Report --- http://www.hamiltonproject.org/papers/major_decisions_what_graduates_earn_over_their_lifetimes/

Jensen Comment
These purportedly are only undergraduates without graduate degrees such as physicians, lawyers, MBAs, CPAs, etc.

It's not clear how the study dealt with five year programs in engineering, accounting, etc. Most of the programs ranked in this article have popular five-year programs. Presumably it excludes graduates who earned masters degrees.

The study also does not indicate how it deals with subsequent tracking into higher management. For example, more CEOs and CFOs tend track more from accounting, finance, marketing, management, and economics undergraduates and graduates than from engineering and science. Were those people included in the study even though they are no longer working in the discipline where they graduated?

The study does not deal with unemployment prospects for students who do not get advanced degrees. For example chemistry, physics, and earth science majors have relatively poor prospects unless they obtain doctorates. Does the study exclude physics undergraduates who also obtained physics doctoral degree? Presumably those science graduates who did move on to graduate school have more of an unemployment problem than nurses and lower-paid majors like elementary school teachers.

Also there's a limitation of using medians that ignore standard deviations and kurtosis. For example, students might be attracted to professions having the most fewer but much higher salary prospects like finance and information technology with a lower-end skewness bulge and prospects of enormous salaries.


Cool Senator Taxpayer Billing Tricks You Never Knew Existed --- Yeah Right!
"O Audit, Where Art Thou?" by Matt Vespa, Townhall, September 12, 2014 ---
http://townhall.com/tipsheet/mattvespa/2014/09/12/o-audit-where-art-thou-n1891215?utm_source=thdaily&utm_medium=email&utm_campaign=nl

Senator Landrieu is certainly not the worst expense abuser in the U.S. Senate
Sen. Mary Landrieu Ranks 25th in Taxpayer Money Spent on Travel (Shreveport Times) ---
http://www.taxpayer.net/media-center/article/sen.-mary-landrieu-ranks-25th-in-taxpayer-money-spent-on-travel-shreve

U.S. Congressional Salaries and Expenses ---
http://www.senate.gov/CRSReports/crs-publish.cfm?pid=%270E%2C*PL[%3D%23P%20%20%0A

Rules That Were Made to be Broken
Baucus Resolution Sets Rules for Senators
---
http://www.finance.senate.gov/newsroom/ranking/release/?id=4fc8730b-02b5-44db-8113-5e61244ee927

Politicians:  Are the only people in the world who CREATE problems and then campaign against them ---
http://www.the-office.com/545.htm

"How much do Canadian Senators spend on travel? Explore two years of expenses," by Stuart A. Thompson and Bill Curry, Globe and Mail, February 13, 2014 ---
http://www.theglobeandmail.com/news/politics/interactive-how-much-do-senators-spend-on-travel-explore-two-years-of-expenses/article8651002/
Also see http://www.huffingtonpost.ca/jj-mccullough/senate-scandal-duffy-brazeau_b_4151851.html


"Clark Redux: Recovery From Accountants for Disallowed Tax Shelter Constitutes Nontaxable Recovery of Capital," by Paul Caron, TaxProf Blog, September 13, 2014 ---
http://taxprof.typepad.com/taxprof_blog/2014/09/clark-redux-.html


LIBOR --- http://en.wikipedia.org/wiki/Libor
Also scroll own to this term at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#L-Terms

"Why LIBOR Manipulation Poses an Ongoing Risk:  A finance professor explains what it will take to fix the problem," by Darrell Duffie, Stanford University Graduate School of Business, September 2014 --- Click Here
http://www.gsb.stanford.edu/news/headlines/darrell-duffie-why-libor-manipulation-poses-ongoing-risk?utm_source=Stanford+Business+Re%3AThink&utm_campaign=154e75cce1-Stanford_Business_Re_Think_Issue_46_9_21_2014&utm_medium=email&utm_term=0_0b5214e34b-154e75cce1-70265733&ct=t%28Stanford_Business_Re_Think_Issue_46_9_21_2014%29


From the CPA Newsletter on September 26, 2014

Public pension finances still deteriorating ---
http://r.smartbrief.com/resp/gejoBYbWhBCJvbevCidKtxCicNMfcm?format=standard

Unfunded liabilities of American public pension funds are continuing to grow despite reforms and rising returns on investments, Moody's Investors Service said in a report. Unfunded liabilities tripled to about $1.99 trillion between 2004 and 2012, the firm said. Pensions & Investments (free access for SmartBrief readers) (9/25)
 

Illinois is Dead Last in Terms of Job Creation
Welfare Sign-ups Beat Job Creation 2-to-1 in Illinois ---
http://townhall.com/tipsheet/sarahjeanseman/2014/09/16/50-percent-more-people-on-food-stamps-in-il-than-working-n1892634?utm_source=thdaily&utm_medium=email&utm_campaign=nl


From the CPA Newsletter on September 23, 2014

Whistleblower to receive record $30M payout from SEC ---
 http://r.smartbrief.com/resp/gdxnBYbWhBCJsPwKCidKtxCicNwlfr?format=standard
The Securities and Exchange Commission plans a record whistleblower payment of more than $30 million to an informant from outside the U.S. who provided valuable, original information that led to a successful enforcement action.
Journal of Accountancy online (9/22)

"Is Whistleblowing an Ethical Practice?" by Steven Mintz, Ethics Sagte, September 30, 2014 ---
http://www.ethicssage.com/2014/09/is-whistleblowing-an-ethical-practice.html

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


"California Community Colleges Will Start Offering 4-Year Degrees," by Sharon Bernstein, Reuters via Business Insider, September 30, 2014 ---
http://www.businessinsider.com/r-california-community-colleges-to-offer-baccalaureate-degrees-2014-9


From the CPA Newsletter on September 23, 2014

PCAOB: Auditors still responsible for evaluating going concern ---
http://r.smartbrief.com/resp/gdxnBYbWhBCJsPwCCidKtxCicNbECS?format=standard
New U.S. GAAP requirements for management to assess going concern do not change public company auditors' existing responsibilities to evaluate a company's ability to continue as a going concern under Public Company Accounting Oversight Board standards, the PCAOB said Monday.
Journal of Accountancy online (9/22)

Teaching Case on Going Concern Rules
From The Wall Street Journal Accounting Weekly Review on September 26, 2014

A Summary of Key Provisions of FASB's ASU on Going Concern
by: Deloitte Risk Journal Editor
Sep 19, 2014
Click here to view the full article on WSJ.com
 

TOPICS: Accounting Standard Update, FASB, Going Concern

SUMMARY: The Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-15 on August 27, 2014, providing guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if "conditions or events raise substantial doubt about [the] entity's ability to continue as a going concern." The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted.

CLASSROOM APPLICATION: This article is appropriate for an update to the topic of going concern.

QUESTIONS: 
1. (Introductory) What is FASB? What is its purpose? What is an Accounting Standard Update?

2. (Advanced) What is "going concern"? Why is it important? Why does GAAP require disclosure?

3. (Advanced) What does the new FASB Accounting Standard Update require? What guidance does it offer?

4. (Advanced) What benefits does the new ASU offer to users of the financial statements? How is the information relevant. Please explain how this information could be used?

5. (Advanced) What are the details of the ASU regarding disclosure thresholds, time horizon, and disclosure content?
 

Reviewed By: Linda Christiansen, Indiana University Southeast

"A Summary of Key Provisions of FASB's ASU on Going Concern." by: Deloitte Risk Journal Editor, The Wall Street Journal, September 19, 2014 ---
http://deloitte.wsj.com/riskandcompliance/2014/09/19/fasb-issues-asu-on-going-concern/

The Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2014-15ą on August 27, 2014, providing guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued.˛ An entity must provide certain disclosures if “conditions or events raise substantial doubt about [the] entity’s ability to continue as a going concern.” The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted.

Following is background on the ASU and a summary of its key provisions, excerpted from Deloitte’s Heads Up newsletter. The newsletter contains decision flowcharts adapted from the ASU that summarize going-concern disclosure considerations (see Appendix A) and a comparison of the ASU to current PCAOB auditing literature (see Appendix B).

Background

Under U.S. GAAP, an entity’s financial reports reflect its assumption that it will continue as a going concern until liquidation is imminent.ł However, before liquidation is deemed imminent, an entity may have uncertainties about its ability to continue as a going concern. Because there are no specific requirements under current U.S. GAAP related to disclosing such uncertainties, auditors have used applicable auditing standards⁴ to assess the nature, timing, and extent of an entity’s disclosures, which has resulted in diversity in practice. The ASU is intended to alleviate that diversity.

The ASU extends the responsibility for performing the going-concern assessment to management and contains guidance on (1) how to perform a going-concern assessment and (2) when going-concern disclosures would be required under U.S. GAAP. The FASB believes that requiring management to perform the assessment will enhance the timeliness, clarity, and consistency of related disclosures and improve convergence with IFRSs (which emphasize management’s responsibility for performing the going-concern assessment). However, the time horizon for the assessment (look-forward period) and the disclosure thresholds under U.S. GAAP and IFRSs will continue to differ.

Editor’s Note: As a result of the ASU’s extension of the going-concern assessment to management, entities may need to implement and document their processes and controls, which would require the use of judgment. The costs of complying with the ASU are likely to be greatest for entities that are not financially strong since such entities would need to perform a more robust evaluation.

Key Provisions of the ASU

Disclosure Thresholds

An entity would be required to disclose information about its potential inability to continue as a going concern when “substantial doubt” about its ability to continue as a going concern exists, which the ASU defines as follows:

“Substantial doubt about an entity’s ability to continue as a going concern exists when conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued . . . . The term probable is used consistently with its use in Topic 450 on contingencies.”

In applying this disclosure threshold, entities would be required to evaluate “relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued.” Reasonably knowable conditions or events are those that can be identified without undue cost and effort.

The ASU provides examples of events that suggest that an entity may be unable to meet its obligations. These examples, which are consistent with those in auditing literature,⁵ include the following:

1. “Negative financial trends, for example, recurring operating losses, working capital deficiencies, negative cash flows from operating activities, and other adverse key financial ratios.

2. Other indications of possible financial difficulties, for example, default on loans or similar agreements, arrearages in dividends, denial of usual trade credit from suppliers, a need to restructure debt to avoid default, noncompliance with statutory capital requirements, and a need to seek new sources or methods of financing or to dispose of substantial assets.

3. Internal matters, for example, work stoppages or other labor difficulties, substantial dependence on the success of a particular project, uneconomic long-term commitments, and a need to significantly revise operations.

4. External matters, for example, legal proceedings, legislation, or similar matters that might jeopardize the entity’s ability to operate; loss of a key franchise, license, or patent; loss of a principal customer or supplier; and an uninsured or underinsured catastrophe such as a hurricane, tornado, earthquake, or flood.”

Editor’s Note: Under current auditing standards, an auditor is required to evaluate the adequacy of going-concern disclosures after concluding that there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period. The ASU uses a “probable” threshold to define substantial doubt (see the definition above), whereas the auditing literature does not explicitly define substantial doubt and instead provides qualitative factors for entities to consider. The ASU’s basis for conclusions notes that some auditors and stakeholders view the existing substantial-doubt threshold as a lower threshold than the new “probable” threshold (with one academic study noting that a threshold of between 50 and 70 percent is used for substantial doubt, and certain comment letter responses indicating that a threshold of greater than 70 percent is used for probable). As a result, there could be fewer going-concern disclosures under the ASU than there are under current guidance.

Time Horizon

In each reporting period (including interim periods), an entity would be required to assess its ability to meet its obligations as they become due for one year after the date the financial statements are issued. In the following illustration, adapted from a handout for the FASB’s May 7, 2014, meeting, the look-forward period is illustrated and compared to current auditing standards:

Continued in article

 


From the CPA Newsletter on September 16, 2014

Coalition asks House to hold off on XBRL measure ---
http://r.smartbrief.com/resp/gdbyBYbWhBCJnXpECidKtxCicNekGa?format=standard
The Data Transparency Coalition is asking the House of Representatives to delay a vote on a measure that would soften Securities and Exchange Commission requirements that companies file financial statements using eXtensible Business Reporting Language. The group is asking that the House reconsider some provisions of the Promoting Job Creation and Reducing Small Business Burdens Act because the coalition says these provisions would hurt the larger goals of transparency and accountability in financial reporting. Accounting Today (9/15)

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


Teachers Erasing the Wrong Answers and Filling in the Right Answers for Bigger Pay Raises
"Here's How An Alleged Cheating Ring That Could Send Atlanta Teachers To Prison Was Uncovered," by Erin Fuchs, Business Insider, September 25, 2014 ---
http://www.businessinsider.com/how-was-the-atlanta-cheating-scandal-was-uncovered-2014-9 


"Here's A Quick Guide To The Startling New Scandal Involving Goldman And The New York Fed," by Elena Holodny, Business Insider, September 26, 2014 ---
http://www.businessinsider.com/propublica-fed-goldman-sachs-recordings-2014-9 

. . .

The report is driven by secret recordings that suggest that the NY Fed regulators were too soft on Goldman and therefore possibly other banks as well.

The recordings come from former New York Fed bank examiner Carmen Segarra, who was fired after just seven months on the job.

The article is nearly 6,000 words long, and the podcast runs for over an hour.

Continued in article

"Why the Fed Is So Wimpy," by Justin Fox, Harvard Business Review Blog, September 26, 2014 ---
http://blogs.hbr.org/2014/09/why-the-fed-is-so-wimpy/?utm_source=Socialflow&utm_medium=Tweet&utm_campaign=Socialflow

Regulatory capture — when regulators come to act mainly in the interest of the industries they regulate — is a phenomenon that economists, political scientists, and legal scholars have been writing about for decades.  Bank regulators in particular have been depicted as captives for years, and have even taken to describing themselves as such.

Actually witnessing capture in the wild is different, though, and the new This American Life episode with secret recordings of bank examiners at the Federal Reserve Bank of New York going about their jobs is going to focus a lot more attention on the phenomenon. It’s really well done, and you should listen to it, read the transcript, and/or read the story by ProPublica reporter Jake Bernstein.

Still, there is some context that’s inevitably missing, and as a former banking-regulation reporter for the American Banker, I feel called to fill some of it in. Much of it has to do with the structure of bank regulation in the U.S., which actually seems designed to encourage capture. But to start, there are a couple of revelations about Goldman Sachs in the story that are treated as smoking guns. One seems to have fired a blank, while the other may be even more explosive than it’s made out to be.

In the first, Carmen Segarra, the former Fed bank examiner who made the tapes, tells of a Goldman Sachs executive saying in a meeting that “once clients were wealthy enough, certain consumer laws didn’t apply to them.”  Far from being a shocking admission, this is actually a pretty fair summary of American securities law. According to the Securities and Exchange Commission’s accredited investorguidelines, an individual with a net worth of more than $1 million or an income of more than $200,000 is exempt from many of the investor-protection rules that apply to people with less money. That’s why rich people can invest in hedge funds while, for the most part, regular folks can’t. Maybe there were some incriminating details behind the Goldman executive’s statement that alarmed Segarra and were left out of the story, but on the face of it there’s nothing to see here.

The other smoking gun is that Segarra pushed for a tough Fed line on Goldman’s lack of a substantive conflict of interest policy, and was rebuffed by her boss. This is a big deal, and for much more than the legal/compliance reasons discussed in the piece. That’s because, for the past two decades or so, not having a substantive conflict of interest policy has been Goldman’s business model. Representing both sides in mergers, betting alongside and against clients, and exploiting its informational edge wherever possible is simply how the firm makes its money. Forcing it to sharply reduce these conflicts would be potentially devastating.

Maybe, as a matter of policy, the United States government should ban such behavior. But asking bank examiners at the New York Fed to take an action on their own that might torpedo a leading bank’s profits is an awfully tall order. The regulators at the Fed and their counterparts at the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation correctly see their main job as ensuring the safety and soundness of the banking system. Over the decades, consumer protections and other rules have been added to their purview, but safety and soundness have remained paramount. Profitable banks are generally safer and sounder than unprofitable ones. So bank regulators are understandably wary of doing anything that might cut into profits.

The point here is that if bank regulators are captives who identify with the interests of the banks they regulate, it is partly by design. This is especially true of the Federal Reserve System, which was created by Congress in 1913 more as a friend to and creature of the banks than as a watchdog. Two-thirds of the board that governs the New York Fed is chosen by local bankers. And while amendments to the Federal Reserve Act in 1933 shifted the balance of power in the Federal Reserve System from the regional Federal Reserve Banks (and the New York Fed in particular) to the political appointees on the Board of Governors in Washington, bank regulation continues to reside at the regional banks. Which means that the bank regulators’ bosses report to a board chosen by … the banks.

Then there’s the fact that Goldman Sachs is a relative newcomer to Federal Reserve supervision — it and rival Morgan Stanley only agreed to become bank holding companies, giving them access to New York Fed loans, at the height of the financial crisis in 2008. While it’s a little hard to imagine Goldman choosing now to rejoin the ranks of mere securities firms, and even harder to see how it could leap to a different banking regulator, it is possible that some Fed examiners are afraid of scaring it away.

All this is meant not to excuse the extreme timidity apparent in the Fed tapes, but to explain why it’s been so hard for the New York Fed to adopt the more aggressive, questioning approach urged by Columbia Business School Professor David Beim in a formerly confidential internal Fed report that This American Life and ProPublica give a lot of play to. Bank regulation springs from much different roots than, say, environmental regulation.

So what is to be done? A lot of the classic regulatory capture literature tends toward the conclusion that we should just give up — shut down the regulators and allow competitive forces to work their magic. That means letting businesses fail. But with banks more than other businesses, failures tend to be contagious. It was to counteract this risk of systemic failure that Congress created the Fed and other bank regulators in the first place, and even if you think that was a big mistake, they’re really not going away.

Continued in article

Also see
http://www.bloombergview.com/articles/2014-09-26/the-secret-goldman-sachs-tapes

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


From the CPA Newsletter on September 30, 2014

Auditors need to focus on fair-value-measurement controls, survey finds  ---
http://r.smartbrief.com/resp/gerJBYbWhBCJxryrCidKtxCicNiXUe?format=standard

Fair-value-measurement audit deficiencies made up about 25% of audit deficiencies found by the Public Accounting Oversight Board in 2012, according to the third annual "Survey of Fair Value Audit Deficiencies" by Acuitas, a valuation and litigation consultancy company. The survey recommends auditors "focus on assessing risk and test internal controls relating to fair value measurements in business combinations and testing goodwill and other intangible assets for impairment." Accounting Today (9/29)

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


From the CPA Newsletter on September 30, 2014

Reports of corporate fraud reach 9-year high ---
http://r.smartbrief.com/resp/gerJBYbWhBCJxrygCidKtxCicNeOnE?format=standard  
The percentage of fraud-related incidents reported by whistleblowers on telephone and Web-based hotlines rose to 26.31% last year from 23.6% in 2012, according to compliance technology provider The Network's 2014 Corporate Governance and Compliance Hotline Report. The figure represents a nine-year high since the first Corporate Fraud Index was released. The report also noted that retaliation against people reporting fraud rose, although slightly, to 2.2% last year from 2% the previous year. Compliance Week/The Filing Cabinet blog (9/26)

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


"Bookkeeper banged to rights over tax:  A Surrey bookkeeper has been jailed for committing tax fraud, following an investigation by HMRC ," by Oliver Griffin, Economia, September 25, 2014 ---
http://economia.icaew.com/news/september-2014/bookkeeper-banged-to-rights-over-tax 

Judith Auclair was sentenced to 15 months in prison after it was discovered she falsely claimed Ł17,254 in tax refunds.

In addition, Auclair also stole a further Ł4,927 of tax and NIC contributions, which had been wrongly deducted from other employees’ wages.

Auclair was able to do this because she regularly submitted PAYE tax returns on her employer’s behalf, and added false employee details to the company’s payroll and claimed they were owed tax refunds. These refunds were paid into her personal bank account.

John Cooper, HMRC’s assistant director of criminal investigation, said, “Judith Auclair abused her position of trust as a bookkeeper by stealing from her employers and UK taxpayers and continued to do so even after she was arrested.

“Committing tax fraud is a serious criminal offence and yesterday’s result shows that HMRC will take action against anyone doing so.”

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


In a “coordinated effort,” officials at the University of North Texas manipulated payroll spending to receive extra money ($75 million) from the state, says a report from the Texas state auditor ---
http://chronicle.com/blogs/ticker/jp/u-of-north-texas-took-more-than-75-million-extra-from-state-auditor-finds?cid=at&utm_source=at&utm_medium=en

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


The Eurozone's youth unemployment rate is eye-watering. Figures out Tuesday put the rate at 23.3% this August ---
http://www.businessinsider.com/europes-youth-unemployment-at-233-2014-9


Question
What accredited law schools offer online tax LL.M. degrees?

Answer (these degrees typically take three years to complete for full-time students unless students already have law degrees)
http://taxprof.typepad.com/taxprof_blog/2014/09/nine-law-schools.html

Selected Online Masters of Accounting and Masters of Taxation Programs ---
http://www.trinity.edu/rjensen/CrossBorder.htm#MastersOfAccounting
Time between enrollment and graduation depends a great deal on meeting prerequisite requirements in accountancy, and business core (including economics and ethics). I'm biased in recommending such degrees from only AACSB-accredited business programs, although not necessarily AACSB-accredited accounting programs. Some of the most prestigious AACSB-accredited universities do not have the added accountancy specialized accreditation.

From US News in 2014
Best Online Degree Programs (ranked)
---
http://www.usnews.com/education/online-education

Best Online Undergraduate Bachelors Degrees --- http://www.usnews.com/education/online-education/bachelors/rankings
Central Michigan is the big winner

Best Online Graduate Business MBA Programs --- http://www.usnews.com/education/online-education/mba/rankings
Indiana University is the big winner

Best Online Graduate Education Programs --- http://www.usnews.com/education/online-education/education/rankings
Northern Illinois is the big winner

Best Online Graduate Engineering Programs --- http://www.usnews.com/education/online-education/engineering/rankings
Columbia University is the big winner

Best Online Graduate Information Technology Programs ---
http://www.usnews.com/education/online-education/computer-information-technology/rankings
The University of Southern California is the big winner

Best Online Graduate Nursing Programs --- http://www.usnews.com/education/online-education/nursing/rankings
St. Xavier University is the big winner

US News Degree Finder --- http://www.usnews.com/education/online-education/features/multistep-oe?s_cid=54089
This beats those self-serving for-profit university biased Degree Finders

US News has tried for years to rank for-profit universities, but they don't seem to want to provide the data.

Bob Jensen's threads on online education and training programs ---
http://www.trinity.edu/rjensen/CrossBorder.htm


Jensen Comment
College Factual has a ranking of good accounting schools, but this is not the list I would create for the top schools.

USA Today publicizes an accounting program ranking from College Factual (never heard of that outfit)
http://college.usatoday.com/2014/09/01/top-10-u-s-colleges-for-an-accounting-degree/

Top Accounting Undergraduate Programs Ranked by US News ---
http://colleges.usnews.rankingsandreviews.com/best-colleges/rankings/business-accounting

  1. University of Texas--Austin
     
  2. University of Illinois--Urbana-Champaign
     
  3. Brigham Young University--Provo

  4. University of Notre Dame

  5. University of Southern California

  6. University of Michigan--Ann Arbor

  7. New York University

  8. Ohio State University--Columbus

 

Jensen Comment
My own listing of the Top 10 would be much closer to the US News rankings. But I would replace one of the above with Cornell University largely because Cornell is in the Ivy League. Being in the Ivy League does not make its undergraduate program better, but being in the Ivy League means that students accepted into the university in general are in a league of their own.

Note that to sit for the Uniform CPA Examination, accounting graduates must have 150 credits. This means they must take a fifth year, and most accounting graduates do so by getting a masters degree in accountancy or taxation rather than an MBA degree. Most states have require accounting courses to sit for the CPA examination that are not available in MBA programs. MBA programs that have accounting concentrations require that students have a set of undergraduate accounting courses.

I should also note that when I scan the listings of employees who have been promoted to partnerships in the largest accounting firms (often much less than 10% of the initial hires by the firms) the alma maters of those new partners are more often than not graduated from much lower-ranked among accounting education programs. The reason is that exceptional accounting graduates can be found in any accounting program, and often the top partner prospects are highly motivated and talented students from lesser-known universities who can compete with graduates in the top universities.


What are the top-ranked accounting graduate programs? 
It all depends on what programs and what criteria are used for the rankings

Top Accounting MBA in Accounting Specialty Programs Ranked by US News
http://grad-schools.usnews.rankingsandreviews.com/best-graduate-schools/top-business-schools/accounting-rankings

University of Texas—​Austin (McCombs)
Austin, TX

University of Pennsylvania (Wharton)
Philadelphia, PA

University of Illinois—​Urbana-​Champaign
Champaign, IL

University of Chicago (Booth)
Chicago, IL

University of Michigan—​Ann Arbor (Ross)
Ann Arbor, MI

Stanford University
Stanford, CA

Brigham Young University (Marriott)
Provo, UT

University of Southern California (Marshall)
Los Angeles, CA

New York University (Stern)
New York, NY

University of North Carolina—​Chapel Hill (Kenan-​Flagler)
Chapel Hill, NC

See all 30 Ranked Schools

Jensen Comment
In some ways the above rankings of MBA programs with accounting specialties are misleading. There are some top-ranked MBA programs above that should probably be avoided for graduates seeking careers as CPAs in auditing and taxation. All the programs above have accounting Ph.D. programs, but the above top rankings for MBA in accounting specialties are not necessarily the top accounting doctoral programs.

Students seeking to pass the CPA examination and aiming for careers in auditing and taxation should probably seek out masters of accounting or masters of taxation programs rather than MBA programs. Brigham Young University (Marriott) has a top-ranked masters of accounting program but no accounting doctoral program. The University of Texas, the University of Michigan, the University of Southern California, the University of North Carolina, and the University of Illinois have top masters of accounting programs, MBA programs, and Ph.D. programs.

Stanford University and the University of Chicago have prestigious MBA programs but do not have masters of accounting programs. Students seeking to pass the CPA examination and searching for careers in auditing and taxation would not normally choose Stanford or Chicago.

Top Masters of Accounting Programs

Best Master’s in Accounting Schools According to Professors

Here are the top ranked master’s in accounting programs in 2013 according to the Public Accounting Report:
1. University of Texas
2. Brigham Young University
3. University of Illinois
4. University of Notre Dame
5. University of Mississippi
6. University of Southern California
7. University of Michigan
8. Texas A&M University
9. Indiana University
10. University of North Carolina

The Public Accounting Report ranks accounting programs annually based on a survey of accounting professors at over 200 colleges and universities.

Accounting Schools with the Highest 2013 First-Time CPA Pass Rate

1. Brigham Young University
2. University Georgia
3. University of Wisconsin Madison
4. University of Michigan Ann Arbor
5. University of Notre Dame
6. Texas A&M University
7. University of Virginia
8. University of Texas Austin
9. Lehigh University
10. University of North Carolina Chapel Hill

These rankings are for large schools with at least 60 candidates for the CPA exam. For all candidates in the United States, the first-time pass rate was 54.6% in 2013 according to Nasba.org. You can find more information and specific statistics on the 2013 NASBA Uniform CPA Examination Candidate Performance report.

 

 

If we were to just rank the accounting doctoral programs in terms of research performance the rankings might be quite different from the rankings shown above for MBA specialty  and Master of Accounting Programs ---
http://www.byuaccounting.net/rankings/univrank/rankings.php


"Accounting Doctoral Programs:  A Multidimensional Description," by Amelia A. Baldwin, Carol E. Brown and BradS. Trinkle.
http://www.academia.edu/532495/Accounting_Doctoral_Programs_A_Multidimensional_Description
Advances in Accounting Education: Teaching and Curriculum Innovations, Volume 11, 101–128Copyright r 2010 by Emerald Group Publishing Limited
ISSN: 1085-4622/doi:10.1108/S1085-4622(2010)000001100

Accounting doctoral programs have been ranked in the past based on publishing productivity and graduate placement. This chapter provides descriptions of accounting doctoral programs on a wider range of characteristics. These results may be particularly useful to doctoral applicants as well as to doctoral program directors, accreditation bodies, and search committees looking to differentiate or benchmark programs. They also provide insight into the current shortage of accounting doctoral graduates and future areas of research. Doctoral programs can be differentiated on more variables than just research productivity and initial placement. Doctoral programs vary widely with respect to the following characteristics: the rate at which doctorate sare conferred on women and minorities, the placement of graduates according to Carnegie classification, AACSB accreditation, the highest degree awarded by employing institution (bachelors, masters, doctorate),

Continued in article

 

Table 1. Accounting Doctoral Graduates by Program, 1987–2006(Size; 3,213 Graduates).
http://www.academia.edu/532495/Accounting_Doctoral_Programs_A_Multidimensional_Description
Note that I corrected the ranking for North Texas State from the original table
The average of 161 per year has been declining. In 2013 there were only 136 new accounting doctorates in the USA.
Rank Program    # Rank Program    # Rank Program     # Rank  Program     #
01 Texas A&M 87 25 Arkansas 46 49 Columbia 31 73 MASS 17
02 Texas 78 26 Florida State 45 50 Drexel 31 74 Syracuse 16
03 Illinois 72 27 Indiana 45 51 Northwester 31 74 Wash St. Louis 15
04 Mississippi 70 28 Tennessee 44 52 Cornell 30 75 Central Florida 14
05 Va. Tech 70 29 Texas Tech 44 53 Purdue 29 76 Cincinnati 14
06 Kentucky 69 30 Georgia St. 43 54 Minnesota 28 77 Cleveland St 14
07 Wisconsin 69 31 Colorado 42 55 Oklahoma 28 78 MIT 13
08 North Texas 65 32 NYU 42 56 Penn 28 79 Fla Atlantic 12
09 Arizona 64 33 Oklahoma St 42 57 Rochester 28 80 UCLA 12
10 Georgia 64 34 Rutgers 42 58 So. Illinois 28 81 Union NY 10
11 Penn State 63 35 Alabama 41 59 Oregon 27 82 Texas Dallas 09
12 Nebraska 61 36 Va. Common 40 60 Texas Arling. 27 83 Tulane 08
13 Arizona St. 60 37 Memphis 38 61 Utah 27 84 Duke 6
14 Houston 60 38 Stanford 37 62 Baruch 25 85 Jackson St. 6
15 Michigan St. 60 39 Chicago 36 63 Connecticut 24 86 Fla. Internat. 4
16 Washington U 55 40 Missouri 36 64 Carnegie M. 23 87 SUNY Bing. 4
17 So. Carolina 54 41 No. Carolina 36 65 Geo. Wash 23 88 Yale 4
18 Michigan 52 42 So. Calif. 36 66 Wash. State 23 89 Ga. Tech 3
19 La. Tech 51 43 UC Berkeley 35 67 Kansas 22 90 Rice 3
20 Ohio State U 50 44 Boston Univ 35 68 SUNY Buffalo 21 91 Tx. San Anton. 3
21 Kent State 49 45 Maryland 35 69 St. Louis 21 93 Miami 2
22 LSU 49 46 Pittsburg 35 70 CWRU 19 94 Cal. Irvine 1
23 Florida 47 47 Iowa 34 71 Harvard 19 95 Hawaii 1
24 Mississippi St 47 48 Temple 34 72 South Fla. 19 96 Vanderbilt 1

Jensen Comment
For years prior to 1987 and years subsequent to 2006 you can see the data by years in a sequence of the Accounting Faculty Directories by James Hasselback. For example, for years 1995-current go to
http://www.jrhasselback.com/AtgDoct/XDocChrt.pdf
For years prior to 1995 you have to go to earlier editions of Jim's directories.

There are some minor discrepancies. For example, the above table shows 3 graduates for Rice after 1987 whereas Jim Hasselback shows no graduates at Rice after 1995. I did not check for all the discrepancies between the two data sources. Rice no longer has a doctoral program in accountancy. There are several newer (small) programs such as the one at the University of Texas at San Antonio.

Nearly all of the long-time programs declined dramatically in output from their pre-1995 years, especially the University of Illinois, the University of Washington. the University of Georgia, the University of Arkansas, Indiana University, and Michigan State University. The Texas state universities kept a more steady average although output varies year-to-year.

In past few years since 2010 Arizona, Arizona State, Rutgers, Penn State, Texas, Texas A&M, Stanford, and Mississippi maintained an average of three or more per year. Chicago in recent years has quite a few in the program but has an average of less than two graduates per year. This suggests to me that there might be more ABDs dammed up at the University of Chicago than in most other doctoral programs. UT Dallas and Illinois are also suspect in this regard ---
http://www.jrhasselback.com/AtgDoct/XDocChrt.pdf

 

The Baldwin, Brown, and Trinkle paper goes on to discuss trends over time in the leading programs and much much more. I did not quote data from their paper that was not previously provided by Jim Hasselback at
http://www.jrhasselback.com/AtgDoct/XDocChrt.pdf

A few of the many important revelations in the BBT study that might be noted for 1987-2006:

There is much more detailed information available in this study at
http://www.academia.edu/532495/Accounting_Doctoral_Programs_A_Multidimensional_Description

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


Jacques Derrida --- http://en.wikipedia.org/wiki/Jacques_Derrida

Philosopher Jacques Derrida Interviews Jazz Legend Ornette Coleman: Talk Improvisation, Language & Racism (1997) ---
http://feedproxy.google.com/~r/OpenCulture/~3/XXDa2VKekcY/jacques-derrida-interviews-ornette-coleman.html?utm_source=feedburner&utm_medium=email


"Gender Ratios at Top PhD Programs in Economics," by Galina Hale and Tali Regev, April 8, 2013 ---
http://econ.tau.ac.il/papers/foerder/2013-10.pdf

The growing concern for the under-representation of women in science and engineering has prompted an interest in the mechanisms driving the share of women in these fields, and in the effect that the gender diversity of the faculty has on the share of female students. Interestingly, some universities are more successful than others in recruiting and retaining women, and in particular female graduate students. Why is this the case? This paper explores the uneven distribution of female faculty and graduate students across ten of the top U.S. PhD programs in economics. We find that the share of female faculty is correlated with the share of female graduate students and show that this correlation is causal. We instrument for the share of female faculty by using the number of male faculty leaving the department as well as the simulated number of leavings. We find that a higher share of female faculty has a positive effect on the share of female graduate students graduating 6 years later.

Women are under represented in science and engineering. In 2010, Men outnumbered women in nearly every science and engineering field in college, and in some fields, women earned only 20 percent of bachelor’s degrees, with representation declining further at the graduate level (Hill et al., 2010). In economics, women constituted 33 percent of the graduating PhD students, and only 20 percent of faculty at PhD granting institutions (Fraumeni, 2011). Women in economics have been shown to have different career paths than men and to be promoted less (Kahn, 1993; Dynan and Rouse, 1997; McDowell et al., 1999; Ginther and Kahn, 2004). Focusing on the progression of women through the academic ladder, most research has failed to fully account for the effect that successful women in the field have had on the entrance and success of other women. More specifically, the gross effect that women faculty have on the share of female students have not been fully explored. In this study we address this gap in the literature and focus on the causal relationship between the share of female faculty in top economics departments and the share of graduating female PhD students.

Continued in article

Jensen Comment
Women seem to be making greater strides in Ph.D. achievements in economics that in many other science fields. It would seem that they could make greater strides in fields like computer science where males dominate to a much higher degree.

In economics at the undergraduate and masters levels in North America there are significantly more male graduates than female graduates. Having more female teachers tends to increase the number of undergraduate majors according to the above study.

In accounting at the undergraduate and masters levels in North America there are significantly more women graduates than men, and the large CPA firms hire more women than men. There is a possible glass ceiling, however, in terms of newly-hired CPA-firm women who eventually become partners. That is a very complicated story for another time other than to note that the overwhelming majority of newly-hired males and females in large CPA firms willingly leave those firms after gaining experience and very extensive training.

Many of those departures go to clients of CPA firms where the work tends to have less travel and less night/weekend duties as well as less stress. In my opinion most accounting graduates who go to work for CPA firms did not ever intend to stay with those CPA firms after gaining experience and training. This accounts for much of the turnover, especially in large CPA firms. Turnover has an advantage in that it creates more entry-level jobs for new graduates seeking experience and extensive training.

Bob Jensen's threads on the history of women in the professions ---
http://www.trinity.edu/rjensen/bookbob2.htm#Women

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


Collateralized Debt Obligation --- http://en.wikipedia.org/wiki/Collateralized_debt_obligation

New Rules for CDOs
"Statement at Open Meeting: Asset-Backed Securities Disclosure and Registration," by Commissioner Kara M. Stein, SEC, August 27, 2014 ---
http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370542772431#.VBgvYBZS7rx

I begin my remarks by echoing others and commending the work of the team that has been working on this rule, including Rolaine Bancroft, Hughes Bates, Michelle Stasny, Kayla Florio, Heather Mackintosh, Silvia Pilkerton, Robert Errett, Max Rumyantsev, and Kathy Hsu. 

Heather and Sylvia have been working on the data tagging and preparing EDGAR to accept this new data.  This is no small endeavor. 

I want to give a special thank you to Paula Dubberly, who retired last year from the SEC and is in the audience today.  She has been a champion for investors through her leadership on asset-backed securities regulation from the development of the initial Reg AB proposal through the rules that are being considered today.

This rule is an important step forward in completing the mandated Dodd-Frank Act rulemakings.[1]  The financial crisis revealed investors’ inability to actually assess pools of loans that had been sliced and diced, sometimes multiple times, by being securitized, re-securitized, or combined in a dizzying array of complex financial instruments.  The securitization market was at the center of the financial crisis.  While securitization structures provided liquidity to nearly every sector in the U.S. economy, they also exposed investors to significant and non-transparent risks due to poor lending practices and poor disclosure practices. 

As we now know, offering documents failed to provide timely and complete information for investors to assess the underlying risks of the pool of assets.[2]   Without sufficient and accurate loan level details, analysts and investors could not gauge the quality of the loans – and without an ability to distinguish the good from the bad, the secondary market collapsed.

Congress responded and required the Commission to promulgate rules to address a number of weaknesses in the securitization process.[3]

Six years after the financial crisis, the securitization markets continue to recover.  While certain asset classes have rebounded, others continue to struggle.

The rule the Commission issues today partially addresses the Congressional mandate.  In effect, today’s rules provide investors with better information on what is inside the securitization package.  The rules today do for investors what food and drug labeling does for consumers – provide a list of ingredients.

This rule also addresses certain critical flaws that became apparent in the securitization process, including a dearth of quality information and insufficient time to make informed assessments of the underlying investments.  This rule is an important step toward providing investors with tools and data to better understand the underlying risks and appropriately price the securities. 

There are several important and laudable aspects of today’s rule that merit specific mentioning.

First, the rule requires the underlying loan information to be standardized and available in a tagged XML format to ensure maximum utility in analysis.[4]   As noted in the Commission’s 2010 Proxy Plumbing Release: “If issuers provided reportable items in interactive data format, shareholders may be able to more easily obtain information about issuers, compare information across different issuers, and observe how issuer-specific information changes over time as the same issuer continues to file in an interactive format.”[5]  The same is true for underlying loan information.  Investors can unlock the value and efficiency that standardized, machine readable data allows. 

Today’s rule also improves disclosures regarding the initial offering of securities and significantly, for the first time, requires periodic updating regarding the loans as they perform over time.  This information will provide a more nuanced and evolving picture of the underlying assets in a portfolio to investors.

The rule also requires that the principal executive officer of the ABS issuer certify that the information in the prospectus or report is accurate.  These kinds of certifications provide a key control to help ensure more oversight and accountability.

As for the privacy concerns that prompted a re-proposal, the staff has worked hard to balance investor needs for loan level data with concerns that the data could lead to identification of individual borrowers.   I believe the rule achieves a workable balance between these two competing needs, while still providing invaluable public disclosure.

Finally, I believe that the new disclosure rule will provide investors with the necessary tools to see what is “under the hood” on auto loan securitizations.  In its latest report on consumer debt and credit, the Federal Reserve Bank of New York noted a recent spike in subprime auto lending.  As the report shows, although consumer auto debt balances have risen across the board, the real growth has been in riskier loans.[6] The disclosure and reporting changes that the Commission is adopting today will help investors see the quality of the loans in a portfolio and the performance of those loans over time. 

While today’s rules are an important step forward, more work needs to be done regarding conflicts of interest.   We now know that many firms who were structuring securitizations before the financial crisis were also betting against those same securitizations. 

In April 2010, the Commission charged the U.S broker-dealer of a large financial services firm for its role in failing to disclose that it allowed a client to select assets for an investment portfolio while betting that the portfolio would ultimately lose its value.  Investors in the portfolio lost more than $1 billion.[7]  

In October 2011, the Commission sued the U.S broker-dealer of a large financial services firm for among other things, selling investment products tied to the housing market and then, for their own trading, betting that those assets would lose money.  In effect, the firm bet against the very investors it had solicited.  An experienced collateral manager commented internally that a particular portfolio was “horrible.”  While investors lost virtually all of their investments in the portfolio, the firm pocketed over $160 million from bets it made against the securitization it created.[8]

The Dodd-Frank Act directed the Commission to adopt rules prohibiting placement agents, underwriters, and sponsors from engaging in a material conflict of interest for one year following the closing of a securitization transaction. Those rules were required to be issued by April 2011.[9]   The Commission initially proposed these rules in September 2011, and still has not completed them.[10]  We need to complete these rules as soon as possible, hopefully, by the end of this year.  These rules will provide investors with additional confidence that they are not being hoodwinked by those packaging and selling those financial instruments. 

Unfortunately, the Commission has put on hold its work to provide investors with a software engine to aid in the calculation of waterfall models.  Although the final rule provides for a preliminary prospectus at least three business days before the first sale, this is reduced from the proposal, which provided for a five-day period.   With only three days to conduct due diligence and make an investment determination, such a software engine could be an important and much needed tool for investors to use in analyzing the flow of funds.  Such waterfall models can help investors assess the cash flows from the loan level data.  We should return to this important initiative to provide investors with the mathematical logic that forms the basis for the narrative disclosure within the prospectus. 

The rule today impacts some significant sectors of the securitization market, however, the Commission should continue to work in making improvements that will provide investors with the disclosures they need regarding other asset classes, such as student loans, equipment loans and leases, and others as appropriate.      

Finally, it is vitally important that the Commission continue to work with our fellow regulators to establish important provisions for risk retention, also required by the Dodd-Frank Act. 

In conclusion, I appreciate the staff’s hard work both with me and my staff over these past several months.  But much work remains to be done.  I am committed to working with the staff and my fellow Commissioners to continue to move forward with Dodd-Frank rulemakings and specifically rulemakings to improve the strength and resiliency of securitization markets. 

A stable securitization market efficiently brings investors and issuers together.  Thus far, the return of capital to securitization markets has been disappointing, and I am hopeful that this rule and others that will follow will provide incentives for both issuers and investors to return with confidence to this once vibrant marketplace.     

The new tools and protections provided in today’s rule should help restore trust in a market that was at the heart of the worst financial crisis since the Great Depression.  But removing this black cloud is going to require continuing focus and effort from all of us. 

Thank you.  I
 


 

[1]           The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (July 21, 2010). 

 

[2]           See Sheila Bair, Bull by The Horns: Fighting to Save Main Street From Wall Street and Wall Street From Itself at 52 (2012) (investors in asset-backed securities lacked detailed loan level information and adequate time to analyze the information before making an investment decision). 
[3]           The Dodd-Frank Wall Street Reform and Consumer Protection Act imposed new requirements on the ABS process and required the Commission to promulgate rules in a number of areas.  Section 621 prohibits an underwriter, placement agent, initial purchaser, sponsor, or any affiliate or subsidiary of any such entity, of an asset-backed security from engaging in any transaction that would involve or result in any material conflict of interest with respect to any investor in a transaction arising out of such activity for a period of one year after the date of the first closing of the sale of the asset-backed security.  Section 941 requires the Commission, the Federal banking agencies, and, with respect residential mortgages, the Secretary of Housing and Urban Development and the Federal Housing Finance Agency to prescribe rules to require that a securitizer retain an economic interest in a material portion of the credit risk for any asset that it transfers, sells, or conveys to a third party. The chairperson of the Financial Stability Oversight Council is tasked with coordinating this regulatory effort.  Section 942 contains disclosure and Exchange Act reporting requirements for ABS issuers.  Section 943 requires the Commission to prescribe regulations on the use of representations and warranties in the ABS market.  Section 945 requires the Commission to issue rules requiring an asset-backed issuer in a Securities Act registered transaction to perform a review of the assets underlying the ABS, and disclose the nature of such review.   See also H.R. Rep. No. 4173 (2010) (Dodd-Frank Conference Report)

 

[4]           See Statement of Former Federal Reserve Governor Randall S. Kroszner at the Federal Reserve System Conference on Housing and Mortgage Markets, Washington, DC, December 4, 2008, available at  http://www.federalreserve.gov/newsevents/speech/kroszner20081204a.htm.

 

[5]           See Concept Release on the U.S. Proxy System, Exchange Act Release No. 62495 (July 14, 2010), available at http://www.sec.gov/rules/concept/2010/34-62495.pdf.

 

 

[6]           See Quarterly Report on Household Debt and Credit, August 14, 2014, Federal Reserve Bank of New York, available at http://www.newyorkfed.org/microeconomics/hhdc.html#/2014/q2.

  

[7]           See SEC v. Goldman, Sachs & Co. and Fabrice Tourre, 10 Civ. 3229 (BJ) (S.D.N.Y. filed April 16, 2010) available at http://www.sec.gov/litigation/complaints/2010/comp-pr2010-59.pdf.

 

[8]           See SEC v. Citigroup Global Markets, 11 Civ. 7387. (Rakoff, J.) (S.D.N.Y. filed Oct. 19, 2011)., available at http://www.sec.gov/litigation/complaints/2011/comp-pr2011-214.pdf.

 

 

[9]           Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, § 621, 124 Stat. 1376, 1632 (2010).

 

[10]          See SEC Release No. 34-65355, Prohibition against Conflicts of Interest in Certain Securitizations, September 19, 2011; SEC Release No. 34-65545, October 12, 2011 (extending the comment period from December 19, 2011 to January 13, 2012); and SEC Release No. 34-66058, October 12, 2011 (extending the comment period end date from January 13, 2012 to February 13, 2012).

 

Bob Jensen's threads on bad debts and loan losses ---
http://www.trinity.edu/rjensen/Theory02.htm#LoanLosses


"PwC to face U.S. lawsuit over Colonial Bank collapse - court ruling,"  by Dena Aubin, Reuters, September 10, 2014 ---
http://www.reuters.com/article/2014/09/10/pricewaterhousecoopers-colonial-bancgrp-idUSL1N0RB0VF20140910?irpc=932

Accounting firms PricewaterhouseCoopers and Crowe Horwath must face a lawsuit accusing them of professional malpractice and breach of contract for not catching a fraud that led to the 2009 collapse of Colonial Bank, a federal judge has ruled.

Filed in 2011 by the bank's parent Colonial BancGroup Inc and its trustee, the lawsuit accused the accounting firms of making "reckless and grossly inaccurate" reports to the bank's board, allowing Colonial to conceal a seven-year fraud that drained it of $1.8 billion.

In an opinion on Tuesday, U.S. District Judge Keith Watkins rejected the auditors' motion to dismiss the complaints, saying the bank made "plausible" claims that PwC and Crowe breached their contract with Colonial.

PwC was the public auditor for Montgomery, Alabama-based Colonial before its collapse, while Crowe provided internal audit services.

Caroline Nolan, a spokeswoman for PwC, said it audited Colonial "in full accordance with professional standards" and is confident it will prevail on the merits of the case, which will now go forward in district court.

Jan Lippman, a spokeswoman for Crowe, said the audit firm was hired to help Colonial with internal services but did not serve as the bank's internal auditor. She said the claims are without merit.

Rufus Dorsey, a lawyer for Colonial, said he was pleased with the decision.

The fraud, one of the biggest stemming from the last decade's mortgage crisis, went undetected until a raid by federal authorities on Aug. 3, 2009. One of the largest U.S. regional banks, Colonial was seized by regulators and filed for bankruptcy protection later that month.

PwC and Crowe are facing a similar lawsuit by the Federal Deposit Insurance Corporation, receiver for the bank. The 2012 FDIC lawsuit said that PwC and Crowe missed "huge holes" in Colonial's balance sheet caused by the diversion of money to now bankrupt Taylor Bean & Whitaker Mortgage Corp.

Lee Farkas, former chairman of Taylor Bean, was sentenced to 30 years in prison in 2011 for his role in the fraud. Several other officers of Taylor Bean and Colonial pleaded guilty for their roles in the scheme.

In Tuesday's opinion, Watkins rejected Crowe's argument that it had no professional duty to Colonial because it was not the bank's internal auditor but merely a provider of services, calling that a "reed thin" distinction.

He also rejected PwC's argument that the negligence claim against it must be dismissed because Colonial's own negligence played a role in its fate, saying that is a question of fact for a jury to decide.

The case is: The Colonial BancGroup Inc et al v PricewaterhouseCoopers et al, U.S. District Court, Alabama Middle District, No 11-cv-00746 (Reporting by Dena Aubin; Editing by Kevin Drawbaugh and Tom Brown)

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


Tax Foundation:  When Canada lowered its corporate income tax rate revenues increased ---
http://taxprof.typepad.com/taxprof_blog/2014/09/tax-foundation-burger-king.html

Laffer Curve ---
http://en.wikipedia.org/wiki/Laffer_curve


HP --- http://en.wikipedia.org/wiki/Hewlett-Packard

HP Autonomy --- http://en.wikipedia.org/wiki/HP_Autonomy#As_a_Hewlett_Packard_company:_2011_.E2.80.93_present

HP Purchases Autonomy for nearly $12 billion before massive accounting fraud was suspected ---
http://www.businessinsider.com/hp-autonomys-former-cfo-2014-8

"HP Believes This Email Shows Autonomy 'Covered Up' Lack Of Revenue In $11 Billion Deal," by Jim Edwards, Business Insider, September 5, 2014 ---
http://www.businessinsider.com/hp-says-autonomy-email-covered-up-lack-of-revenue-2014-9

HP has produced an email in court that it believes shows executives at Autonomy, a British software company, knew they were representing their revenues fraudulently when HP acquired their business for $11 billion.

The email, which comes from federal court documents filed by HP, was sent to Autonomy CEO Mike Lynch as the acquisition was going down. It appears to state the company "covered up" a revenue shortfall by booking sales from Bank of America that allegedly never materialized,* and that Autonomy's sales reps were chasing "imaginary deals."

The backstory stems from HP's purchase Autonomy for $11 billion in 2011. A year later, HP wrote off $8.8 billion and alleged Autonomy had improperly inflated its revenues and margins by $5 billion. HP called it fraud.

Autonomy execs deny HP's accusations, arguing that HP's mismanagement caused the revenue shortfall and the subsequent write-down. They say the email is being deliberately taken out of context. What the email doesn't say, Autonomy says, is that even though the exec who wrote it was complaining that revenue was coming in behind target, that revenue was nonetheless greater than the company's projections.

Here is the email, which was written by Autonomy CFO Sushovan Hussain:

Continued in article

HP Also Blames Deloitte
Read Deloitte's Glowing Audit Report o Autonomy
"H.P. Takes Huge Charge on ‘Accounting Improprieties’ by Michael J. De La Merced and Quentin Hardy, The New York Times, November 20, 2012 ---
http://dealbook.nytimes.com/2012/11/20/h-p-takes-big-hit-on-accounting-improprieties-at-autonomy/

Hewlett-Packard said on Tuesday that it had taken an $8.8 billion accounting charge, after discovering “serious accounting improprieties” and “outright misrepresentations” at Autonomy, a British software maker that it bought for $10 billion last year.

It is a major setback for H.P., which has been struggling to turn around its operations and remake its business.

The charge essentially wiped out its profit. In the latest quarter, H.P. reported a net loss of $6.9 billion, compared with a $200 million profit in the period a year earlier. The company said the improprieties and misrepresentations took place just before the acquisition, and accounted for the majority of the charges in the quarter, more than $5 billion.

Shares in H.P. plummeted nearly 11 percent in early afternoon trading on Tuesday, to less than $12.

Hewlett-Packard bought Autonomy in the summer of 2011 in an attempt to bolster its presence in the enterprise software market and catch up with rivals like I.B.M. The takeover was the brainchild of Léo Apotheker, H.P.’s chief executive at the time, and was criticized within Silicon Valley as a hugely expensive blunder.

Mr. Apotheker resigned a month later. The management shake-up came about one year after Mark Hurd was forced to step down as the head of H.P. after questions were raised about his relationship with a female contract employee.

“I’m both stunned and disappointed to learn of Autonomy’s alleged accounting improprieties,” Mr. Apotheker said in a statement. “The developments are a shock to the many who believed in the company, myself included. ”

Since then, H.P. has tried to revive the company and to move past the controversies. Last year, Meg Whitman, a former head of eBay, took over as chief executive and began rethinking the product lineup and global marketing strategy.

But the efforts have been slow to take hold.

In the previous fiscal quarter, the company announced that it would take an $8 billion charge related to its 2008 acquisition of Electronic Data Systems, as well as added costs related to layoffs. Then Ms. Whitman told Wall Street analysts in October that revenue and profit would be significantly lower, adding that it would take several years to complete a turnaround.

“We have much more work to do,” Ms. Whitman said at the time.

Hewlett-Packard continues to face weakness in its core businesses. Revenue for the full fiscal year dropped 5 percent, to $120.4 billion, with the personal computer, printing, enterprise and service businesses all losing ground. Earnings dropped 23 percent, to $8 billion, over the same period.

“As we discussed during our securities analyst meeting last month, fiscal 2012 was the first year in a multiyear journey to turn H.P. around,” Ms. Whitman said in a statement. “We’re starting to see progress in key areas, such as new product releases and customer wins.”

The strategic troubles have weighed on the stock. Shares of H.P. have dropped to less than $12 from nearly $30 at their high this year.

The latest developments could present another setback for Ms. Whitman’s efforts.

When the company assessed Autonomy before the acquisitions, the financial results appeared to pass muster. Ms. Whitman said H.P.’s board at the time – which remains the same now, except for the addition of the activist investor Ralph V. Whitworth – relied on Deloitte’s auditing of Autonomy’s financial statements. As part of the due diligence process for the deal, H.P. also hired KPMG to audit Deloitte’s work.

Neither Deloitte nor KPMG caught the accounting discrepancies. Deloitte said in a statement that it could not comment on the matter, citing client confidentiality. “We will cooperate with the relevant authorities with any investigations into these allegations,” the accounting firm said.

Hewlett-Packard said it first began looking into potential accounting problems in the spring, after a senior Autonomy executive came forward. H.P. then hired a third-party forensic accounting firm, PricewaterhouseCoopers, to conduct an investigation covering Autonomy sales between the third quarter 2009 and the second quarter 2011, just before the acquisition.

The company said it discovered several accounting irregularities, which disguised Autonomy’s actual costs and the nature of the its products. Autonomy makes software that finds patterns, data that is used by companies and governments.

H.P. said that Autonomy, in some instances, sold hardware like servers, which has higher associated costs. But the company booked these as software sales. It had the effect of underplaying the company’s expenses and inflating the margins.

“They used low-end hardware sales, but put out that it was a pure software company,” said John Schultz, the general counsel of H.P. Computer hardware typically has a much smaller profit margin than software. “They put this into their growth calculation.”

An H.P. official, who spoke on background because of ongoing inquiries by regulators, said the hardware was sold at a 10 percent loss. The loss was disguised as a marketing expense, and the amount registered as a marketing expense appeared to increase over time, the official said.

H.P. also contends that Autonomy relied on value-added resellers, middlemen who sold software on behalf of the company. Those middlemen reported sales to customers that didn’t actually exist, according to H.P.

H.P. also claims that that Autonomy was taking licensing revenue upfront, before receiving the money. That improper assignment of sales inflated the company’s gross profit margins.pfront, before receiving the money. It had the effect, the company said, of significantly bolstering Autonomy’s gross margin.

Continued in the article

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


Seeking a Gargantuan Refund
"Georgia woman files bogus $94 million tax return, gets arrested," by Deborah Hastings, NY Daily News, September 27, 2014 ---
http://www.nydailynews.com/news/national/ga-woman-cash-fake-94-million-tax-return-article-1.1955126

Brigitte Jackson is nabbed by cops in elaborate sting. She gets caught when she tries to cash fake state check for $94,323,148.

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


"Deloitte Posts Record Annual Revenue:  Professional Services Firm Says Revenue Grew 6.5% for Fiscal Year That Ended in May," by Erin McCarthy, The Wall Street Journal, September 24, 2014 ---
http://online.wsj.com/articles/deloitte-posts-record-annual-revenue-1411556590

Deloitte LLP said Wednesday that its member firms posted a record revenue of $34.2 billion in the fiscal year ended in May.

The professional services firm said its revenue growth of 6.5% for the year ended May 31 was driven by heightened demand for its services globally, though demand for consulting services was especially strong.

Its consulting services posted a 10% rise in revenue, followed by a 7.7% gain in tax and legal services and a 6.8% increase in financial advisory services.

Its Americas member firms led growth, with their aggregate revenue increasing 7.5% in local currency, largely driven by Latin America.

Europe, Middle East and Africa member firms' revenue grew 5.8%, while Asia-Pacific firms' revenue climbed 4.9%.

 


"SEC Is Looking Into Whether PIMCO Artificially Boosted Returns," by Matt Johnston and Lynette Lopez, Business Insider, September 23, 2014 ---
http://www.businessinsider.com/report-sec-probing-pimco-for-artifically-boosting-returns-2014-9

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


"AgFeed Agrees to Pay $18 Million to Settle SEC Accounting Fraud Case:  AgFeed, Which is in Chapter 11 Bankruptcy, Didn't Admit or Deny Allegations in Agreeing to Settle," by Michael Rapoport, The Wall Street Journal, September 15, 2014 ---
http://online.wsj.com/articles/agfeed-agrees-to-pay-18-million-to-settle-sec-accounting-fraud-case-1410815266

A Chinese animal-feed and hog-production company has agreed to pay $18 million to settle Securities and Exchange Commission allegations that it reported fake revenue to meet financial targets and boost its stock price, the SEC said Monday.

AgFeed Industries Inc. inflated its revenue by $239 million by creating fake invoices for the sale of feed and purported sales of hogs that didn't actually exist, among other methods, the SEC said when it filed suit against the company in March. The moves boosted the company's annual revenue over a 3 ˝-year period by amounts ranging from 71% to 103%, according to the SEC.

AgFeed, which is in Chapter 11 bankruptcy, didn't admit or deny the allegations in agreeing to the settlement. Five former AgFeed executives and a former audit committee chairman still face related SEC allegations, also filed in March.

A lawyer for AgFeed couldn't immediately be reached for comment.

AgFeed is now based in Tennessee, but it was based in China before it merged with a U.S. company in 2010 and spread its operations between the two countries. The company was delisted from the Nasdaq Stock Market in 2012 and filed for bankruptcy protection in 2013.

The case against AgFeed is among more than 20 the SEC has filed against U.S.-traded Chinese companies and their officials over alleged accounting fraud and other issues. Over the past few years, regulators, auditors and investors have raised questions about more than 170 U.S.-traded Chinese companies about their accounting and disclosure practices.

The $18 million settlement will be distributed to victims of the company's fraud, the SEC said. The settlement is subject to approval by both the Tennessee court where the SEC's lawsuit was filed and the Delaware court overseeing AgFeed's bankruptcy.

Jensen Comment
AgFeed's auditor Goldman Parks Kurland Mohidin LLP, a California CPA firm, failed to detect the fraud.

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

 


"Walmart Spokesman Resigns Over a Lie on His Résumé," Time Magazine, September 16, 2014 ---
http://time.com/3381672/wal-mart-spokesman-resigns-resume-david-tovar/?xid=newsletter-brief

David Tovar represented himself as a graduate of the University of Delaware but in fact had no such degree

In the middle of a probe over alleged corruption in its international division, Walmart has caught its own spokesman in a lie.

David Tovar, Walmart’s vice president of communications, and the company’s spokesperson as it responds to allegations that it violated the Foreign Corrupt Practices Act, has said he is leaving the job he has held since 2006, Bloomberg reports.

Continued in article

The above revelation reminds me of a 2007 case at MIT
"MIT dean of admissions confesses fraud, resigns," by Kimberly Chow Friday, Yale Daily News, April 27, 2007 ---
http://yaledailynews.com/blog/2007/04/27/mit-dean-of-admissions-confesses-fraud-resigns/

Marilee Jones, dean of admissions at the Massachusetts Institute of Technology in Cambridge, Mass., resigned Wednesday after university officials discovered she had fabricated her academic credentials.

Jones’ resume stated that she had earned degrees from Rensselaer Polytechnic Institute, Union College and Albany Medical College, but MIT administrators said these were all false claims. After receiving a phone call last week suggesting that the university investigate Jones’ credentials, MIT officials determined that Jones had misrepresented her academic record. Jones, whose resignation was effective immediately, worked at MIT for 28 years and had acted as dean of admissions since 1997.

Senior Associate Director of Admissions Stuart Schmill will act as interim director of admissions, and a search for a new dean of admissions will begin presently, MIT Dean for Undergraduate Education Daniel Hastings said in an e-mail to the MIT community Wednesday.

Jones issued a statement explaining that she had falsified her resume when she first applied for a lower-level position at the university.

Continued in article

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

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


Big Handcuffs for a Tiny Woman
"Accountant gets 3 years in prison for stealing more than $250,000 from Urban League," by W. Zachary Malinowski, Providence Journal, September 12, 2014  ---
http://www.providencejournal.com/news/courts/20140912-accountant-gets-3-years-in-prison-for-stealing-more-than-250000-from-urban-league.ece

A former accountant at Urban League of Rhode Island was sentenced on Friday to three years in prison and a 20-year suspended sentence for stealing more than $250,000 from the struggling non-profit.

Manivone Phimmahom, 42, of Cumberland, a small woman, was taken away in handcuffs. She must serve a year at the Adult Correctional Institutions followed by two years of home confinement.

Judge Jeffrey A. Lanphear also ordered her to pay $251,617 in restitution. Lanphear barred her from visiting any casinos and ordered her to undergo counseling for her “gambling addiction.”

The court proceeding took about five minutes.

On July 30, Phimmahom pleaded no contest to three felony charges; embezzlement over $100 and two counts of forgery and counterfeiting.

The Providence police investigated the case that was brought to their attention in March 2012. It was prosecuted by Special Assistant Attorney General Carole McLaughlin.


Mary Schneir, 42, of Bethel Park admitted that as office manager of the Karna C. Goldsmith CPA firm she shuffled money into and out of the accounts of three clients to hide funds she stole to pay off credit card debt and a mortgage ---
http://www.post-gazette.com/local/city/2014/09/10/Former-South-Hills-accounting-firm-office-manager-guilty-wire-fraud/stories/201409100169

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


W. Edwards Deming --- http://en.wikipedia.org/wiki/W._Edwards_Deming
As both an engineer and a statistician Deming made monumental contributions to quality control in manufacturing
He is idolized in many parts of the world, especially in Japan where he made huge contributions to quality of Japanese products

"The Deming Institute Launches a New Podcast Series," by Jim Martin, MAAW's Blog, September 4, 2014 ---
http://maaw.blogspot.com/2014/09/the-deming-institute-launches-new.html

Deming Podcast Series - http://blog.deming.org/2014/06/the-w-edward-deming-institute-launches-a-new-podcast-series/

Online Deming Resources - http://blog.deming.org/online-deming-resources/

MAAW's section devoted to Deming's work - http://maaw.info/DemingMain.htm

Many companies still seem to have the 7 deadly diseases and obstacles: lack of constancy of purpose, emphasis on short term profits, evaluation by performance reviews, merit ratings, management mobility, seeking examples to follow rather than developing solutions, and running the company on visible figures alone.

 


From the CPA Newsletter on September 12, 2014

The impact of fraud in fluctuating currencies
http://r.smartbrief.com/resp/gcveBYbWhBCJkbecCidKtxCicNHyUm?format=standard
Transactions involving the use and exchange of foreign currencies are one of the least-researched international fraud topics. While the topic is complex, the potential risks to companies make it crucial for corporate fraud fighters to educate themselves. FVS News (9/3)


From the CPA Newsletter on September 4, 2014

CPA practitioners rate their tax preparation software
http://r.smartbrief.com/resp/gbwLBYbWhBCJdbmnCidKtxCicNZefG?format=standard
Likes, dislikes, technical support and more -- CPA tax practitioners once again this year share their assessments of the leading programs for preparing and filing tax returns on behalf of clients. Extensive tables and analysis give users' responses for eight products. A link from the article provides free online access to still more detailed results and information. Journal of Accountancy print issue (9/2014)

Bob Jensen's neglected threads on accounting and tax software ---
http://www.trinity.edu/rjensen/Bookbob1.htm#SoftwareAccounting


Andrew was the last living son of Bernie Madoff
"Andrew H. Madoff, son of convicted financier, dies at 48," by Emily Langer, The Washington Post, September 3, 2014 ---
http://www.washingtonpost.com/national/andrew-h-madoff-son-of-convicted-financier-dies-at-48/2014/09/03/49c10da4-0e81-11e4-b8e5-d0de80767fc2_story.html

Bob Jensen's threads on Bernie Madoff are at
http://www.trinity.edu/rjensen/FraudRotten.htm#Ponzi


"The 25 Most Successful Stanford Business School Graduates," by Richard Feloni, Business Insider, September 9, 2014 ---
http://www.businessinsider.com/famous-stanford-business-school-students-2014-9?op=1 

Jensen Comment
When I was in Stanford's Graduate School of Business I took a course from a psychologist on the faculty of the GSB. For a series of years Professor Harrell had a grant from the U.S. Navy to collect a huge database on factors suspected, in combination, leading to "success." He claimed that the biggest factor was the problem of defining "success" --- what he called the Criterion Problem ---
http://www.trinity.edu/rjensen/Assess.htm#CriterionProblem

There's also a factor of advantage. The parents of Bill Gates could afford to send him to Harvard and help him with resources to buy the PC DOS system for $50,000 from IBM. How many really poor undergraduate students could have done as well or better if IBM gave away the PC DOS system in some sort of competitive contest?


"SEC Targets Timing of Insiders' Trade Notices:  Combined Financial Penalties From 33 Defendants Total $2.6 Million," by Jean Eaglesham and Susan Pulliam, The Wall Street Journal, September 10, 2014 ---
http://online.wsj.com/articles/sec-reaches-settlements-with-insiders-over-late-filings-1410367803?tesla=y&mod=djemCFO_h&mg=reno64-wsj

The Securities and Exchange Commission is stepping up its scrutiny of corporate executives who sell shares in their own companies, announcing a raft of cases Wednesday against insiders for allegedly breaking rules on disclosing stockholdings and trades.

The action, on an unprecedented scale for such offenses, is part of the "broken windows" strategy SEC Chairman Mary Jo White announced almost a year ago. She said the strategy—named for policing tactics used in New York that sought to reduce serious crime by not tolerating minor violations—will mean "even the smallest infractions" are pursued.

SEC investigators decided to step up their focus on insider transactions because of concerns about poor levels of compliance, enforcement chief Andrew Ceresney said. The agency filed civil charges Wednesday against 36 individuals and companies, with none of them involving a penalty of more than $375,000.

The charges Wednesday are part of the agency's broader look at how executives and other insiders manage stockholdings.

The Wall Street Journal in a page-one article in November 2012 examined instances in which corporate insiders made timely trades in the shares of their companies just before the release of potentially market-moving news. Following the article, federal prosecutors and the SEC began a probe of trading by seven corporate executives named in the article, the Journal previously reported. That investigation is continuing, according to people close to the situation. The executives either denied wrongdoing or declined to comment.

The Journal's analysis of executives' trading, based on regulatory filings by 20,237 executives who traded the week before their companies made news, found that 1,418 executives recorded average gains of 10% or more within a week. This was close to double the 786 who saw the stock they traded move against them that much.

For the cases announced Wednesday, the agency says it used algorithms to identify insiders who allegedly repeatedly broke securities rules requiring trades to be reported promptly.

The dozens of resulting enforcement actions included charges against 13 officers and directors, 15 shareholders—five individuals and 10 firms—and six companies. Apart from one case that is being contested, the actions were all settled, without admissions or denials of liability, for sanctions totaling $2.6 million.

Continued in article


"Audi Drives Innovation on the Shop Floor:  A carmaker’s automated body shop illustrates how German manufacturing is moving forward," by Russ Juskalian, MIT's Technology Review, September 16, 2014 ---
http://www.technologyreview.com/news/530691/audi-drives-innovation-on-the-shop-floor/?utm_campaign=newsletters&utm_source=newsletter-daily-all&utm_medium=email&utm_content=20140922

Jensen Comment
This and related robotics articles have important implications for cost accounting. Have cost accounting innovations kept pace with robotics manufacturing innovations? I have my doubts.

Video
"Seven Trends in Management Accounting," by Jim Martin, MAAW's Blog, February 18, 2014 ---
http://maaw.blogspot.com/2014/02/seven-trends-in-management-accounting.html

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


Bloomberg Terminal --- http://en.wikipedia.org/wiki/Bloomberg_Terminal
"Incredible Images Of Wall Street Trading Before The Bloomberg Terminal," by Elena Holodny, Business Insider, September 29, 2014 ---
 http://www.businessinsider.com/old-wall-street-trading-technology-2014-9


From the CFO Journal's Morning Ledger on September 29, 2014

After years of a successful tax strategy that saw its corporate tax rate dwindle, Apple Inc. is finding itself in the European Union’s crosshairs, and may need to take out its wallet to pay back billions of euros. EU regulators will publish on Tuesday their preliminary view that tax deals granted to Apple and Fiat SpA violated EU law, the WSJ’s Tom Fairless reports.  This marks the first time that the EU has elected to review corporate tax deals through the region’s state-aid rules.

Apple Chief Financial Officer Luca Maestri told the Financial Times, “There’s never been any special deal, there’s never been anything that would be construed as state aid.” But people involved in the case say preliminary findings of the investigation of the iPhone maker’s tax affairs in Ireland, where it has had a rate of less than 2%, will show that it benefited from illicit state aid after striking backroom deals.

The EU assault on tax deals for multinational firms comes at the same time that the Obama administration is working to limit the tax benefits for U.S. firms that engage in inversion deals to incorporate overseas—or, in the case of Burger King Worldwide Inc., just north of the border in Canada. Are your finance departments beginning to feel the ground shift under their feet when it comes to international tax? Send us a note and let us know.

 


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

U.S., Europe impasse on derivatives ---
http://online.wsj.com/articles/u-s-europe-hit-impasse-over-rules-on-derivatives-1411672215?mod=djemCFO_h
U.S. and European policy makers are at loggerheads over postcrisis efforts to coordinate on international rules for derivatives. Industry observers see the spat as retaliation for steps U.S. officials took earlier this year, when the U.S. Commodity Futures Trading Commission declined to grant full equivalence to European trading platforms for swaps.


Committee of Sponsoring Organizations of the Treadway Commission (COSO) ---
http://en.wikipedia.org/wiki/Committee_of_Sponsoring_Organizations_of_the_Treadway_Commission

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

Implementing COSO's Internal Control-Integrated Framework ---
http://deloitte.wsj.com/cfo/2014/09/26/implementing-cosos-internal-control-integrated-framework/

To unlock the value that can be achieved by adopting COSO's 2013 Internal Control-Integrated Framework, management should take a step back and evaluate how it is addressing the risks to its organization in light of its size, complexity, global reach and risk profile. Learn about leading internal control practices that may help address common challenges related to implementing the 2013 Framework, as well as perspectives on applying the framework for operational and regulatory compliance purposes.

Continue Reading Today's Article --- http://deloitte.wsj.com/cfo/2014/09/26/implementing-cosos-internal-control-integrated-framework/

Read More --- Deloitte Insights »http://deloitte.wsj.com/cfo/

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


From the CFO Journal's Morning Ledger on September 24, 2014

Fraudulent transactions surface in wake of Home Depot breach ---
http://online.wsj.com/articles/fraudulent-transactions-surface-in-wake-of-home-depot-breach-1411506081?mod=djemCFO_h
The transactions are rippling across financial institutions and, in some cases, draining cash from customer bank accounts. Criminals are using stolen card information to buy prepaid cards, electronics and even groceries, and financial institutions are stepping up efforts to block the transactions by rejecting them if they appear unusual. Fraud losses from existing bank accounts and credit-card accounts rose 45% last year to $16 billion, according to Javelin Strategy & Research.


Question
What are "hopscotch loans?"

From the CFO Journal's Morning Ledger on September 24, 2014

U.S. Treasury officials this week began their assault on corporate tax-inversion deals by wielding five sections of the U.S. tax code. Those moves are likely to curb new deals for a while but are unlikely to stop them completely, the WSJ reports. And the changes don’t appear to be enough to even trigger the clauses inserted in some merger agreements that would have let buyers walk away if the tax benefits of the deal were limited by a change in the rules.

Still, stock markets took the rule changes seriously. Share prices for several deal targets fell yesterday on the announcement. Shire PLC, for instance, which previously agreed to a $54 billion takeover from American rival AbbVie Inc., saw its shares slide by 6% at midday on Tuesday.

Among the tax strategies targeted in the rule changes is the practice of making “hopscotch” loans. A hopscotch loan occurs when an inverted company makes a loan to a newly formed foreign parent, instead of the U.S. parent. By avoiding the U.S., the loan isn’t considered a taxable dividend. Treasury essentially told firms to stop that.

 


From the CFO Journal's Morning Ledger on September 22, 2014

Stocks lose favor for pension plans ---
http://blogs.wsj.com/cfo/2014/09/23/stocks-lose-favor-for-pension-plans/?mod=djemCFO_h

To reduce their risk, more corporate pension plans are selling stocks and buying corporate bonds, CFOJ’s Vipal Monga reports. Companies in the S&P 500 index had slashed the stockholdings in their pension funds to 47% at the end of last year from 61% at the end of 2007. Instead, companies are investing more in 10-year and 30-year corporate bonds in order to more closely align the average maturity of assets with liabilities.


From the CFO Journal's Morning Ledger on September 22, 2014

Brooklyn insider-trading middleman pleads guilty ---
http://online.wsj.com/articles/brooklyn-man-charged-as-middleman-in-insider-trading-ring-1411152266?mod=djemCFO_h

A Brooklyn man pleaded guilty to acting as the middleman in a $5.6 million insider-trading scheme that involved passing tips through napkins and sticky notes near the clock at Grand Central Terminal, U.S. Attorney Paul J. Fishman said in a statement.

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


Mexico's Drug Cartels Have An Ingeniously Simple Method Of Laundering Money ---
http://www.businessinsider.com/laundering-mexicos-drug-money-washing-up-2014-9

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


From the CPA Newsletter on September 22, 2014

Internal Revenue Service updates 2014-2015 per diem rates ---
http://r.smartbrief.com/resp/gdtyBYbWhBCJshzGCidKtxCicNWQYO?format=standard
The Internal Revenue Service issued its annual updates of per diem rates for use in substantiating certain business expenses taxpayers incur when traveling away from home on or after Oct. 1. Friday's notice contains the transportation industry meals and incidental expenses rates, the rate for the incidental-expenses-only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method. Journal of Accountancy online (9/19)


From the CPA Newsletter on September 22, 2014

Framework for public sector accounting approved ---
http://r.smartbrief.com/resp/gdtyBYbWhBCJshzyCidKtxCicNezAJ?format=standard
The International Public Sector Accounting Standards Board has approved its general framework for standard-setting and guidance. The Conceptual Framework for General Purpose Financial Reporting by Public Sector Entities will be issued by the end of October. Accounting Today (9/19)

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


How to Mislead With Statistics
"Government Accounting Deceptions Are Everywhere," by Jason Richwine, National Review, September 26, 2014 ---
http://www.nationalreview.com/agenda/388983/government-accounting-deceptions-are-everywhere-jason-richwine

The new issue of National Affairs features my article with Jason Delisle, “The Case for Fair-Value Accounting.” We go into a lot of detail about what fair-value accounting (FVA) is, why it’s needed, and how both parties have hypocritically flip-flopped on it.

I’m not someone who is easily shocked by government misconduct, but when we assembled all  the examples of accounting malfeasance for this article, even I was surprised at how widespread and deceptive it all is.

Some quick background: The “fair value” of an investment is its current market price. Built into the market price of any asset are the expectations of its future value and the risk that those expectations may not be met. Both components of the price are critical. All else equal, investors obviously prefer assets with higher expected returns, but that preference is mediated by the risk involved. Investors may prefer low-returning assets with low risk (such as bonds) over high-return and high-risk assets (such as stocks). FVA cost estimates naturally include both expected returns and the cost of risk.

But most federal credit programs are scored based on expectations only, disregarding the cost of market risk. When the federal government offers student loans, for example, it estimates how much students will pay back and then assumes that its estimate carries no uncertainty. But no private investor would purchase the right to collect student loan repayments for just the expected value. The investor would demand a lower price for such a risky asset.

By placing a greater value on its assets than the market does, the government generates a number of bogus “free lunch” scenarios, and politicians try to exploit them:

For example, in the depths of the recession, Ohio senator Sherrod Brown proposed that the federal government buy up private student loans, convert them to federal loans, and then reduce the interest rates that borrowers pay. Lenders holding the loans would be paid face value for them — that is, the government would pay the lenders the full outstanding balance on the loans. Borrowers would receive new, better terms and repay the remainder of their loans to the Department of Education. The CBO was required under [current law] to show that this transaction would result in an immediate $9.2 billion profit to the government.

Bear in mind that this was a debt swap in which borrowers would pay less interest to the government than they would pay to private lenders. But, miraculously, $9.2 billion in new cash for the government would appear out of thin air as soon as the transaction was made. This money could then promptly be spent on more government programs.

Under FVA, Senator Brown’s scheme would not have generated a profit at all, but rather a cost of $700 million.

Now consider the Federal Housing Administration’s single-family mortgage-insurance program, which provides default guarantees to home-mortgage lenders:

Home buyers secure subsidized mortgages, which are loans with terms better than any private lender would offer without the government guarantee. Because [government accounting] rules exclude a market-risk premium, the program appears to both subsidize homeowners and generate profits for the government, “earning” a $60 billion free lunch for the government over ten years. But once a market-risk premium is added to these tallies, the loan guarantees show a $3 billion annual cost.

The same problem of disregarding market risk affects public pensions:

As discussed earlier, [government] accounting enables the federal government to claim a “profit” simply by purchasing a private-sector loan. In the pension world, the analogous transaction is the “pension-obligation bond,” which allows states to conjure money through an interest-rate arbitrage scheme. In essence, a state sells a government bond that pays, say, a guaranteed 5% interest rate and then places the proceeds from the bond sale into the pension fund. The trick is that the pension fund is assumed to return 8%, so the state nets 3% per year in “free” money. The fallacy, of course, is that the pension fund’s 8% expected return carries risk — which is why investors are willing to buy the (safer) pension-obligation bonds in the first place.

The examples go on and on, and the only way to end this mischief is to apply FVA to all government credit and investment programs.

 

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


Audit Firms Unhappy With PCAOB Ruling Requiring Partners in Charge of Audits to be Named
From the CFO Journal's Morning Ledger on September 22, 2014

Regulators, accounting firms bicker over audit rule ---
http://online.wsj.com/articles/regulators-accounting-firms-bicker-over-audit-rule-1411336193?mod=djemCFO_h
The Public Company Accounting Oversight Board is getting ready to approve a long-awaited rule requiring accounting firms to name the lead auditor on each public-company audit they perform every year, the WSJ’s Michael Rapoport reports. But while PCAOB Chairman James Doty wants the disclosure placed in the company’s audited annual report, the 10-K, accounting firms would rather it be in a separate form auditing firms file with the PCAOB, known as a Form 2. Accounting firms worry that putting the name in the annual report would expose their audit partners to more lawsuits, and could cause other complications, especially in cases in which a partner has resigned or retired. They also point out that a Form 2 disclosure would get around the problem of securities laws that require accountants and their firms to give consent if their names are to be included in forms to be filed with the SEC, such as the 10-K. The Form 2, which isn’t an SEC document, wouldn’t raise that problem.

Teaching Case on Naming of Auditors In Charge of Audits
From The Wall Street Journal Weekly Accounting Review on September 26, 2014

Regulators, Accounting Firms Bicker Over Audit Rule
by: Michael Rapoport
Sep 22, 2014
Click here to view the full article on WSJ.com
 

TOPICS: Accounting Firms, Auditing, Disclosure, PCAOB

SUMMARY: Regulators are poised to require that accounting firms identify exactly who is in charge of each audit they perform at thousands of publicly traded companies. Just where that disclosure will happen is still up for debate, however. The Public Company Accounting Oversight Board, the government's audit regulator, expects to give final approval in the next few weeks to a long-awaited rule that will mandate accounting firms disclose the name of their lead "engagement partner," their partner in charge, on each public-company audit they perform each year. The move is aimed at increasing accountability for auditors and giving more information to investors.

CLASSROOM APPLICATION: You can use this article when covering the rule regarding the disclosure of the lead engagement partner's name.

QUESTIONS: 
1. (Introductory) What rule and related debate is discussed in the article? What is the reason for this rule?

2. (Advanced) What is the PCAOB? What is its purpose and area of authority?

3. (Advanced) What are the two disclosure locations under debate? Why is this in dispute? What does the PCAOB prefer and why? What is the choice of the accounting industry? Why?
 

Reviewed By: Linda Christiansen, Indiana University Southeast
 

RELATED ARTICLES: 
Regulator Says Rule to Identify Lead Audit Partners Ready in September
by Michael Rapoport
Aug 13, 2014
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"Regulators, Accounting Firms Bicker Over Audit Rule," by Michael Rapoport, The Wall Street Journal, September 22, 2014 ---
http://online.wsj.com/articles/regulators-accounting-firms-bicker-over-audit-rule-1411336193

Regulators are poised to require that accounting firms identify exactly who is in charge of each audit they perform at thousands of publicly traded companies. Just where that disclosure will happen is still up for debate, however.

The Public Company Accounting Oversight Board, the government's audit regulator, expects to give final approval in the next few weeks to a long-awaited rule that will mandate accounting firms disclose the name of their lead "engagement partner," their partner in charge, on each public-company audit they perform each year. The move is aimed at increasing accountability for auditors and giving more information to investors.

PCAOB Chairman James Doty wants the name disclosed in the audited company's annual report, also known as the 10-K, in the section in which the auditor's opinion appears. But big accounting firms are pushing for disclosure in a different location: a separate report the auditing firms file with the PCAOB, known as a Form 2.

To those outside the accounting industry, the debate may sound like splitting hairs. But the location makes a big difference, say experts on both sides of the issue. Investor advocates say the company's annual report is the simplest and most prominent place to disclose the partner's name to investors. Other alternatives like the Form 2 aren't as well known, would make it more difficult for investors to find the name and would result in delayed disclosure, these advocates add.

"Investors and others don't want to have to go digging for this information," said Matt Waldron, director of financial reporting policy for the CFA Institute, which represents chartered financial analysts who work with individual investors.

He said putting the auditor's name in the company's 10-K report would make it "accessible and transparent." The alternative Form 2 disclosure would be much more complicated for investors to find, he added.

Former Securities and Exchange Commission Chairman Arthur Levitt, who frequently has called for tougher oversight of the accounting industry, agrees. "An effort to place [the disclosure] in a document that few investors read is puzzling. If it's good enough to go in a document, it's certainly good enough to go in the 10-K."

But accounting firms say putting the name in the annual report would expose their audit partners to more lawsuits, and could cause other complications, especially in cases in which a partner has resigned or retired.

The firms "broadly support enhancing transparency," but the Form 2 "would be a more sensible place to provide this information," said Cindy Fornelli, executive director of the Center for Audit Quality, an accounting-industry group.

The Form 2 is an accounting firm's own annual filing with the PCAOB and is available on the regulator's website.

The accounting industry has raised other concerns about the prominent display of partner names in the 10-K. According to securities laws, accountants and their firms must give consent if their names are to be included in documents filed with the SEC such as annual reports. Disclosure on Form 2, which isn't an SEC document, wouldn't raise that problem, Ms. Fornelli says.

The discussion over naming names has been going on since 2005, and the PCAOB in December issued its current proposal to make the disclosure mandatory. Some other countries, such as the U.K., already require audit firms to identify their engagement partners. The PCAOB proposal is subject to SEC approval before it can come into force.

"I think we will bring this lengthy process to a good result shortly, and that result will benefit investors while addressing the concerns" raised by the industry, Mr. Doty said in a statement Friday.

"We are working toward a balanced approach to meet investors' need for enhanced transparency while appropriately addressing the most significant concerns raised," said Jeanette Franzel, a PCAOB member who in the past has expressed reservations about the plan.

The PCAOB's latest proposal called for the partner's name to be disclosed in the company's annual report. But the board said in June that its staff was drafting a final version of the requirement that took into account comments the board had received on "alternative locations for the disclosure."

Some are concerned that Form 2 disclosure would delay the release of the partner's name to investors. The accounting firms file their annual Form 2 with the PCAOB every June, covering the year ending the previous March. In theory, that could mean the identify of an audit partner filing an audit report on April 1 of one year might not be disclosed until June 30 of the following year—a lag of up to 15 months.

Continued in article

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


Teaching Case on Accounting Controversies at Tesco
From The Wall Street Journal Accounting Weekly Review in September 26, 2014

Tesco Investigates Accounting Error
by: Peter Evans and Lisa Fleisher
Sep 23, 2014
Click here to view the full article on WSJ.com
 

TOPICS: Accounting Errors, Accounting, Auditing

SUMMARY: In the latest of a series of setbacks for a once-highflying global retailer, the U.K.'s Tesco has suspended four senior executives and called in outside auditors and legal counsel to investigate a $408.8 million overstatement of its forecast first-half profit. The newly installed chief executive, Dave Lewis, said that Tesco had uncovered a "serious" accounting issue, amounting to a third profit warning in as many months. Tesco has engaged accounting firm Deloitte LLP to investigate the first-half irregularity. Tesco's shares plunged nearly 12% and have been cut in half since 2011. The stock is trading around its lowest level since the fall of 2003.

CLASSROOM APPLICATION: This article is appropriate for discussions of accounting errors, restatements, and investigations.

QUESTIONS: 
1. (Introductory) What are the facts of the Tesco situation? What are the estimates for the accounting errors? Are these material amounts? How did the news affect the market price of the stock?

2. (Advanced) To what accounting activities have the errors been traced? How do those errors impact the financial statements in the short-term and in the long-term?

3. (Advanced) The article states that the company has not ruled out illegal activity. Why is the company mentioning the possibility of illegal activity? Could these errors be related to illegal activity? Is it likely? If not related to illegal activity, how could the errors have occurred?

4. (Advanced) Who is Tesco's auditor? Who has the company hired to investigate the accounting issues? Why didn't the company hire its auditor to do the investigation work?
 

Reviewed By: Linda Christiansen, Indiana University Southeast
 

RELATED ARTICLES: 
Tesco's Rebate Accounting Is in Focus
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Commercial Income? As Usual, In Tesco Accounting Error, There's Wiggle Room
by Hester Plumridge
Sep 23, 2014
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Tesco Can't Even Account for Its Problems
by Helen Thomas
Sep 23, 2014
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Tesco Error Leaves Analysts 'Flabbergasted'
by Phillipa Leighton-Jones
Sep 22, 2014
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"Tesco Investigates Accounting Error," by Peter Evans and Lisa Fleisher, The Wall Street Journal, September 23, 2014 ---
http://online.wsj.com/articles/tesco-error-triggers-new-profit-warning-1411367294

In the latest of a series of setbacks for a once-highflying global retailer, the U.K.'s Tesco TSCO.LN -0.56% PLC has suspended four senior executives and called in outside auditors and legal counsel to investigate a Ł250 million ($408.8 million) overstatement of its forecast first-half profit.

The newly installed chief executive, Dave Lewis, said Monday that Tesco had uncovered a "serious" accounting issue, amounting to a third profit warning in as many months.

The company said an employee alerted its general counsel on Friday about an issue involving the early booking of income and delayed booking of costs. Tesco said it had done a preliminary investigation into its U.K. food business and hadn't ruled out illegal activity but would wait until the results of the investigation were known.

The accounting error puts in the line of fire a board of directors long criticized by shareholders and industry analysts for lacking retail experience, and exposes the scale of the problem faced by Mr. Lewis in only his fourth week at the company.

"We have uncovered a serious issue and have responded accordingly," said Mr. Lewis, the former Unilever ULVR.LN +0.31% PLC executive who took up the reins at Tesco on Sept. 1, a month earlier than expected. The former CEO, Philip Clarke, was dismissed in July.

Tesco—which vies with Carrefour SA CA.FR +0.14% of France for the position of world's second-largest retailer by revenue behind Wal-Mart Stores Inc. WMT -1.25% —won applause for its swift growth and global ambitions through the 1990s and early 2000s. But it has weakened since the 2008 economic downturn. It took heavy losses on U.S. chain Fresh & Easy, unloading it last year to Ron Burkle's Yucaipa Cos., and has retreated from several other international markets. Its still-leading market share in the U.K. has steadily eroded in the face of competition from both higher-end grocery stores and aggressive discounters.

Among Tesco's main problems has been its lack of an executive clearly in charge of finances. Laurie McIlwee stepped down as chief financial officer in April but won't be replaced until December, when Alan Stewart —currently at Tesco's rival Marks & Spencer Group MKS.LN -0.40% PLC—takes over the role.

Mr. McIlwee has remained on the company's payroll as "CFO emeritus," according to a Tesco spokesman. In that role he offers advice but doesn't sit on the company's executive board and wasn't involved in decisions related to the accounting irregularity.

Instead, Tesco's finances have been run directly by the CEO's office during the past three months, according to a person with direct knowledge of the situation. In that time, Tesco has issued three profit warnings.

Mr. Clarke, who remains a Tesco employee, was acting as both CEO and CFO until the end of August, according to the person. A Tesco spokesman said Mr. Lewis assumed the interim-CFO role when he took over as CEO.

 

From the CFO Journal's Morning Ledger on September 22, 2014

U.K. supermarket operator Tesco PLC issued its fourth profit warning in three years and said it is investigating why it overstated its most recent profit forecast by more than $400 million, the WSJ’s Lisa Fleisher and Peter Evans report. Newly installed Chief Executive Dave Lewis said the company uncovered a “serious” accounting issue involving the early booking of revenue and delayed booking of costs. Four senior executives have been suspended—but don’t look for a finance chief to be among them.

Tesco has already named a new CFO in July in Alan Stewart, who was previously the head of finance for Marks & Spencer Group PLC. But Mr. Stewart doesn’t take over until Dec. 1, as he sits out a noncompete clause in his contract from his previous employer. The prior CFO, Laurie McIlwee, resigned from the position April 4, though the company said at the time he would remain as an employee until Oct. 3.

After Mr. McIlwee stepped down, responsibility for finance flowed to former Chief Executive Philip Clarke, who was supposed to step down in October. But the company later said in August that Mr. Clarke would be replaced a month earlier than planned by Dave Lewis, as the company struggled to find its footing amid profit warnings and the ongoing management shakeup. As it turns out, CFOs come in handy. How does your company manage succession during a period of crisis? Send us an email, or tell us in the comments.

"As Tesco Profits Vanish In Flawed Accounts, Analyst Says It's 'No Longer A Viable Investment'," by Mike Bird, Business Insider, September 22, 2014 ---
http://www.businessinsider.com/tesco-profit-restatement-2014-9

Tesco is not having a good year.

On Monday morning, the UK’s biggest supermarket revealed that it overstated its profits in the first half of the year by an astonishing Ł250 million ($408 million). In August it said its trading profit was about Ł1.1 billion, but the figure has now been clipped by roughly a quarter.

The chain has been forced to call in accountants from Deloitte to investigate the massive shortfall, and the share price is down by more than 8% at the time of writing. 

Marc Kimsey at Accendo Markets offered investors his brutal take in a note titled “every little hurts” Monday morning:

“Tesco is no longer a viable investment. Traders are clearing the books of all holdings and reallocating funds in sector peers. The last two years have tested investors' patience, but with the dividend being cut back and today's revelation, justification to hold is non-existent.”

Analysts at Cantor Fitzgerald said they were expecting an even worse drop in profits: a Ł300m overestimation would mean a fall in earnings of about 55% on sales excluding VAT. Tesco had revenues of Ł63.557 billion in 2013-2014, and the slump in profit is making margins look increasingly thin.

In a note to clients, Cantor’s Mike Dennis said: “The read across is that Tesco may now have to sell assets across its UK and International portfolio to pay for this behaviour.”

The new boss at Tesco isn't one to shy away from massive cuts — nicknamed 'Drastic' Dave Lewis, he cut 40% of the firm's costs and laid off 300 workers as chairman of Unilever UK. With more than half a million employees, Tesco is the UK's second-largest private employer, and major workforce cuts could be extremely painful.

On Monday, Lewis said "we have uncovered a serious issue and have responded accordingly" and that he expected Tesco "to operate with integrity and transparency."

Tesco is still the country’s biggest supermarket, but its market share is slipping at the fastest pace in 20 years.  


Read more: http://www.businessinsider.com/tesco-profit-restatement-2014-9#ixzz3E2gNfDzW

"Tesco-style accounting risks well known in retail industry," by Tom Bergin, Reuters, September 23, 2014 ---
http://uk.reuters.com/article/2014/09/23/uk-tescoaccounting-idUKKCN0HI2DF20140923

From the CFO Journal's Morning Ledger on August 120, 2014

PCAOB watchdog reviews auditing of estimates, mark-to-market accounting
The U.S. government’s auditing watchdog will review audit procedures for complex accounting estimates and mark-to-market accounting, with the aim to improve current practices
, CFOJ’s Emily Chasan reports. Auditors’ use of mark-to-market accounting and their reliance on management’s accounting estimates have raised frequent red flags.

Jensen Comment
The key to reviewing estimates is to conduct serious analysis of underlying assumptions.

I once wrote a research monograph on this topic for the American Accounting Association

Volume No. 19. Review of Forecasts: Scaling and Analysis of Expert Judgments Regarding Cross-Impacts of Assumptions on Business Forecasts and Accounting Measures
AAA Studies in Accounting Research
http://aaahq.org/market/display.cfm?catID=5
By Robert E. Jensen. Published 1983, 235 pages.

I think older AAA research and teaching monographs should be digitized and made available free to the public.

Bob Jensen's threads on pro forma reporting controversies ---
http://www.trinity.edu/rjensen/Theory02.htm#ProForma


From the CFO Journal's Morning Ledger on September 15, 2014 ---

Trial over AIG bailout carries risk for insurer ---
http://online.wsj.com/articles/trial-over-aig-bailout-carries-risk-for-insurer-1410727085?mod=djemCFO_h

A firm run by former American International Group Inc. boss Hank Greenberg is suing the U.S. government over its bailout of AIG six years ago. A trial set to start late this month poses a risk for the insurer. If Mr. Greenberg wins, AIG could conceivably be on the hook for the damages. Mr. Greenberg is seeking more than $40 billion for losses that he says his firm and other shareholders suffered in the bailout

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

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

 

From The Wall Street Journal Accounting Weekly Review on March 30, 2007

Ernst Censure Over Independence, Agrees to $1.5 Million Settlement
by Judith Burns
Mar 27, 2007
Page: C2
Click here to view the full article on WSJ.com ---
http://online.wsj.com/article/SB117495897778849860.html?mod=djem_jiewr_ac
 

TOPICS: Accounting, Advanced Financial Accounting, Auditing, Auditing Services, Auditor Independence, Financial Accounting, Sarbanes-Oxley Act, Securities and Exchange Commission

SUMMARY: Ernst & Young (E&Y) "was censured by the Securities and Exchange Commission (SEC) and will pay $1.5 million to settle charges that it compromised its independence through work it did in 2001 for clients American International Group Inc. and PNC Financial Services Group. "Regulators claimed AIG hired E&Y to develop and promote an accounting-driven financial product to help public companies shift troubled or volatile assets off their books using special-purpose entities created by AIG." PNC accounted incorrectly for its special purpose entities according to the SEC, who also said that "PNC's accounting errors weren't detected because E&Y auditors didn't scrutinize important corporate transactions, relying on advice given by other E&Y partners.

QUESTIONS: 
1.) What are "special purpose entities" or "variable interest entities"? For what business purposes may they be developed?

2.) What new interpretation addresses issues in accounting for variable interest entities?

3.) What issues led to the development of the new accounting requirements in this area? What business failure is associated with improper accounting for and disclosures about variable interest entities?

4.) For what invalid business purposes do regulators claim that AIG used special purpose entities (now called variable interest entities)? Why would Ernst & Young be asked to develop these entities?

5.) What audit services issue arose because of the combination of consulting work and auditing work done by one public accounting firm (E&Y)? What laws are now in place to prohibit the relationships giving rise to this conflict of interest?
 

Reviewed By: Judy Beckman, University of Rhode Island
 

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

Bob Jensen's threads on the 2008 Bailout and the Greatest Swindle in the History of the World ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout

 


 

From the CFO Journal's Morning Ledger on September 12, 2014

Internet marketplace company eBay Inc. has been a big buyer of smaller companies, completing dozens of acquisitions in the last decade. Bob Swan, the company’s long-time CFO, told CFO Journal’s Emily Chasan how it has focused on honing its integration strategy, as about 30% of the company’s growth now stems from those purchases.

“If you read the literature about failed acquisitions, there’s a laundry list of common themes: strategically disconnected, valuation in excess of synergies, management teams not deeply engaged in making acquisitions successful,” Mr. Swan said. “I think from an external standpoint it’s simply understanding others’ lessons learned and incorporating them into how we go about doing deals ourselves.”

So how does eBay make the choice between when to build a capability or just buy it outright? A lot of it comes down to speed—the speed of movement in the marketplace, compared with the speed at which eBay can go it alone. “If somebody else has a competency or a capability, that if we acquire now it will be quicker than building it, and can accelerate the path of bringing new technologies to market, that is an important aspect of whether to buy or build.”

 


From the CFO Journal's Morning Ledger on September 10, 2014

Franchise Chain Disclosures
For would-be entrepreneurs, sizing up a franchise chain can be challenging, because the disclosure requirements are somewhat limited. Chains aren’t required by law to disclose their franchisees’ first-year average sales and failure rates, for example, although the Federal Trade Commission does require them to share recent bankruptcy filings and prior litigation.

That missing data may help explain why certain franchise brands have been such repeat offenders when it comes to charge-offs of Small Business Administration loans. A Wall Street Journal analysis of SBA-backed franchise loans in the past decade found that Quiznos, Cold Stone Creamery, Planet Beach Franchising and Huntington Learning Centers Inc. ranked among the 10 worst franchise brands in terms of SBA loan defaults.

That means franchisees of those 10 brands have left taxpayers on the hook for 21% of all franchise-loan charge-offs in the past decade. The finding comes as franchising is booming in popularity, in part because many people see it as an easier route to entrepreneurship in an uncertain economic landscape.

 


From the CFO Journal's Morning Ledger on September 10, 2014

PCAOB warns auditors to look closer at revenues ---
http://blogs.wsj.com/cfo/2014/09/09/pcaob-warns-auditors-to-look-closer-at-revenues/?mod=djemCFO_h

The government’s audit watchdog issued an alert reminding auditors to be more rigorous in looking at company revenues, following a spike in deficiencies in that area, report Michael Rapoport and Noelle Knox for CFO Journal. The Public Company Accounting Oversight Board flagged common problems, including: testing the timing of when revenue is booked; evaluating whether companies have made the proper disclosures about their revenue; and responding to fraud risks associated with revenue.

"PCAOB Warns Auditors to Look Closer at Revenues," by Michael Rapoport, The Wall Street Journal, September 9, 2014 ---
http://blogs.wsj.com/cfo/2014/09/09/pcaob-warns-auditors-to-look-closer-at-revenues/

The government’s audit watchdog issued a 33-page alert Tuesday reminding auditors to be more rigorous in looking at company revenues, following a spike in deficiencies in that area.

The Public Company Accounting Oversight Board flagged common problems, including: testing the timing of when revenue is booked; evaluating whether companies have made the proper disclosures about their revenue; and responding to fraud risks associated with revenue.

“Revenue is one of the largest accounts in the financial statements and an important driver of a company’s operating results, James Doty, the PCAOB’s chairman, said in a statement. “Given the significant risks involved when auditing revenue, auditors should take note of the matters discussed in this practice alert in planning and performing audit procedures over revenue.”

The board advised audit firms to revisit their methodologies and consider increased staff training.

The alert follows a similar note to auditors the board sent to auditors last year after its inspectors saw a surge in internal control auditing deficiencies. As CFO Journal reported the PCAOB’s alert led to more document requests and closer audits of internal controls, which act as a company’s first line of defense against fraud and financial misstatements.

PwC:  In depth: Revenue standard is final – A comprehensive look at the new model (Real estate industry supplement) ---
http://www.pwc.com/us/en/cfodirect/publications/in-depth/real-estate-supplement-new-revenue-recognition-model-us2014-01.jhtml?j=564573&e=rjensen@trinity.edu&l=858637_HTML&u=21387916&mid=7002454&jb=0
Download
http://www.pwc.com/en_US/us/cfodirect/assets/pdf/in-depth/2014-01-revenue-recognition-real-estate-supplement.pdf

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 WSJ.com
 

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.

QUESTIONS: 
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 http://www.fasb.org/cs/BlobServer?blobkey=id&blobnocache=true&blobwhere=1175828814244&blobheader=application%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-Disposition&blobheadervalue2=1265035&blobheadervalue1=filename%3DASU_2014-09_Section_A.pdf&blobcol=urldata&blobtable=MungoBlobs

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 ---
http://online.wsj.com/articles/u-s-global-accounting-rule-makers-issue-long-awaited-revenue-1401274005?mod=djem_jiewr_AC_domainid

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

Bob Jensen's threads on Revenue Accounting Controversies --- http://www.trinity.edu/rjensen/ecommerce/eitf01.htm 


From the CFO Journal's Morning Ledger on September 8, 2014

Conflict minerals reporting can’t seem to get a break
First, the rule itself, required by Dodd-Frank, was found unconstitutional because it amounted to compelled speech, a ruling that forced the SEC to water it down. As a result, companies don’t have to declare whether conflict minerals are in their supply chains, but instead merely confirm that they’ve looked into it. But now the government has had to admit that it isn’t up to the challenge of figuring out which smelters are financing the violence in the Congo either.

The Commerce Department already missed its January 2013 deadline under Dodd-Frank to list “all known conflict-mineral processing facilities world-wide.” But on Friday, though the department published a list of 400 sites from Australia to Brazil and Canada, it also conceded that it “does not have the ability to distinguish” which are being used to fund militia groups, CFOJ’s Emily Chasan reports.

Companies including Intel Corp. and Apple Inc. said they spent years and millions of dollars investigating their supply chains for evidence of metals from mining operations that are paying for violence. A dozen companies acknowledged their suppliers may have obtained minerals from such mines, but the vast majority said they simply didn’t know. “At the end of the day, the conflict minerals rule creates the worst outcome—it has not helped lessen the conflicts in the Congo and creates economic harm in the U.S.,” said Tom Quaadman, vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness.

 


Corporate Tax Inversions:  The Beautiful and the Ugly

The Beaurtiful and the Ugly ---
http://www.lexology.com/library/detail.aspx?g=65635b84-3af9-4ea5-a268-c219a3366f92

From the CFO Journal's Morning Ledger on August 27, 2015

More corporate finance divisions are looking into the details of what an inversion would actually do for their tax bill, even if their companies ultimately aren’t willing to take the plunge and decamp for a foreign country, CFOJ’s Emily Chasan reports. A foreign domicile often will mean a lower overall tax rate, but a thorough analysis must also factor the cost of moving some management overseas, reorganizing the company, the sustainability of a move and its political consequences.

And the political consequences, though at this point mostly limited to accusations of unpatriotic behavior, could become more serious if legislators make good on their threats. The Treasury Department is currently reviewing its options for limiting the tax benefits of an inversion. And since Burger King Worldwide Inc. announced its intention to relocate to Canada through a merger with Tim Hortons Inc., the iconic burger chain has come under direct criticism from lawmakers. Sen. Dick Durbin (D., Ill.) said, “I’m disappointed in Burger King’s decision to renounce their American citizenship” and added that “with every new corporate inversion, the tax burden increases on the rest of us to pay what these corporations won’t.” The companies say the deal is not about taxes, but about growth (more on that below).

But the Burger King deal highlights what chief financial officers are learning in their investigations of inversion deals: that the tax benefits are not so straightforward, and often lurk in the details. Writing for Heard on the Street, John Carney notes that Canada offers a generous tax break for profits from countries with which it has a tax treaty. These get counted as “exempt surplus,” which isn’t taxed at all by Canada. And in some of Burger King’s fastest-growing markets, a Canadian domicile would also give it the benefit of “tax sparing”—a system that credits companies even for taxes that aren’t actually paid as part of a complex incentive to invest in developing countries.

 

"Microsoft Has Nearly $93 Billion In Overseas Cash, And It's Reduced Its Tax Bill By Almost $30 Billion," by Julie Bort, Business Insider, August 23, 2014 ---
http://www.businessinsider.com/microsofts-offshore-cash-2014-8

Whopper Deal --- Burger King Headquarters May Move to Canada:  There are tax savings in addition to a purchase of Canada's Tim Horton's Inc.
From the CFO Journal's Morning Ledger on August 25, 2015

The inversion wave that overtook the pharmaceutical and drug retail industries continues to spread, and now one of America’s most storied hamburger chains is looking to decamp for a lower-tax domicile to the north.

Burger King Worldwide Inc. is in talks to buy Canadian coffee-and-doughnut chain Tim Hortons Inc. in a tax inversion that would shift the hamburger seller’s base to Canada. Canada’s federal corporate tax rate was lowered to 15% in 2012.

And despite the saber-rattling from American lawmakers who fear that such moves will drain U.S. tax coffers, Burger King is planning to make the move without the protection of a provision that would let it walk away from the deal even if the tax benefits are taken away through new legislation. That may suggest that American big business perceives the U.S. government as unwilling, or incapable, of making any serious moves to restrain inversions.

"One Way to Fix the Corporate Tax: Repeal It," by by N. Gregory Mankiw (Harvard), The New York Times, August 23, 2014 ---
http://www.nytimes.com/2014/08/24/upshot/one-way-to-fix-the-corporate-tax-repeal-it.html?rref=upshot&abt=0002&abg=1&_r=0

“Some people are calling these companies ‘corporate deserters.’ ”

That is what President Obama said last month about the recent wave of tax inversions sweeping across corporate America, and he did not disagree with the description. But are our nation’s business leaders really so unpatriotic?

A tax inversion occurs when an American company merges with a foreign one and, in the process, reincorporates abroad. Such mergers have many motives, but often one of them is to take advantage of the more favorable tax treatment offered by some other nations.

Such tax inversions mean less money for the United States Treasury. As a result, the rest of us end up either paying higher taxes to support the government or enjoying fewer government services. So the president has good reason to be concerned. Continue reading the main story Related Coverage

Walgreen on Wednesday said it would take over the British pharmacy retailer Alliance Boots but would not, after all, move its headquarters overseas to save on taxes. Tax Reform: Inverting the Debate Over Corporate InversionsAUG. 6, 2014

Yet demonizing the companies and their executives is the wrong response. A corporate chief who arranges a merger that increases the company’s after-tax profit is doing his or her job. To forgo that opportunity would be failing to act as a responsible fiduciary for shareholders.

Of course, we all have a responsibility to pay what we owe in taxes. But no one has a responsibility to pay more.

The great 20th-century jurist Learned Hand — who, by the way, has one of the best names in legal history — expressed the principle this way: “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes.”

If tax inversions are a problem, as arguably they are, the blame lies not with business leaders who are doing their best to do their jobs, but rather with the lawmakers who have failed to do the same. The writers of the tax code have given us a system that is deeply flawed in many ways, especially as it applies to businesses.

The most obvious problem is that the corporate tax rate in the United States is about twice the average rate in Europe. National tax systems differ along many dimensions, making international comparisons difficult and controversial. Yet simply cutting the rate to be more in line with norms abroad would do a lot to stop inversions.

A more subtle problem is that the United States has a form of corporate tax that differs from that of most nations and doesn’t make much sense in the modern global economy.

A main feature of the modern multinational corporation is that it is, truly, multinational. It has employees, customers and shareholders around the world. Its place of legal domicile is almost irrelevant. A good tax system would focus more on the economic fundamentals and less on the legal determination of a company’s headquarters.

Most nations recognize this principle by adopting a territorial corporate tax. They tax economic activity that occurs within their borders and exclude from taxation income earned abroad. (That foreign-source income, however, is usually taxed by the nation where it is earned.) Six of the Group of 7 nations have territorial tax systems.

Continued in article

Hi again Richard,
Perhaps you can clear up my misunderstanding of how large LLP partnerships may be taxed as corporations in the U.K.

United Kingdom

The new form of limited liability partnership (LLP), created in 2000, is similar to a US LLC in being tax neutral: member partners are taxed at the partner level, but the LLP itself pays no tax. It is treated as a body corporate for all other purposes including VAT. Otherwise, all companies, including limited companies and US LLCs, are treated as bodies corporate subject to United Kingdom corporation tax if the profits of the entity belong to the entity and not to its members.
http://en.wikipedia.org/wiki/Limited_liability_company

 

I said something incorrect about Accenture. Accenture is now headquartered in Ireland under a "never-here" loop hole in the USA corporate tax code ---
http://fortune.com/2014/07/07/taxes-offshore-dodge/

We’ve also got a second, related problem, which I call the “never-heres.” They include formerly private companies like Accenture ACN 0.17% , a consulting firm that was spun off from Arthur Andersen, and disc-drive maker Seagate STX , which began as a U.S. company, went private in a 2000 buyout and was moved to the Cayman Islands, went public in 2002, then moved to Ireland from the Caymans in 2010. Firms like these can duck lots of U.S. taxes without being accused of having deserted our country because technically they were never here. So far, by Fortune’s count, some 60 U.S. companies have chosen the never-here or the inversion route, and others are lining up to leave.

Miscellaneous Links:

Offshore Corporate Tax Loophole ---
http://www.americansfortaxfairness.org/files/ATF-Offshore-Corporate-Tax-Loopholes-Fact-Sheet.pdf

Tax avoidance: The Irish inversion ---
http://www.ft.com/intl/cms/s/2/d9b4fd34-ca3f-11e3-8a31-00144feabdc0.html#axzz3BiBwi9as

Tax avoidance:  The Netherlands Version ---
http://www.pkf.com/media/387161/the netherlands_2012.pdf

What is a PAYE umbrella company?
http://www.contractorcalculator.co.uk/paye_umbrella.aspx


From the CPA Newsletter on September 10, 2014

Survey: Economic crime increases worldwide
http://r.smartbrief.com/resp/gcmdBYbWhBCJhAzGCidKtxCicNqOvy?format=standard
Economic crime is increasing among global companies, according to a PwC survey. The number of respondents reporting economic crime is up 3% compared with 2011. Asset misappropriation, procurement fraud, bribery and corruption, and cybercrime are the top four crimes reported. PwC surveyed 5,128 people from 99 countries.
CFO.com (9/8)


From the CPA Newsletter on September 3, 2014

What format should the next version of the CPA exam take?
http://r.smartbrief.com/resp/gbsdBYbWhBCJbSoQCidKtxCicNJqmS?format=standard 
The AICPA on Tuesday released a document for public comment on what format should be taken by the next version of the Uniform CPA Examination in order to continue to reflect the skills newly licensed CPAs need. Provide your feedback and help determine the knowledge and skills newly licensed CPAs need in today's market. Journal of Accountancy online (9/2)

Bob Jensen's threads on the CPA and CMA examinations ---
http://www.trinity.edu/rjensen/Bookbob1.htm#010303CPAExam


The financial statements from states are misleading and don’t show the true picture,” she said, “yet legislators are making decisions based upon these inaccurate budgets
"Ohio Dubbed a ‘Sinkhole’ State for Mounting Debt," State Data Lab, September 22, 2014 ---
http://www.statedatalab.org/news/detail/ohio-dubbed-a-sinkhole-state-for-mounting-debt

"Measuring Pension Liabilities under GASB Statement No. 68," by John W. Mortimer and Linda R. Henderson, Accounting Horizons, September 2014, Vol. 28, No. 3, pp. 421-454 ---
http://aaajournals.org/doi/full/10.2308/acch-50710

While retired government employees clearly depend on public sector defined benefit pension funds, these plans also contribute significantly to U.S. state and national economies. Growing public concern about the funding adequacy of these plans, hard hit by the great recession, raises questions about their future viability. After several years of study, the Governmental Accounting Standards Board (GASB) approved two new standards, GASB 67 and 68, with the goal of substantially improving the accounting for and transparency of financial reporting of state/municipal public employee defined benefit pension plans. GASB 68, the focus of this paper, requires state/municipal governments to calculate and report a net pension liability based on a single discount rate that combines the rate of return on funded plan assets with a low-risk index rate on the unfunded portion of the liability. This paper illustrates the calculation of estimates for GASB 68 reportable net pension liabilities, funded ratios, and single discount rates for 48 fiscal year state employee defined benefit plans by using an innovative valuation model and readily available data. The results show statistically significant increases in reportable net pension liabilities and decreases in the estimated hypothetical GASB 68 funded ratios and single discount rates. Our sensitivity analyses examine the effect of changes in the low-risk rate and time period on these results. We find that reported discount rates of weaker plans approach the low-risk rate, resulting in higher pension liabilities and creating policy incentives to increase risky assets in pension portfolios.

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

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


What is California-Styled "Advanced Manufacturing?"

Manufacturers may not have to leave litigious California to avoid high wages, activist unions, labor regulations, and labor safety regulations
"Mother Machines:  A California factory recently built by Japanese-German firm DMG Mori Seiki makes the case for the future of U.S. advanced manufacturing," by Robert L. Simison, MIT's Technology Review, September 18, 2014 ---
http://www.technologyreview.com/news/530716/mother-machines/?utm_campaign=newsletters&utm_source=newsletter-daily-all&utm_medium=email&utm_content=20140916

Jensen Comment
But industries caught up in pollution and other environmental-protection regulations had best look outside activist California in the grips of politics dominated by progressives and lawmakers to the left of progressives. Also it's not a good time for industries needing lots of water to expand in California.

Why can't Nevada make Tesla-type deals to all manufacturers? Reason 1 is the shortage of water, especially in water-starved Las Vegas.  Reason 2 is the dearth of skilled labor when robots can't do the jobs. Nevada has very high unemployment, but most of the unemployed are low in advanced skills. There are lots of high-tech workers in California who are probably not ecstatic over "advanced manufacturing."


From the CFO Journal's Morning Ledger on September 15, 2014 ---

Trial over AIG bailout carries risk for insurer ---
http://online.wsj.com/articles/trial-over-aig-bailout-carries-risk-for-insurer-1410727085?mod=djemCFO_h

A firm run by former American International Group Inc. boss Hank Greenberg is suing the U.S. government over its bailout of AIG six years ago. A trial set to start late this month poses a risk for the insurer. If Mr. Greenberg wins, AIG could conceivably be on the hook for the damages. Mr. Greenberg is seeking more than $40 billion for losses that he says his firm and other shareholders suffered in the bailout

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

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

 

From The Wall Street Journal Accounting Weekly Review on March 30, 2007

Ernst Censure Over Independence, Agrees to $1.5 Million Settlement
by Judith Burns
Mar 27, 2007
Page: C2
Click here to view the full article on WSJ.com ---
http://online.wsj.com/article/SB117495897778849860.html?mod=djem_jiewr_ac
 

TOPICS: Accounting, Advanced Financial Accounting, Auditing, Auditing Services, Auditor Independence, Financial Accounting, Sarbanes-Oxley Act, Securities and Exchange Commission

SUMMARY: Ernst & Young (E&Y) "was censured by the Securities and Exchange Commission (SEC) and will pay $1.5 million to settle charges that it compromised its independence through work it did in 2001 for clients American International Group Inc. and PNC Financial Services Group. "Regulators claimed AIG hired E&Y to develop and promote an accounting-driven financial product to help public companies shift troubled or volatile assets off their books using special-purpose entities created by AIG." PNC accounted incorrectly for its special purpose entities according to the SEC, who also said that "PNC's accounting errors weren't detected because E&Y auditors didn't scrutinize important corporate transactions, relying on advice given by other E&Y partners.

QUESTIONS: 
1.) What are "special purpose entities" or "variable interest entities"? For what business purposes may they be developed?

2.) What new interpretation addresses issues in accounting for variable interest entities?

3.) What issues led to the development of the new accounting requirements in this area? What business failure is associated with improper accounting for and disclosures about variable interest entities?

4.) For what invalid business purposes do regulators claim that AIG used special purpose entities (now called variable interest entities)? Why would Ernst & Young be asked to develop these entities?

5.) What audit services issue arose because of the combination of consulting work and auditing work done by one public accounting firm (E&Y)? What laws are now in place to prohibit the relationships giving rise to this conflict of interest?
 

Reviewed By: Judy Beckman, University of Rhode Island
 

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

Bob Jensen's threads on the 2008 Bailout and the Greatest Swindle in the History of the World ---
http://www.trinity.edu/rjensen/2008Bailout.htm#Bailout
 

 


From the CPA Newsletter on September 3, 2014

How retirement planning has changed since ERISA was enacted
http://r.smartbrief.com/resp/gbsdBYbWhBCJbSoSCidKtxCicNRJcg?format=standard
The Employee Retirement Income Security Act was enacted in 1974 in response to some much publicized failures of private defined benefit (or pension) plans. Rebecca Miller, CPA, Robert Lavenberg, CPA, J.D., and Ian MacKay, CPA, CGMA, mark ERISA's 40th anniversary with a look back at the challenges ERISA was originally intended to address and the issues facing retirees now and in the future. Journal of Accountancy print issue (9/2014)

What five classic Disney movies can teach us about personal finance ---
http://www.csmonitor.com/Business/Saving-Money/2014/0904/What-five-classic-Disney-movies-can-teach-us-about-personal-finance

The Washington Post's New Personal Finance Service ---
http://www.washingtonpost.com/business/get-there/
http://www.csmonitor.com/Business/Saving-Money/2014/0904/What-five-classic-Disney-movies-can-teach-us-about-personal-finance

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

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


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

The Road to Effective Disclosures
http://deloitte.wsj.com/cfo/2014/09/05/the-road-to-effective-disclosures/

Regulators and standard setters have lately been renewing their focus on disclosure effectiveness, and certain projects at the SEC, the FASB and the IASB have been gaining momentum. Although those projects are in the early stages, their common goal of making comprehensive improvements to the U.S. public company disclosure regime may increase their likelihood of success. While views on how to achieve improvements may differ, most seem to agree that the entire disclosure system is due-if not overdue-for modernization.

Read Today's Full Column --- http://deloitte.wsj.com/cfo/2014/09/05/the-road-to-effective-disclosures/

Read More Deloitte Insights --- http://deloitte.wsj.com/cfo/

 


From the CFO Journal's Morning Ledger on September 2, 2014

Can the New York Stock Exchange be saved?
http://online.wsj.com/articles/can-the-new-york-stock-exchange-be-saved-1409625002?mod=djemCFO_h
The NYSE’s new owners have launched a bruising, top-to-bottom renewal that includes shrinking the company and reshaping its culture. Through layoffs and the sale of several European exchanges and technology businesses, the number of employees and contractors has been slashed from 4,000 to about half that amount.


From the CPA Newsletter on September 2, 2014

SEC gives internal auditor $300,000 whistleblower award
The Securities and Exchange Commission is giving a $300,000 whistleblower award to a corporate internal auditor who provided information that directly resulted in an enforcement action. The auditor had reported the wrongdoing internally, but when no action was taken within 120 days, the auditor turned to the SEC. Awards to whistleblowers range from 10% to 30% of the money collected from an enforcement action. CFO.com (8/29)

Jensen Comments
Such puny settlements might be beneficial to career advancement, but they are more likely to be just the opposite if they are the cause of getting fired and the cause of troubles finding other jobs.  Whistleblowers are seldom heroes in USA except where national security is involved.

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


"Trying My Best to Save LOCOM for Inventory," by Tom Selling, The Accounting Onion, September 1, 2014 ---
http://accountingonion.com/2014/09/trying-my-best-to-save-locom-for-inventory.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+typepad%2Ftheaccountingonion+%28The+Accounting+Onion%29

In my previous post, I expressed my opposition to the FASB’s proposal for replacing the LOCOM rule for inventory with “lower of cost or net realizable value.”

I stated that the extant U.S. GAAP on LOCOM embodied a principle of measuring the economic utility of an asset that exists nowhere else.  It is worth preserving, if for no other reason, than to show students of accounting and business that bridges between financial reporting and economics can indeed be construct. As the last one is being blasted to smithereens, it’s legitimate to ask why there aren’t more such bridges.

But, I was surprised when my post led to this comment by a former FASB member, whom I respect greatly and choose not to name:

“Unlike Tom who believes this is an assault on users’ information needs, I think this is a ho hum matter. The answers are not likely to differ greatly in most cases and it’s quite possible that most companies will find that they just keep doing what they were already doing. I don’t think an extensive basis for conclusions is needed when the Board just wants to simplify what is essentially a mechanical process.”

I took these comments to heart in the comment letter I just submitted to the FASB.  I hope expressed clearly, these three points:

First, if you believe in the same economic principles that the members of the Committee on Accounting Procedure believed in back in 1947, then logic dictates that the proposal violates the FASB’s pledge to not promulgate “simplifications” that reduce the usefulness of the information provided to users of financial statements.

Second, as the former FASB member said, it’s quite possible that most users will continue to do what they have been doing, so there won’t be an appreciable savings of time and effort.  Instead of eliminating LOCOM, the Board could have issued a set of indicators to clarify when the “floor” and “ceiling” tests would not be needed.

Third, the ED is a seriously flawed document, that sends an implicit message that comments on the key issues are not welcome.  I’ll quote from my comment letter:

The Board’s simplification initiative seems to have a single objective and a single constraint. This makes it self-evident that the most important questions the FASB should have for stakeholders are: (1) whether the simplification objective is met; and (2) whether the information usefulness constraint is violated. Both of these questions are arguably subsumed in “Question 1,” but I suggest that in future proposals they should be separated and explicitly addressed.

Moreover, the ED does not disclose how the Board has concluded that its information usefulness constraint is not violated. In my opinion, this is an unconscionable omission. [emphasis supplied]

* * * * * * *

As I stated in my post, but did not state in my comment letter, I smell a rat.  I believe that there is more at stake than “simplifying” the accounting for inventory.  For one thing, LOCOM is just the tip of the iceberg of a very complex topic (e.g., LIFO), for another the FASB’s proposal assures that there will be fewer write downs; and when they occur, many will be for less than under the current rules.

Continued in article

Jensen Comment
I confess to my own ignorance of the issues in the FASB proposal "Simplifying the Measurement of Inventory" July 15, 2014 --- Click Here
http://www.fasb.org/cs/BlobServer?blobkey=id&blobnocache=true&blobwhere=1175829030470&blobheader=application%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-Disposition&blobheadervalue2=472243&blobheadervalue1=filename%3DProposed_ASU_Inventory_%2528Topic_330%2529_Simplifying_the_Measurement_of_Inventory.pdf&blobcol=urldata&blobtable=MungoBlobs

I always thought that the Lower of Cost or Market valuation of inventory had a net realizable override (NRV) when NRV applies to damaged or obsolete inventory was less than historical cost. My 1932 edition of the Accountant's Handbook by Bill Paton on Page 32 states that "imperfect, defective, damaged, or obsolete goods should be valued at ... net selling price."

If inventory is not ""imperfect, defective, damaged, or obsolete," the historical cost should not (in my personal opinion) be written down for downward for  transitory market price movements that have a high probability of recovering. For example, a farmer's corn inventory costing $3.47 a bushel should not, in my opinion, be written down every time the spot price falls below $3.47 unless the market has totally collapsed (e.g., if Congress no longer requires ethanol in gasoline) or the corn is damaged such as when the corn on hand has mold or has otherwise deteriorated in quality. However, apparently the FASB wants the write down to NRV to take place even when the price movement downward is transitory

33010-35-1 --- Click Here

A departure from the cost basisof pricing the inventory is required when the utility of the goods is no longer as great as their cost of inventory exceeds its  net realizable value. Where there is evidence that the utility of goods, in their disposal in the ordinary course of business, will be less than cost net  realizable value of inventory is less than cost, whether due to physical  deterioration, obsolescence, changes in price levels, or other causes, the  difference shall be recognized as a loss in earnings in the period in which it occurs

of the current period. This is generally accomplished by measuring inventory at the lower of cost and  net realizable value stating  such goods at a lower level commonly designated as market.

August 2, 2014 message from Dennis Beresford

Bob,

The FASB’s simplification of the inventory standard, I believe, is not much more than an effort to do away with an outdated rule that has been misapplied in practice thousands of times over the past sixty plus years. Most accountants have looked at the rule in a very simplistic way: whether the cost is higher than the item can be sold for at the balance sheet date. Complications like normal profit margins and costs of disposal are taken into consideration, I’m sure, in very sophisticated situations but the large number of items often held in inventory, difficulty in determining normal profit margins, and many other factors make LOCOM determinations quite problematic in most situations.

Unlike Tom who believes this is an assault on users’ information needs, I think this is a ho hum matter. The answers are not likely to differ greatly in most cases and it’s quite possible that most companies will find that they just keep doing what they were already doing. I don’t think an extensive basis for conclusions is needed when the Board just wants to simplify what is essentially a mechanical process.

Denny

Jensen Comment
Hence we have a difference of opinion between Denny Beresford and Tom Selling about the FASB's July 15, 2014 inventory valuation proposal. I won't comment further since I'm still hung up on transitory price movements of non-damaged and non-obsolete inventory items. I don't think inventory should be written down for transitory price declines,  but this is not source of the disagreement between Denny and Tom.

Maybe the AECM can shed more light on these issues.

September 2, 2014 reply from Barbara Scofield

No one has yet mentioned the financial statement impact of lower of cost or net realizable value.
 
Inventory has a value that is the same OR HIGHER under lower of cost or net realizable value than it has under current GAAP using lower of cost or market with the three measures of market value -- replacement cost, net realizable value, or net realizable value less normal profit.
 
When inventory is written down to net realizable value, and assuming that the inventory is sold at net realizable value, then the write down is limited and no gross profit is recognized at the time of sale.
 
When inventory is written down to replacement cost with bounds of net realizable value and net realizable value less normal profit, then inventory may be written down below net realizable value, and some gross profit is recognized at the time of sale.
 
The same total profit is recognized in both cases, but using lower of cost or net realizable value, income is recognized sooner.

 
So the change to lower of cost or net realizable value fits into the trend to ignore income statement effects and concentrate on balance sheet effects.  And income becomes less and less relevant for financial statement users.
 

 
Barbara W. Scofield, PhD, CPA
Professor of Accounting
Washburn University -- HC 311L
Topeka, KS   66621

785-670-1804 (office)
 
barbara.scofield@washburn.edu
 

Big Iron to Big Aluminum
"Ford Is Making A Huge Bet On An Innovation That Could Transform The Auto Industry ," by Daniel Gross, Slate via Business Insider, September 13, 2014 ---
http://www.businessinsider.com/ford-is-betting-the-farm-on-one-huge-innovation-that-could-transform-the-car-industry-2014-9

There’s widespread and justifiable concern over a dearth of great ideas, risky innovation, and progressive advances being produced by corporate America. Apps and widgets don’t have the impact of electricity, steam, or the PC. (Taco Bell’s Biscuit Taco doesn’t count.)

But right now, a storied American corporation is embarking on a huge, all-in, Cortés-burning-the-ships gamble. And it could have a significant impact on the industry that is both America’s largest manufacturing sector and its largest retailing sector: autos.

The company is Ford, which hasn’t gotten nearly enough credit for its remarkable, bailout-avoiding turnaround. (Go read Bryce Hoffman’s book about it, American Icon.) And the gamble involves transforming its highly popular F-150 pickup truck into a vehicle made largely out of aluminum.

When it comes to sustainability, big car companies have been tinkering around the edges in various ways: with a small-batch all-electric car, with hybrids, by improving engines. That’s all to the good. The fleet of cars sold in August got 25.8 miles per gallon, a record. But to really move the needle on emissions and efficiency, you need to produce large numbers of gas guzzlers that rack up lots of miles more efficient. I wrote last week on how Proterra is trying to do this on a small scale with all-electric buses.

In the coming months, however, Ford is set to do it with the F-150. Month in, month out, the F-150 is the best-selling vehicle in the U.S—and has been for the last three decades. In August alone, Ford sold 68,109 F-150s. It has sold nearly 500,000 so far this year. The F-150 by itself accounts for more than 4 percent of all vehicle sales.

The Big Three have been rushing to make pickups more fuel-efficient, in part to comply with incoming fuel standards, and in part to gain a competitive advantage. They’ve had success in small doses. Chrysler sells a diesel-powered Ram that gets 28 miles per gallon on the highway, and some models of the Chevrolet Silverado can get up to 24, according to EPA estimates. But those are niche offerings, accounting for only a small portion of overall sales. Ford is trying to change the game.

The idea of using greater amounts of lightweight aluminum to build cars isn’t exactly new, says Peter Friedman, the self-described “aluminum guy” who manages the manufacturing research department at Ford’s innovation center. Several years ago, as the company looked ahead to how it could keep improving its pickups, it became apparent that making the vehicles lighter was the best option—and the best way to make them lighter would be to swap out steel for aluminum wherever possible.

Ford had used aluminum—which is about one-third as dense than steel—in prototypes, and had owned Jaguar back when it made an aluminum-based model. But switching over entirely would be a long process. There’s plenty of bauxite, the raw material from which aluminum is derived, but the supply capacity to produce huge volumes of automotive aluminum simply didn’t exist in 2010. “The other big part is the changes to our production system,” Friedman says. “We have 100 years or more of making steel vehicles: stamping, framing line, welding a body structure together. Many of these processes had to change.”

The 2015 F-150, the result of these efforts, goes on sale later this year. It will look similar to previous year’s models, only much lighter. The frame is still steel, but the box (the cab, the front end, the bay) is almost all aluminum. That shift alone saves about 450 pounds in weight. Ford is compensating for aluminum’s lower density by making the panels thicker. But there’s more to the story. If the body weighs less, then everything else—the springs, the frame, the engine—can weigh less. The frame, for example, uses 65 fewer pounds of steel. Thanks to this compounding effect, the 2015 F-150 will weigh some 700 pounds less than prior models. (The 2014 version weighs about 5,000 pounds.)

Lower weight translates into higher fuel efficiency: A rule of thumb holds that a 10 percent reduction in weight leads to a 3 percent increase in fuel economy, assuming nothing else changes. But there are bigger gains to be had.

Thanks to the lower weight, these trucks can generate a higher level of pulling power with a smaller, more efficient engine. In the past few years, Ford has already integrated its EcoBoost engine (which was funded in part by a $5.9 billion Department of Energy loan) into the F-150.

In August about 45 percent of the F-150s sold had 3.5-liter EcoBoost engines. For 2015, Ford will offer as an option a more efficient 2.7-liter EcoBoost with start-stop technology, which shuts off the engine while in neutral.

Combined, the materials and the smaller engines can make a big difference. Ford isn’t making concrete promises about mileage yet, and the EPA has yet to weigh in. But analysts are projecting that the F-150 could get up to 27 or 28 miles per gallon on the highway, a significant increase from the 21 or 22 miles per gallon that 2014 F-150s get.

Beyond the prospect of a huge increase in gas mileage, several things are noteworthy about this effort. First, these are work vehicles. And Ford is promising that the aluminum pickups will be just as tough, durable, and able to pull loads as the steel-based ones they’re replacing, all without corroding or rusting.

Second, unlike hybrids or the Tesla, the F-150 isn’t a premium product aimed at the high end of the market. The basic F-150 XL will have a base price of $25,420 in 2015, only $395 more than the 2014 version, or an increase of just 1.6 percent. The 2.7-liter EcoBoost engine costs an extra $495.

Third, beyond avoiding the use of millions of gallons of gasoline, an aluminum pickup truck can make other meaningful contributions to sustainability. Compared with steel, aluminum can more easily be recycled and reused.

Fourth, there’s the question of scale. Ford has chosen to go aluminum on all versions of its highest-selling product, which is made at the River Rouge plant in Michigan and a second plant in Kansas City. This is not a test. “We have stopped production of the steel vehicle at the Rouge, and won’t make it again,” Friedman says.

Read more: http://www.slate.com/articles/business/the_juice/2014/09/ford_f_150_pickup_truck_the_auto_company_is_gambling_on_aluminum.html#ixzz3DHm3HBzL

Question

How are the enormous financial risks of such a "sinking of the ships" disclosed?


From Forbes in 2014
Best Nations for Doing Business (taxation, regulation, credit policy and other matters) ---
http://www.forbes.com/pictures/fgdi45eflkk/best-places-to-do-business-3/

Jensen Comment
I think this is a useless ranking because "doing business" can be defined in so many ways from production to sales to financing to the personal lives, numbers, and skills  of local workers. Uncertainty for the future must also be factored in when "doing business" entails capital investment and relocation of key workers.

For example the second-highest-ranked nation above, Hong Kong, is also the most uncertain nation given the conflicts that erupted in 2014 between Hong Kong and its parent mainland China. Investment and relocation decisions are much more risky in Hong Kong's changed business climate.

New Zealand, Denmark, Norway, and Iceland may be good sales markets but these high-welfare nations are not noted for motivated or skilled labor. Also relocation costs can be very high in terms of personal income taxes and real estate prices in these nations.

Ireland carries the baggage of being in the Eruozone. Both the United Kingdom and Ireland carry the advantages and disadvantages of being in the troubled European Union --- troubles ranging from immigration unrest to carrying of high unemployment nations like Greece, Italy, Spain, and Portugal. The EU is threatening to take some of the tax advantages of Ireland out of the picture. There are also business uncertainties for USA companies doing business amidst an unfriendly EU attitude to USA companies. Exhibit A comprises the huge fines of high tech companies (e.g., Google and Microsoft) for anti-trust "violations."

The United Kingdom more than any other European Nation is troubled with Jihadist unrest and terrorism threats that could become more focused on businesses. South Korea faces the faces enormous problems of bordering an insane nuclear-armed North Korea.

The USA has the highest corporate tax rates and the most complicated system for avoiding taxes. The sales markets are great in the USA, but many corporations are seeking to reduce USA tax obligations and labor costs with relocations of production in other places like Mexico and Asia. The USA also is probably the most litigious nation with over 80% of the tort lawyers of the world.

About all that can be said for the top 10 nations above is that they are more politically stable and enforce contracts better than most of the other 183 nations, particularly the many nations having civil strife, massive corruption, violent gangs, revolution, and very militant labor unions that scare the bejeebers out of companies thinking about production investments.  Exhibit A is Venezuela. Exhibit B is Bolivia.

Perhaps the greatest advantage of Singapore is its stability and near-absence of corruption. But it's too small to be compared to a potential sales market like China and India. China could become the business center of the world if it could rid itself of massive corruption. The same can be said about India. If the BRIC nations (Brazil, Russia, India, and China) could become less corrupt than the USA, Canada, Australia, and the EU the world of commerce would become almost totally dominated by the BRICs.

But the BRICs will flounder as long as they continue to be inflicted to massive corruption. None of the BRICs made the 2014 top 10 list shown above.


Teaching Case on SEC Filings
From The Wall Street Journal Accounting Weekly Review on September 19, 2014

To Be Clear, SEC Reviewers Want Filings in Plain English, Period
by: Theo Francis
Sep 13, 2014
Click here to view the full article on WSJ.com
 

TOPICS: SEC, SEC Filings, Securities and Exchange Commission

SUMMARY: Every year, SEC lawyers and accountants review several thousand of the more than half-million documents that companies file with the agency. And while they are primarily on the prowl for accounting inconsistencies and breaches of securities regulations, they also chase down typos, sentence fragments, jargon, puffery and sloppy punctuation. In 2013 alone, the securities industry's style police sent nearly 8,800 letters to more than 4,600 companies, according to LogixData, which analyzes SEC filings. The letters, which eventually become public, contained more than 66,000 questions, most seeking fuller disclosure or better adherence to accounting rules. But many would have been right at home in freshman English.

CLASSROOM APPLICATION: This is an interesting article that we can use when discussing the various SEC filings.

QUESTIONS: 
1. (Introductory) What is the SEC? What is its purpose and areas of authority?

2. (Introductory) What are some of the filings required by the SEC? What is reported in each of those filings? Who uses that information?

3. (Advanced) What does the article report about the SEC requirements? Why is the SEC particular about these requirements?

4. (Advanced) What accounting information is reported in SEC filings? What accounting information is in financial statement form or in numbers/dollars? What accounting information is in written form? What is the value of each of these forms of information?

5. (Advanced) What is "plain English"? Why would the SEC be so interested in its use? Why is it valuable? What is the alternative to plain English? Why would something other than plain English be used?
 

Reviewed By: Linda Christiansen, Indiana University Southeast

"To Be Clear, SEC Reviewers Want Filings in Plain English, Period," by Theo Francis, The Wall Street Journal, September 12, 2014 ---
http://online.wsj.com/articles/to-be-clear-sec-reviewers-want-filings-in-plain-english-period-1410555347?mod=djem_jiewr_AC_domainid

After combing through a 19,974-word filing for a securities offering, Securities and Exchange Commission senior counsel Catherine Gordon had some guidance for the company that drafted it.

"In the second paragraph, add a comma," she wrote to an attorney for the trust, sponsored by Incapital LLC, in December, "to improve readability."

Meet the stock market's punctuation police. Corporate securities filings are plagued by some of the world's most impenetrable prose, but it isn't for lack of effort. Every year, SEC lawyers and accountants review several thousand of the more than half-million documents that companies file with the agency. And while they are primarily on the prowl for accounting inconsistencies and breaches of securities regulations, they also chase down typos, sentence fragments, jargon, puffery and sloppy punctuation.

Making sure corporate disclosures pass muster falls to the SEC's 350-member Corporation Finance division—Corp Fin in the trade—which reviews every public company's primary filings at least once every three years.

Last year alone, the securities industry's style police sent nearly 8,800 letters to more than 4,600 companies, according to LogixData, which analyzes SEC filings. The letters, which eventually become public, contained more than 66,000 questions, most seeking fuller disclosure or better adherence to accounting rules. But many would have been right at home in freshman English.

SEC staffers asked a brewer to provide the volume of a barrel, a wedding organizer to define "marriage-seeking profiles," racing companies to describe their horses with complete sentences, a biopharmaceutical maker to explain aplastic anemia and an annuity company to punctuate the end of a sentence.

In reply, they received nearly 8,700 letters containing more than 67,000 answers and proposed revisions. Incapital added the comma and agreed to additional changes prompted by 19 other queries in the letter from Ms. Gordon and her colleagues, including requests for more detail about investment practices and references to the "economic environment."

The SEC declined to comment on specific letters or to make staffers who sent them available for comment.

"Please use a readable type size throughout," senior staff attorney Kathryn McHale wrote First Internet Bancorp INBK +0.44% in October after it filed to sell shares. "The summary selected financial data beginning on page 6 is too small."

The bank promised to increase the font size, though subsequent filings continued to use 8-point type for the numbers. Most of the rest of the text appears in 13-point type.

First Internet said it used small type to fit figures for seven financial periods in the table. The company uses larger type where possible, and online filings mean readers can zoom in, spokeswoman Nicole Lorch said. "It was not our intention to obfuscate financial data," she said.

Some inquiries get technical. Pamela Long, one of Corp Fin's assistant directors, questioned Technology Applications International Corp. , a marketer of water purifiers and cosmetics based in Aventura, Fla., about this phrase: "rotatable perfused time varying electromagnetic force bioreactor."

She asked the company to explain what exactly it was, along with "how this enhances the product, if at all."

Technology Applications proposed a revision: "In use, the rotatable perfused time varying electromagnetic force bioreactor supplies a time varying electromagnetic force to the rotatable perfusable culture chamber of the rotatable perfused time varying electromagnetic force bioreactor to expand cells contained therein."

Ms. Long wasn't satisfied.

"The revised disclosure uses a number of terms that are unclear to the reader and appear to be industry jargon," she wrote, asking the company to revise.

The company's next revision—with a color illustration—mostly passed muster: The device is designed to grow more-natural cell cultures. But Ms. Long remained concerned by language saying the device was "sponsored" or "managed" by the National Aeronautics and Space Administration.

"As currently drafted, the disclosure suggests that NASA is actively involved in the process of making the cosmetics," she wrote in January 2013.

The company now says in its filings that the device was "developed and patented" by NASA and a private firm.

John Stickler, vice president at Technology Applications, said the company expected some back and forth with the SEC over its share registration, though the extent came as a bit of a surprise. "The process got a little old after a while when you kept reiterating this is how it works, this is how it works," said Mr. Stickler.

Most of Corp Fin's inquiries tackle tougher topics. But simplifying language to be better understood by investors is also a serious goal.

Former SEC Chairman Arthur Levitt made clarity a career mission, prompting the agency in 1998 to publish an 83-page "Plain English Handbook" that still circulates today.

"What we are getting to is clear and concise disclosure that people can understand," said Shelley Parratt, Corp Fin's deputy director for disclosure operations.

Continued in article


Teaching Case on Tax Increases
From The Wall Street Journal Accounting Weekly Review on September 19, 2014

Backdoor Tax Increases May Hit Investors
by: Laura Saunders
Sep 12, 2014
Click here to view the full article on WSJ.com
 

TOPICS: Individual Taxation, Tax Planning, Taxation

SUMMARY: Many investors will see spikes in income this year as a surge in corporate deals generates unexpected payouts. That could trigger a surprising spike in their tax rates, too. The U.S. tax code rescinds tax benefits and adds surtaxes for higher earners, typically those with incomes of more than $150,000 a year. These are essentially backdoor tax increases, and the effects can vary greatly. Investors who are at risk should run their individual numbers or consult a professional while there is still time to make moves this year that could soften the blow.

CLASSROOM APPLICATION: This article discusses various "backdoor" tax increases and can be used for those topics, as well as general tax planning for individuals.

QUESTIONS: 
1. (Advanced) What is the purpose of this article? What does the article mean by "backdoor" tax increases? How do those differ from other tax increases?

2. (Introductory) The article mentions inversions. What are those and why are they relevant to the topic of the article?

3. (Advanced) The article notes that taxpayers with a certain income range will experience the greatest tax impact from inversions and other corporate deals. What is that income range? Why will that group experience the greatest impact?

4. (Advanced) What is the alternative minimum tax? What was its original purpose? How would the AMT affect taxes on capital gains?

5. (Advanced) What is the net investment income tax? To what type of income does it apply? At what income levels does it apply? How can a taxpayer plan to minimize this tax?

6. (Advanced) What is the personal exemption phaseout? To whom does it apply? How can it be minimized?

7. (Advanced) What is the Pease limitation? What is its impact on a tax liability?
 

Reviewed By: Linda Christiansen, Indiana University Southeast

"Backdoor Tax Increases May Hit Investors." by Laura Saunders, The Wall Street Journal, September 12, 2014 ---
http://online.wsj.com/articles/backdoor-tax-increases-may-hit-investors-this-year-1410458648?mod=djem_jiewr_AC_domainid

Profits From 'Inversions' and Other Deals Could Trigger Alternative Minimum Tax, Exemption Phaseouts and More on 2014 Returns

Many investors will see spikes in income this year as a surge in corporate deals generates unexpected payouts. That could trigger a surprising spike in their tax rates, too.

The U.S. tax code rescinds tax benefits and adds surtaxes for higher earners, typically those with incomes of more than $150,000 a year. These are essentially backdoor tax increases, and the effects can vary greatly. Investors who are at risk should run their individual numbers or consult a professional while there is still time to make moves this year that could soften the blow, experts say.

It has been a banner year for mergers, with U.S. deal activity up 58% by value year to date over the same period in 2013, according to Dealogic. The takeovers of Micros Systems, Hillshire Brands and Furiex Pharmaceuticals will include taxable cash payments to shareholders.

Another dozen or more firms, including AbbVie, ABBV +0.45% Medtronic MDT 0.00% and Burger King Worldwide, BKW +0.32% are planning "inversions," where U.S. companies merge with foreign firms and move to lower-tax countries. Investors holding stock in taxable accounts—as opposed to a tax-sheltered retirement plan—often get a windfall due to an inversion because it is treated as a sale, along with a surprise tax bill.

In addition, energy giant Kinder Morgan KMI -0.46% has announced a reorganization that could generate income for many holders of units of Kinder Morgan Energy Partners, KMP +1.89% its widely held master limited partnership.

The result could be that some income and capital gains could be taxed at substantially higher rates.

Chris Hesse, an accountant at CliftonLarsonAllen in Minneapolis, researched how backdoor tax increases change the tax rates on investment income for a typical family of four as long-term capital gains are added to an income of $80,000 of wages and $20,000 of interest.

He found that a wide swath of people with a nominal tax rate of 15% on long-term gains actually owed nearly 28% on the gains.

The impact is likely to be most significant for people with incomes between $150,000 and $500,000, says Mr. Hesse. When the typical family's income rose above $500,000, the actual rate on long-term gains flattened to about 24%, he found.

Taxpayers who are most affected by these backdoor tax increases sometimes have the most room to avoid them, if they act in time, says Scott Kaplowitch, an accountant at Edelstein & Co. in Boston. He recently advised a client with a deal-related windfall that waiting to take deferred compensation until next January will cut his tax rate on the income by 10 percentage points, as the client will have retired by then and be in a lower bracket.

Here's a brief guide to the main backdoor tax increases and some ways to limit the resulting bills.

Alternative minimum tax. The AMT was originally imposed to keep the wealthy from taking too many tax breaks, although now it falls most heavily on the affluent. It works by eliminating certain benefits, such as the personal exemption and state and local tax deductions, and limiting the value of others.

While capital gains aren't penalized by the AMT, having a high proportion of long-term capital gains to ordinary income can trigger the levy, says Mr. Kaplowitch.

So a taxpayer who plans to make charitable donations over several years might be able to lower the capital gain and avoid the AMT by making several years' worth of gifts of appreciated stock to favorite charities all at once.

If the AMT is unavoidable, however, it might make sense to postpone donations to a future year, when they will be more valuable—and to accelerate state tax payments into this year to reduce the likelihood of triggering the AMT again next year.

Net investment-income tax. This flat levy of 3.8% applies to the amount of net investment income, including dividends, capital gains and interest, that a taxpayer has above a certain threshold. It is pegged at $250,000 of adjusted gross income, or AGI, for most married couples and $200,000 for most singles, and it isn't adjusted for inflation.

While the 3.8% surtax typically doesn't apply to quarterly payouts made to investors by master limited partnerships such as Kinder Morgan's, experts say it will apply to the income generated by reorganizations such as the one Kinder Morgan plans.

The best way to limit this levy is to keep AGI below the threshold. Itemized deductions such as mortgage interest don't help, but putting income into a tax-deductible retirement plan or deferring income to a future year could. Making a charitable gift of appreciated inversion stock could also reduce the portion of a long-term gain that raises AGI.

Personal Exemption Phaseout. The PEP restriction takes effect at $305,050 of AGI for most married couples and $254,200 for most single filers.

PEP rescinds the value of the $3,950 deduction that is allowed for each family member. It disappears entirely at $427,550 of AGI for most couples and $376,700 for most singles—if the taxpayer isn't subject to the AMT, which disallows the deduction entirely. For that reason, PEP is more likely to affect people with higher incomes from low-tax states who aren't caught by the AMT.

The best way to avoid PEP, say experts, is to keep AGI below the threshold, using the same methods that can work for the net investment income tax.

Pease limitation. This provision takes effect at the same threshold as PEP. It reduces most itemized deductions, such as those for mortgage interest, state and local taxes, and charitable donations, by 3% of the amount over the threshold—although it can never take away more than 80% of a taxpayer's itemized deductions.

Continued in article

 


Teaching Case on Taxation of Meals
From The Wall Street Journal Accounting Weekly Review on September 5, 2014

Silicon Valley Cafeterias Whet Appetite of IRS
by: Mark Maremont
Sep 01, 2014
Click here to view the full article on WSJ.com
 

TOPICS: Deductions, Fringe Benefits, Gross Up, Taxation

SUMMARY: Putting a new focus on the issue, the IRS and U.S. Treasury Department has included taxation of "employer-provided meals" in their annual list of top tax priorities for the fiscal year ending June 2015. The agencies said they intend to issue new "guidance" on the matter, but gave no specifics about timing or what the guidance would say. In general, employer-provided meals - beyond those served at the occasional business meeting - are a taxable fringe benefit, similar to personal use of a company car or the value of employer-paid life-insurance coverage above the IRS threshold of $50,000. But it is a complex area of tax law, and there are exceptions. For example, meals can remain untaxed if they are served for a "noncompensatory" reason for the "convenience of the employer."

CLASSROOM APPLICATION: Students may have heard about the amazing benefits tech employers in Silicon Valley offer to employees - free food in particular. For that reason, this is a great article to use when covering the taxation of fringe benefits.

QUESTIONS: 
1. (Introductory) What are fringe benefits? What are the details of the fringe benefits offered by Silicon Valley employers?

2. (Advanced) What are the tax rules regarding employer-provided meals? What are the exceptions? Why do you think the rules are drafted this way?

3. (Advanced) Should employees be taxed for the meals provided by tech employers? Do any of the exceptions apply? What options do employers have in managing this situation?

4. (Advanced) Why is the IRS beginning to focus on employer-provided meals? Do you think the IRS will win this issue? What other enforcement issues should the IRS be addressing?

5. (Advanced) What other benefits are taxable? Which ones are not? What is the reasoning behind taxing some fringe benefits and not others?
 

Reviewed By: Linda Christiansen, Indiana University Southeast

"Silicon Valley Cafeterias Whet Appetite of IRS," by Mark Maremont, The Wall Street Journal, September 1, 2014 ---
http://online.wsj.com/articles/silicon-valley-cafeterias-whet-appetite-of-irs-1409612488?mod=djem_jiewr_AC_domainid

There is a grumpy new face in line at Silicon Valley's lavish freebie cafeterias: the Internal Revenue Service.

Staffers at technology companies such as Google Inc., GOOGL +0.24% Facebook Inc. FB -0.20% and Twitter Inc. TWTR -1.70% long have enjoyed free gourmet meals, courtesy of their employers. The groaning buffets, in-house pizza joints, and kitchens stocked with organic produce are an intrinsic part of the culture in much of Silicon Valley, encouraging both collaboration and longer work hours.

The IRS, arguing that these freebies are a taxable fringe benefit, has given new attention to the issue in recent months during routine audits of some companies, tax lawyers said. When employers haven't been withholding taxes related to the meals, the IRS increasingly has sought back taxes that can amount to 30% of the meals' fair-market value, the lawyers said.

In another sign of a new focus on the issue, the IRS and U.S. Treasury Department last week included taxation of "employer-provided meals" in their annual list of top tax priorities for the fiscal year ending next June. The agencies said they intend to issue new "guidance" on the matter, but gave no specifics about timing or what the guidance would say.

"I suspect this is going to be guidance on these free cafeterias, that the benefit has got to be included in income," said Anne G. Batter, an employment-tax attorney at Baker & McKenzie in Washington.

An IRS spokesman declined to comment.

Tax lawyers expect some employers will fight the IRS over the matter, and said the issue is likely to be decided in the courts. Any broad IRS crackdown could spur complaints about petty government interference with the culture of a crucial industry.

But allowing free meals to go untaxed, critics say, distorts the economy and gives some employers an unfair edge.

In theory, individual employees could be dunned for back taxes on the free meals. In practice, the IRS generally tries to collect from employers, who are liable for failing to withhold taxes on any taxable income.

Google, Facebook and Twitter—three companies known for their food perks—declined to comment.

IRS interest in the free-meals issue ticked up last year, after The Wall Street Journal published an article focusing on whether the food should be considered a taxable benefit, said Thomas M. Cryan Jr. , a Washington employment-tax attorney at Buchanan Ingersoll & Rooney PC.

"It's definitely an area the IRS is auditing," said Mr. Cryan, who said two of his clients are in the midst of IRS audits over this matter.

Mr. Cryan said he has been told by IRS agents that the meals-tax push stems from a national directive by senior officials.

In general, tax experts said, employer-provided meals—beyond those served at the occasional business meeting—are a taxable fringe benefit, similar to personal use of a company car or the value of employer-paid life-insurance coverage above the IRS threshold of $50,000.

But it is a complex area of tax law, and there are exceptions. For example, meals can remain untaxed if they are served for a "noncompensatory" reason for the "convenience of the employer."

The exception generally applies to workers in remote locations, such as oil rigs, or in professions where reasonable lunch breaks aren't feasible. A Las Vegas casino won in court over the issue by arguing that stringent security made it impractical for employees to eat outside the premises.

Some lawyers argue that, in many cases, corporate free-meal programs fit under the "convenience of the employer" test.

"Look at the time savings," said Mary B. Hevener, an employee-benefits attorney at Morgan, Lewis & Bockius LLP in Washington.

"If your employees are able to eat lunch and get back to their desks in 20 or 30 minutes, that's a big time savings," she added. "The food is a lot healthier in many cases. And maybe you don't want your employees running around in other eateries talking business."

Ms. Hevener wouldn't discuss her clients, but said "examining agents are not fairly assessing what the regulations and legislation say" in this area.

Even if tax-free meals eventually go away, that won't necessarily spell the demise of Silicon Valley's no-cost buffets. Marianna Dyson, an attorney at Miller & Chevalier in Washington, said she knows of at least one Silicon Valley company that provides free food, but "grosses up" its employees, paying them extra to cover additional taxes owed on the perk.


Teaching Case on Pending Lease Accounting Rule Changes
From The Wall Street Journal Accounting Weekly Review on September 5, 2014

The Big Number: Changes in Lease Accounting Rules Draw Closer
by: Emily Chasan
Sep 01, 2014
Click here to view the full article on WSJ.com
 

TOPICS: Debt Covenants, Financial Accounting, Lease Accounting

SUMMARY: U.S. and international accounting-rule makers are edging closer to completing a decade-long effort to overhaul lease accounting rules. The rules, which could be issued in 2015, threaten to bring roughly $2 trillion of off-balance-sheet leases onto corporate books. But adding assets and liabilities for store leases, airplanes and the like could force companies to renegotiate the terms of their loans with lenders. Banks and lenders often require companies to maintain covenants, such as a specific debt-to-equity ratio, fixed-asset ratio or earnings metric, which could all be thrown out of whack by such a significant accounting change.

CLASSROOM APPLICATION: This is an interesting article about the changes to lease accounting because it highlights an important ripple effect: calculations for debt covenants will be affected. This is important to note for students that any change to accounting rules can change the financial statements and any corresponding financial statement analysis calculations. These ripple effects can cause problems for the firms and should be anticipated and addressed.

QUESTIONS: 
1. (Introductory) What changes have been proposed for accounting for leases? Why are rule-makers working on these changes?

2. (Advanced) What are some of the ripple effects resulting from the changes to the lease rules? More specifically, what is the impact on calculations for debt covenants?

3. (Advanced) How should lenders react? Should they adjust their calculations? How should they approach enforcing existing contract requirements?
 

Reviewed By: Linda Christiansen, Indiana University Southeast

"The Big Number: Changes in Lease Accounting Rules Draw Closer," by Emily Chasan, The Wall Street Journal, September 1, 2014 ---
http://online.wsj.com/articles/the-big-number-changes-in-lease-accounting-rules-draw-closer-1409613447?mod=djem_jiewr_AC_domainid

50%

Percentage of global companies with bank-debt covenants potentially affected by lease accounting changes

U.S. and international accounting-rule makers are edging closer to completing a decadelong effort to overhaul lease accounting rules. The rules, which could be issued next year, threaten to bring roughly $2 trillion of off-balance-sheet leases onto corporate books.

But adding assets and liabilities for store leases, airplanes and the like could force companies to renegotiate the terms of their loans with lenders. Banks and lenders often require companies to maintain covenants, such as a specific debt-to-equity ratio, fixed-asset ratio or earnings metric, which could all be thrown out of whack by such a significant accounting change.

Some 50% of global companies have business loans with debt covenants that could require them to repay a loan if they break any covenants, according to a survey of more than 2,000 directors and C-level executives by accounting firm Grant Thornton International Ltd. But only about 8% of those companies currently believe that putting leases on their balance sheet will affect their compliance with bank covenants.

"Many companies are in for a big surprise when this comes out and they have to go to the bank," said Ed Nusbaum, chief executive of Grant Thornton International. "They need to start talking to their bankers."

In North America, about 75% of the executives polled said their loans could be recalled if they break this type of covenant, but less than 5% of executives thought the lease accounting change would affect them.

The American Bankers Association has been pushing rule makers to build a long transition period into the new rules, so that they wouldn't take effect until at least 2018.

"There has to be a huge amount of education for loan officers, who have to start figuring out what the right ratios are and what they will have to adjust," said Michael Gullette, vice president of accounting and financial management at the ABA.

From EY:  FASB addresses sale and leasebacks, US GAAP topics in leases project
http://www.ey.com/Publication/vwLUAssetsAL/TothePoint_BB2822_Leases_3September2014/$FILE/TothePoint_BB2822_Leases_3September2014.pdf
What you need to know

• The FASB decided that repurchase options exercisable at fair value would not preclude sale accounting for sale and leaseback transaction s involving non - specialized underlying assets that are readily available in the marketplace .

• The FASB decided that l essees that are not public business entities could make an accounting policy election to use the risk - free rate for the initial and subsequent measurement of lease liabilities. This is consistent with the Board’s 2013 proposal.

• The Board affirmed its 2013 proposal to eliminate today’s accounting model for leveraged leases but decided that leveraged leases that exist at transition would be grandfathered.

 • The Board also affirmed its 2013 proposal for lessees and lessors to account for related party leases on the basis of the legally enforceable terms and conditions of the lease .

Overview

The Financial Accounting Standards Board (FASB or Board ) continued to redeliberate its 2013 joint proposal 1 t o put most leases on lessees’ balance sheets . At last week’s FASB - only meeting, the Board made more decisions to clarify the proposed guidance on the accounting for sale and leaseback transactions. The Board also affirmed its 2013 proposed decisions about the discount rate for lessee entities that are not public business entities (PBE) , the accounting for leveraged leases and the accounting for related party leasing transactions. The Board’s latest decisions, like all decisions to date, are tentative. No. 201 4 - 333 September 2014 To the Point FASB — proposed guidance

Continued in article

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


Teaching Case on Going Concern Accounting
From The Wall Street Journal Accounting Weekly Review on September 5, 2014

Executive Responsibility For 'Going Concern' Disclosures Increases
by: Emily Chasan and Maxwell Murphy
Aug 28, 2014
Click here to view the full article on WSJ.com
 

TOPICS: Accounting Deficiency

SUMMARY: Corporate managers will have to make more uniform disclosures when there is substantial doubt about their business' ability to survive, according to the Financial Accounting Standards Board. The FASB updated U.S. accounting rules, effective by the end of 2016, to define management's responsibility to evaluate whether their business will be able to continue operating as a "going concern," and make relevant disclosures in financial statement footnotes. Previously, there were no specific rules under U.S. Generally Accepted Accounting Principles and disclosures were largely up to auditors. Corporate executives had the option to make any voluntary disclosures they felt relevant.

CLASSROOM APPLICATION: This is a good article to discuss going concern, notes to the financial statements, and FASB, as well as management's responsibility in financial reporting.

QUESTIONS: 
1. (Introductory) What is FASB? What is its function? What is GAAP? Why is GAAP used in accounting?

2. (Advanced) What does the concept "going concern" mean? Why is it important? What kind of disclosures is FASB requiring? Who is required to make the disclosures? Why are these parties included in the requirement?

3. (Advanced) In general, what is included in the notes to financial statements? Why are notes required? Who uses the notes and how are they used? Please give some examples of information regularly included in the notes.

4. (Advanced) What is the benefit of this new rule? How can this information be used? Are there other ways besides a note that someone could access this information?
 

Reviewed By: Linda Christiansen, Indiana University Southeast
 

RELATED ARTICLES: 
Going Concern Opinions on Life Support With Investors
by Emily Chasan
Sep 12, 2014
Online Exclusive

"Executive Responsibility For 'Going Concern' Disclosures Increases," by Emily Chasan and Maxwell Murphy, The Wall Street Journal, August 27, 2014 ---
http://blogs.wsj.com/cfo/2014/08/27/executive-responsibility-for-going-concern-disclosures-increases/?mod=djem_jiewr_AC_domainid

Corporate managers will have to make more uniform disclosures when there is substantial doubt about their business’ ability to survive, the Financial Accounting Standards Board said Wednesday.

The FASB updated U.S. accounting rules, effective by the end of 2016, to define management’s responsibility to evaluate whether their business will be able to continue operating as a “going concern,” and make relevant disclosures in financial statement footnotes. Previously, there were no specific rules under U.S. Generally Accepted Accounting Principles and disclosures were largely up to auditors. Corporate executives had the option to make any voluntary disclosures they felt relevant.

Investors, however, have grown frustrated with a lack of going concern opinions during the financial crisis that failed to warn them of impending bankruptcies.

The FASB first issued a proposal at the peak of the financial crisis in 2008, but debate and revisions delayed the final standard, which didn’t go up for a vote until May.

Supporters of the changes have argued that corporate managers have better information about a company’s ability to continue financing their operations than auditors. The updated rule will force executives to disclose serious risks even if management has a credible plan to alleviate them, for example.

Information currently disclosed by companies can vary significantly. Only about 40% of companies that filed for bankruptcy in the past two decades have explicitly disclosed the possibility that they could cease to operate before running into trouble, according to a study this month from Duke University’s Fuqua School of Business.


Teaching Case on Consolidation and Tax Strategy
From The Wall Street Journal Accounting Weekly Review on September 5, 2014

The Bill Comes Due on Kinder Morgan MLPs
by: Laura Saunders
Aug 30, 2014
Click here to view the full article on WSJ.com
 

TOPICS: Consolidation, Master Limited Partnerships, Partnerships, Tax Planning, Tax Strategy, Taxation

SUMMARY: Energy giant Kinder Morgan Inc. is pursuing a reorganization that could trigger surprise tax bills for investors in its two publicly traded master limited partnerships: Kinder Morgan Energy Partners and El Paso Pipeline Partners. One of the partnerships has generated an average return of nearly 18% annually over the past five years and 12% over the past 10 years. The potential obligations to Uncle Sam, however, are a reminder of the complex tax issues that come with MLP investments. That is especially true when shares-or units, as they are known-are sold.

CLASSROOM APPLICATION: This article explains what is happening in the reorganization of these partnerships and focuses on the tax impact on the owners.

QUESTIONS: 
1. (Introductory) What are the facts of the Kinder Morgan situation discussed in the article? What is Kinder Morgan planning? Why is it making the change?

2. (Advanced) What are master limited partnerships (MLPs)? What is the tax treatment of an MLP's income? How is that information reported?

3. (Advanced) What are the tax advantages of MLPs? What is the tax treatment when an investor sell units in an MLP? What does the article indicate is the best tax planning for owners of MLPs? Why?

4. (Advanced) How will investors calculate tax liability for the units sold through the reorganization?
 

Reviewed By: Linda Christiansen, Indiana University Southeast
 

RELATED ARTICLES: 
Kinder Morgan to Consolidate Empire
by Alison Sider and Russell Gold
Aug 11, 2014
Online Exclusive

Kinder Morgan's Limited Partner Master Plan
by LIam Denning
Aug 12, 2014
Online Exclusive

Kinder Morgan Deal Risks Big Tax Bills for Investors
by Lau, Alison Sider, and Russell Gold
Aug 12, 2014
Online Exclusive

Q&A: How the Kinder Morgan Deal Affects Investors' Taxes
by Laura Saunders
Aug 12, 2014
Online Exclusive

Kinder Morgan CEO Wins Big in Deal
by Russell Gold and Alison Sider
Aug 16, 2014
Online Exclusive

Tax Savings to Await Kinder Morgan Deals
by Alison Sider
Aug 14, 2014
Online Exclusive

 

"The Bill Comes Due on Kinder Morgan, by Laura Saunders, The Wall Street Journal, August 30, 2014 ---
http://online.wsj.com/articles/the-tax-bill-comes-due-on-kinder-morgan-mlps-1409335312?mod=djem_jiewr_AC_domainid

Energy giant Kinder Morgan Inc. KMI +0.23% is pursuing a reorganization that could trigger surprise tax bills for investors in its two publicly traded master limited partnerships: Kinder Morgan Energy Partners KMP +0.34% and El Paso Pipeline Partners. EPB +0.53%

Investors long have cherished the hefty payouts from MLPs, and the two partnerships—led by Richard Kinder, who also heads Kinder Morgan—have done well. According to Chicago-based investment researcher Morningstar, Kinder Morgan Energy Partners—the more widely held investment—has generated an average return of nearly 18% annually over the past five years and 12% over the past 10 years.

The potential obligations to Uncle Sam, however, are a reminder of the complex tax issues that come with MLP investments. That is especially true when shares—or units, as they are known—are sold. Here is what is happening, and what taxpayers can do about it:

Why MLP taxes are different. Because MLPs are partnerships and not corporations, they don't owe federal income tax. Instead, investors—who are technically members of the partnership—record a proportional share of the partnership's income, depreciation, losses and other items on their personal tax returns. Investors receive this information in a document called a K-1.

Incorporating K-1 information into the investor's tax return often takes far more time (or fees to tax preparers) than reporting dividend information, experts say.

The reason many investors owe little to no tax each year on MLP payouts is that most taxes are deferred until units are sold. There are tax effects that accumulate over time, however. An important one is that, unlike with dividends, MLP payouts reduce the investor's "cost basis," the starting point for measuring income tax after a sale. The lower the cost basis, the higher the taxable income.

When units are sold, there is a reckoning with the Internal Revenue Service. The investor's cost basis is often much lower than his purchase price, and some of his profit could be taxed at rates for ordinary income, which are higher than capital-gains rates.

Many tax issues disappear if MLP investors hold units until death, says Don Williamson, who heads the Kogod Tax Center at American University. At death, no income tax on the MLPs is owed and heirs get a fresh start—a cost basis equal to full market value at the date of death.

"Death is the best tax planning for MLPs," Mr. Williamson says.

Most Kinder Morgan MLP investors won't be able to use this strategy. The coming reorganization counts as a taxable sale, with investors slated to receive $10.77 in cash and 2.1931 shares of the new firm for each Kinder Morgan Energy Partners unit they currently hold.

Continued in article


Teaching Case on Valuation
From The Wall Street Journal Accounting Weekly Review on September 12, 2014

The Heated Litigation Over Arizona Iced Tea
by: Mike Esterl
Sep 04, 2014
Click here to view the full article on WSJ.com
 

TOPICS: Business Valuation

SUMMARY: As a business partnership soured, hot heads got in the way of a cold calculation: What is the value of Arizona Beverage Co., maker of the popular Arizona iced tea? A New York State Supreme Court judge is set to hear closing arguments in a four-year-old fight over the valuation, in which Arizona's estranged co-founders have been as far apart as water in the desert. One co-founder, who wants to be bought out, contends that Arizona is worth between $3 billion and $4 billion. The other, who is willing to buy out his former partner, argues Arizona's value is closer to $500 million. Aside from wrapping up the messy business-divorce proceedings, a conclusion in the case could pave the way for Coca-Cola Co. or another drinks company to buy a stake.

CLASSROOM APPLICATION: This article is appropriate for a class that covers the topic of business valuation.

QUESTIONS: 
1. (Introductory) What are the facts of this case? Who is the plaintiff and who is the defendant? What issue do the parties want the court to decide?

2. (Advanced) What is a business valuation? Besides litigation, what are other uses of business valuations? Why might a business want to know its value?

3. (Advanced) What are some methods used to value a business? Which of these might methods might be appropriate for use in this case?

4. (Advanced) Why are the parties so far apart with these valuation amounts? Do each of the parties have a legitimate basis for the amount they are proposing? Which is more likely to be correct?

5. (Advanced) What knowledge and skills are necessary to do business valuations? What education and business experience would be beneficial for someone interested in a career in business valuation? What are the career opportunities?
 

Reviewed By: Linda Christiansen, Indiana University Southeast

"The Heated Litigation Over Arizona Iced Tea," by Mike Esterl, The Wall Street Journal, September 4, 2014 ---
http://online.wsj.com/articles/the-heated-litigation-over-arizona-iced-tea-1409787182?mod=djem_jiewr_AC_domainid

As a business partnership soured, hot heads got in the way of a cold calculation: What is the value of Arizona Beverage Co., maker of the popular Arizona iced tea?

On Thursday, a New York State Supreme Court judge is set to hear closing arguments in a four-year-old fight over the valuation, in which Arizona's estranged co-founders have been as far apart as water in the desert. One co-founder, who wants to be bought out, contends that Arizona is worth between $3 billion and $4 billion. The other, who is willing to buy out his former partner, argues Arizona's value is closer to $500 million.

Aside from wrapping up the messy business-divorce proceedings, a conclusion in the case could pave the way for Coca-Cola Co. KO -0.19% or another drinks company to buy a stake.

Nassau County, N.Y., Supreme Court Judge Timothy Driscoll will be the one to determine how much co-founder Domenick Vultaggio must pay co-founder John Ferolito to take full control. Depending on how much the court values Mr. Ferolito's stake, Mr. Vultaggio might have to seek outside investors for help. That could finally reopen talks between Arizona and several beverage companies like Coke that are eager to grab a huge part of the growing U.S. market for ready-to-drink tea.

Judge Driscoll has told both parties he will try to issue a ruling by Columbus Day.

As young men, Messrs. Ferolito and Vultaggio, two friends from Brooklyn, teamed up in 1971 to deliver beer around New York City from a Volkswagen VOW3.XE -0.66% bus. Decades later, after seeing Snapple teas fill up store shelves, they launched Arizona and its Southwestern-inspired label motif in 1992, eventually taking it national and unseating Snapple and several other brands owned by deeper-pocketed companies.

Arizona had a 40% share of U.S. ready-to-drink tea in 2013 by volume, ahead of PepsiCo Inc., PEP +0.93% which sells Lipton through its joint venture with Unilever ULVR.LN -0.30% and had a 34% share, according to industry tracker Beverage Digest. Snapple, now owned by Dr Pepper Snapple Group Inc., DPS +0.56% had a 10% share.

Beverage Digest estimates annual U.S. ready-to-drink tea sales to be around $6 billion.

The two founders have been feuding for years and Mr. Ferolito has long stopped being involved in day-to-day operations, moving to Florida.

Mr. Ferolito began looking at selling his stake in Arizona roughly a decade ago, but was blocked by Mr. Vultaggio. An agreement prevented either side from selling its stake without the other's consent.

The legal battle has featured plenty of fireworks. Mr. Vultaggio's lawyers have accused Mr. Ferolito of trying to intimidate Mr. Vultaggio at one point in the yearslong dispute by appearing at the company with an armed former New York City detective. Nicholas Gravante, an attorney for Mr. Ferolito, called the allegation "a complete fabrication.''

"Both sides have thrown a lot of grenades back and forth. The court has shown absolutely no interest in that nonsense. This is a valuation case,'' added Mr. Gravante, an attorney at Boies, Schiller & Flexner LLP.

The case, which went to trial earlier this summer, has produced about 5,000 pages of transcripts and thousands of pages in exhibits, according to Louis Solomon, an attorney for Mr. Vultaggio.

Mr. Solomon, an attorney at Cadwalader, Wickersham & Taft LLP, said Mr. Vultaggio has no intention of selling the company. "He's not a seller. He's never been a seller,'' Mr. Solomon said, adding that Mr. Vultaggio's children also are involved in the business.

But attorneys for both men acknowledge that companies including Coke, Nestlé SA NESN.VX +0.28% and Tata Global Beverages 500800.BY -4.67% have approached Mr. Ferolito and Arizona in the past about acquiring part or all of the company. The valuation court case, which began in 2010, effectively killed such talks.

Coke and Nestlé declined Wednesday to comment on any previous talks, or any potential interest in acquiring part or all of Arizona if it becomes available. Tata, which is based in India, didn't immediately return calls on Wednesday. The Wall Street Journal reported in 2007 that Coke and Arizona executives had held talks.

"If it is for sale, it would be a terrific deal for Coke because it needs a much bigger North American tea business,'' said John Sicher, publisher of Beverage Digest, adding tea should continue to grow thanks to its "health and wellness aura.''

Coke's Fuze, Gold Peak and Honest Tea brands had a 5.5% share of the U.S. ready-to-drink tea market by volume last year, according to Beverage Digest. Coke ended its Nestea partnership in the U.S. with Nestlé in 2012.

Coke already has made two moves into caffeinated drinks this year, buying minority stakes in countertop coffee maker Keurig Green Mountain Inc. GMCR +1.16% and energy drink maker Monster Beverage Corp. MNST -0.51%

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


Teaching Case on the Globalization of IFRS:  Allowing IFRS and Requiring IFRS are Two Different Matters
From The Wall Street Journal Accounting Weekly Review on September 12, 2014

Non-IFRS Accounting Zones Dwindle in Number
by: Maxwell Murphy
Sep 09, 2014
Click here to view the full article on WSJ.com
 

TOPICS: IFRS

SUMMARY: The U.S., China, Egypt, Bolivia, Guinea-Bissau, Macao and Niger don't allow their domestic publicly traded companies to use International Financial Reporting Standards. In 106 countries, all or most domestic public companies are required to report under IFRS. This article provides data regarding the number of countries using IFRS and those that do not.

CLASSROOM APPLICATION: Use this article when covering IFRS to show the extensive use around the world.

QUESTIONS: 
1. (Introductory) What is IFRS? Where is it used? What countries do not use IFRS?

2. (Advanced) What set of standards does the U.S. use? Why does the U.S. use those standards and not others? Does the U.S. offer any exceptions to its required set of standards? Why or why not?

3. (Advanced) What is the status of IFRS in the U.S.? Do you think it should implemented? Why or why not? Should it be implemented?
 

Reviewed By: Linda Christiansen, Indiana University Southeast

"Non-IFRS Accounting Zones Dwindle in Number," by Maxwell Murphy, The Wall Street Journal, September 9, 2014 ---
http://blogs.wsj.com/cfo/2014/09/09/non-ifrs-accounting-zones-dwindle-in-number/?mod=djem_jiewr_AC_domainid

The U.S., China, Egypt, Bolivia, Guinea-Bissau, Macao and Niger don’t allow their domestic publicly traded companies to use International Financial Reporting Standards.

In 106 countries, all or most domestic public companies are required to report under IFRS, according to a review of 130 countries by the parent of the London-based International Accounting Standards Board. Another 15 countries permit or require the use of IFRS at least for financial-services companies.

For more than a decade, the IASB and the U.S. Financial Accounting Standards Board have been working to align their accounting rules. And while they hope to wrap up that project next year, there is still disagreement.

Some U.S. investors worry that the expense of moving U.S. companies to IFRS and adopting new approaches to inventory and acquisition accounting, for example, wouldn’t yield sufficient benefit to justify the cost.

It is unclear whether U.S. Securities and Exchange Commission Chairman Mary Jo White and James Schnurr, the agency’s incoming chief accountant, will take up the task of integrating IFRS and U.S. generally accepted accounting practices.

Ms. White has made a priority to give more direction on IFRS but didn’t say whether she would consider giving U.S. companies an option to use international rules.

The U.S. allows about 500 U.S.-listed foreign companies, such as HSBC Holdings HSBA.LN -0.21% PLC and Unilever ULVR.LN -0.45% PLC, to report results solely according to IFRS. The IASB views that exception as indication that the SEC accepts that IFRS accounting won’t harm investors, said Paul Pacter, a former IASB member and now a consultant to the board.

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


Teaching Case on Accounting Disclosures
From The Wall Street Journal Accounting Weekly Review on September 12, 2014

The Road to Effective Disclosures
by: Deloitte CFO Journal Editor
Sep 05, 2014
Click here to view the full article on WSJ.com
 

TOPICS: Disclosure, Financial Reporting

SUMMARY: Lately, regulators and standard setters have been renewing their focus on disclosure effectiveness. Although SEC, FASB, and IASB projects are in the early stages, their common goal of making comprehensive improvements to the U.S. public company disclosure regime may increase their likelihood of success. While views on how to achieve improvements may differ, most seem to agree that the entire disclosure system is due - if not overdue - for modernization.

CLASSROOM APPLICATION: This article about the SEC, FASB, and IASB plans for disclosure effectiveness is appropriate for a financial accounting or auditing class.

QUESTIONS: 
1. (Introductory) What are the SEC, FASB, and IASB? What are their purposes? How do they differ?

2. (Advanced) What disclosures are discussed in the article? In general, what do these organizations plan to do to increase the effectiveness of disclosures?

3. (Advanced) Please explain the details of the SEC's disclosure effectiveness project and its other disclosure plans. What will these plans add to financial reporting? Do you think these are good moves?

4. (Advanced) Please review SEC filings for a large public company of your choice (available online). Were you able to understand the information presented? What information is easy to find and understand? What information is challenging to find or to understand? Having reviewed this information, what suggestions do you have to improve access and readability?

5. (Advanced) What are FASB's plans regarding improvement of disclosures? Why is FASB particularly important for financial reporting purposes and information dissemination?

6. (Advanced) What is IASB considering? How could these changes help companies and investors in the U.S.?
 

Reviewed By: Linda Christiansen, Indiana University Southeast

"The Road to Effective Disclosures," Deloitte CFO Journal Editor, September 5, 2014 ---
http://deloitte.wsj.com/cfo/2014/09/05/the-road-to-effective-disclosures/?mod=djem_jiewr_AC_domainid

The call for modernizing and improving the public company disclosure regime—whether in the name of combatting complexity and “overload,” improving efficiency or effectiveness, or adapting to new technology—is hardly new. Indeed, in the past decade alone, several regulatory and standard-setting initiatives have included such broad goals. But none of those efforts resulted in fundamental changes to the disclosure system, in part because of competing agenda priorities and difficulties achieving consensus on the specific nature of comprehensive changes.

Lately, however, regulators and standard setters have been renewing their focus on disclosure effectiveness. SEC Commissioner Kara Stein remarked in a May 2014 speech that “[i]mproving disclosures is an important and herculean task,” and certain projects at the SEC and at the FASB and IASB have been gaining momentum. Although those projects are in the early stages, their common goal of making comprehensive improvements to the U.S. public company disclosure regime may increase their likelihood of success. While views on how to achieve improvements may differ, most seem to agree that the entire disclosure system is due—if not overdue—for modernization.

SEC Disclosure Effectiveness Project

A motivating factor in the SEC’s recent efforts to improve disclosure effectiveness (known as its “disclosure effectiveness project”) has been its concern that investors often struggle to find salient information in registrants’ filings. In an October 2013 speech, SEC Chair Mary Jo White questioned “whether investors need and [investors] are optimally served by the detailed and lengthy disclosures about all of the topics that companies currently provide in the reports they are required to prepare and file with [the SEC].” And in a May 2014 speech, Ms. White emphasized the importance of “full and fair disclosure [for the] capital markets to thrive” and asked whether “the information companies are currently required to disclose is the most useful information for investors and whether [it] is being provided at the right time and in the right way.”

Further, in a January 2014 speech, Commissioner Daniel Gallagher noted his observations that registrants often disclose matters that are generic, outdated, redundant, and immaterial. He stated that “[t]oday’s mandated disclosure documents are no longer efficient mechanisms for clearly conveying material information to investors.”

The SEC’s recent focus on disclosure effectiveness has also been prompted by Section 108 of the JOBSą Act, under which the SEC was instructed to review disclosure requirements in Regulation S-K (which contains many of the nonfinancial statement reporting requirements for SEC filings), identify ways to update and modernize them for emerging growth companies (EGCs), and submit a report to Congress. In its report  (issued in December 2013), the SEC recommended seeking disclosure improvements for all public companies, not just EGCs, even though a more comprehensive study would take additional time.

With the SEC’s report serving as a springboard for further action, Ms. White asked the staff to undertake a comprehensive review of the disclosure requirements in Regulation S-K as well as those in Regulation S-X (which contains requirements on the form and content of financial statements included in SEC filings) and to make specific recommendations. To achieve this objective, the SEC noted that it would focus not only on eliminating outdated, redundant, and overlapping disclosures but also on identifying topics for which investors may need better or more information to make informed investment decisions. Remarking on the need to reduce immaterial disclosures, Keith Higgins, director of the SEC’s Division of Corporation Finance, noted in a March 2014 speech that “[u]nfortunately, there is no easy answer or consensus on how to do so. What one person sees as overload, another might very well see as important information for making an investment or voting decision.”

SEC Review of Disclosure Content

In an April 2014 speech, Mr. Higgins explained that the SEC staff will identify ways to improve the disclosure requirements in Regulations S-K and S-X. The staff will analyze Regulation S-K as part of the first phase of its disclosure effectiveness project, focusing “on the business and financial disclosures that flow into periodic and current reports, namely Forms 10-K, 10-Q, and 8-K, and, in one way or another, make their way into transactional filings.” For example, the staff will consider eliminating disclosure requirements that were originally created to fill a void in U.S. GAAP but are no longer necessary. Further, the staff will:

Editor’s Note: In her May 2014 speech, Ms. White indicated that since investors have a significant interest in increased transparency into audit committee activities, she has asked the SEC staff to consider, separately from the disclosure effectiveness project, whether audit committee reporting requirements and reports can be improved. Commenting generally on how the SEC staff will prioritize its ongoing review, Mr. Higgins noted in his April 2014 speech that the staff’s evaluation of proxy disclosures would take place in a “later phase of the project.”

In addition, the staff plans to study whether the benefits associated with requirements in Regulation S-X outweigh their costs to preparers. For example, the staff will review:

SEC Review of Disclosure Format

Mr. Higgins indicated that the staff would also study how information is currently disclosed and whether improvements can be made to the presentation of company filings. Similarly, Ms. Stein has stated that disclosures need to be more accessible, useful, and timely. In her May 2014 speech, she noted the following:

In an era where nearly all data is electronic . . . a huge portion of public disclosures are presented in a format that isn’t structured and easily accessible for analytics. [The SEC] should be making sure that as many disclosures as practicable are required to be submitted in useful, structured formats that investors, the public, and the Commission can use. In the same vein, I believe [the SEC] should require disclosures to be timelier. News and business move faster than ever before. Does it still make sense for investors to wait for quarterly or annual statements that are delivered weeks or months later?

In particular, the SEC has questioned the appropriateness of the format, structure, and timing of filings in light of improvements in technology and ways that investors search for information. In his March 2014 speech, Mr. Higgins discussed considerations related to the SEC’s efforts to “harness the rapidly changing technology that has made the sharing of information so efficient in other areas of life [and] bring the same level of efficiency to how investors find information about a company.” He also outlined the SEC’s plans to enhance the “navigability” of disclosure documents by exploring:

Editor’s Note: As part of examining potential improvements to disclosure format, the SEC solicited support in July 2014 for modernizing its EDGAR filing system. Contractors submitted proposals to provide “the groundwork for SEC decision-making to shape the modernization effort,” including:

—Reducing the number of form types and acceptable data formats.

—Reducing the duplication of information collected.

—Functionally improving communications between filers and the SEC staff.

—Improving the functional “look and feel” for a better filer and investor experience.

—“Other innovative ideas that the contractor will bring to the table and that the contractor will identify in their interviews with stakeholders.”

FASB Disclosure Improvement and Simplification Efforts

The FASB has also been looking into ways to reduce complexity and improve financial statement disclosures. In a June 2014 speech, FASB Vice Chairman Jim Kroeker noted that the “object of [the Board’s disclosure framework] project is to remove the clutter, and focus on making disclosures more useful to investors.”⁴ In a key step toward meeting that objective, the FASB released an exposure draft for public comment in March 2014 on its decision process for determining disclosures to require in notes to financial statements (see Deloitte’s March 6, 2014, Heads Up for additional information). The comment period ended in July 2014, and the FASB plans to start redeliberations in September 2014. In addition, the Board has been considering a similar decision-making framework for financial statement preparers and has been reviewing information gathered in a field study by its staff about how public, private, and not-for-profit organizations determine which disclosures to provide in the notes to their financial statements.

Continued in article

Bob Jensen's threads on disclosures ---
http://www.trinity.edu/rjensen/theory02.htm#CreditDisclosures


From EY:  SEC Comments and Trends 2014---
http://www.ey.com/UL/en/AccountingLink/Accounting-Link-Home


Teaching Case on Analysis of Financial Statements
From The Wall Street Journal Accounting Weekly Review on September 12, 2014

Investing Tips from Warren Buffett? Try Writing Tips Instead
by: Michael Rapoport
Sep 08, 2014
Click here to view the full article on WSJ.com
 

TOPICS: Annual Report, Disclosures, Financial Accounting

SUMMARY: Regulators have been concerned that the volume of disclosures required of public companies has made their financial reports so lengthy it's become harder for investors to find the most relevant information. To address that problem, a committee of the Association of the Bar of the City of New York is proposing yet another required disclosure for companies: A short, plain-English overview, at the start of a company's annual report, that would describe what happened at the company over the past year and management's expectations and concerns for the year to come.

CLASSROOM APPLICATION: This is a good article to share with students as we discuss annual reports and required disclosures.

QUESTIONS: 
1. (Introductory) What is an annual report? What are its components? What is the purpose of an annual report?

2. (Advanced) Who are the users of the annual report? How is this information used? Why is accurate information and full disclosure important?

3. (Advanced) What has a group of lawyers proposed regarding the requirements for annual reports? What is the reasoning behind this proposal? What are the benefits of this proposal? Are there any drawbacks?

4. (Advanced) Should this proposal be implemented? Why or why not?
 

SMALL GROUP ASSIGNMENT: 
Find the annual report for a large public company (either a physical copy or online). Do you find that the critiques detailed in the article apply to the financial information you are reviewing? Is information organized well? Are the disclosures easy to find, read, and understand? Would the proposal presented in the article be an improvement for the annual report you are reviewing? Do you have other ideas for improvements to presentation?

Reviewed By: Linda Christiansen, Indiana University Southeast

"Investing Tips from Warren Buffett? Try Writing Tips Instead," by Michael Rapoport, The Wall Street Journal, September 8, 2014 ---
http://blogs.wsj.com/moneybeat/2014/09/08/investing-tips-from-warren-buffett-try-writing-tips-instead/?mod=djem_jiewr_AC_domainid

A prominent lawyers’ group has an idea for how companies can improve annual reports: write a letter explaining the results in plain English, as Warren Buffett often does it.

Regulators have been concerned that the volume of disclosures required of public companies has made their financial reports so lengthy it’s become harder for investors to find the most relevant information.

To address that problem, a committee of the Association of the Bar of the City of New York is proposing yet another required disclosure for companies: A short, plain-English overview, at the start of a company’s annual report, that would describe what happened at the company over the past year and management’s expectations and concerns for the year to come.

“Business disclosure should not be akin to a game of ‘Where’s Waldo’ in which a reader is left suspecting that critical information is buried somewhere in the document but good luck finding it,” Michael R. Young, who chairs the bar association’s financial-reporting committee, wrote in a letter last week to Keith Higgins, the Securities and Exchange Commission’s director of corporation finance. “Rather, the most important information is best volunteered, up front, by management in a way that is both understandable and provides context.”

The committee plans to announce its proposal Monday. In an interview, Mr. Young called the proposal “a rule to cut through the rules” and said it wouldn’t replace any of the existing, more-detailed disclosures that the SEC requires of public companies. “The goal is to encourage companies and executives to report on what’s going on [to investors] much as they would to the board of directors,” he said.

The model, Mr. Young said, is the widely read, plain-spoken Berkshire Hathaway Inc. shareholder letter that Mr. Buffett writes each year. That “was sort of looked to as the platonic ideal” in developing the new proposal, he said.

The SEC would be the agency to ultimately decide whether to propose and implement such a move. The SEC’s Mr. Higgins said he didn’t have any reaction to the committee’s proposal itself, but he likes the idea in principle. “We encourage companies to make it easier to understand what management thought for the prior year and what’s up for the future,” he said.

According to 2012 research from accounting firm Ernst & Young LLP, the average number of pages in annual reports devoted to footnotes and management’s discussion and analysis has quadrupled over the last two decades. In recent months, SEC officials have said they will look at possible steps to make disclosure more effective, such as weeding out outdated and redundant disclosure requirements.

“As the number of pages in annual reports has steadily increased, it may become more difficult for investors to find the most salient information,” Mr. Higgins said in an April speech to business lawyers, in which he invited their suggestions.

Mr. Young says he “appreciates the irony” of fighting disclosure overload by proposing another disclosure requirement. But enacting such requirements is “the main tool regulators have to work with” in solving the problem, he said.

Bob Jensen's threads on financial statement analysis are at
http://www.trinity.edu/rjensen/roi.htm


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

One of the most popular Excel spreadsheets that Bob Jensen ever provided to his students ---
www.cs.trinity.edu/~rjensen/Excel/wtdcase2a.xls

"Mark-to-market Madness," by David M. Katz, CFO.com, April 24, 2009 --- http://www.cfo.com/blogs/?f=header

As if they needed any, the critics of fair value got a fresh new example of the craziness of an oft-decried provision in FAS 157, paragraph 15 of Fair Value Measurements. The provision rewards companies whose credit spreads on their debt liabilities have widened and punishes those who have become more creditworthy.

On Wednesday, Morgan Stanley reported that it had to cut its first-quarter net revenues $1.5 billion because the credit spreads on some of its long-term debt had narrowed. What happened was that as the investment bank grew more reliable to its creditors over the first part of the year, its debt became more valuable. And under the dictates of mark-to-mark accounting, the firm had to take a writeoff because of this very positive occurrence.

Sound nuts? It has sounded so to many observers. In the 15th paragraph of 157 FASB says, nevertheless, that "the fair value of [a company's] liability shall reflect the nonperformance risk relating to that liability." Thus, as the nonperformance risk--as reflected by slimmer credit spreads—narrowed, Morgan Stanley had to reflect the decreased value of its debt as a decrease in sales on its income statement.

Like the alleged evils of mark-to-market accounting in illiquid markets—although to a lesser extent—the irrational practice of forcing improved creditworthiness to be reflected in revenue decreases has become fodder for fair value’s enemies. When FASB made its recent amendments to 157, it neglected to attack the provision. If only to preserve fair-value accounting from more political attacks, it should do so now.

"The Fair-Value Deadbeat Debate Returns: On hiatus while other fair-value questions were debated, the hotly-contested issue of why companies can book a gain when their credit rating sinks has returned to center stage," by  Marie Leone, CFO.com, June 29, 2009 --- http://www.cfo.com/article.cfm/13932186/c_2984368/?f=archives

"Is Fair Value Foul? A Stanford professor argues that the less that investors use fair value accounting to value companies, the better.," by David M. Katz, CFO Magazine, September 22, 2014 ---
http://ww2.cfo.com/management-accounting/2014/09/is-fair-value-accounting-foul/
 

Reply to Mohammad Raza from Bob Jensen on September 23, 2014

Hi Mohammad,
 

We had some discussion on the AECM when this paper by Professor Katz was originally published in Stanford Magazine.
 
My own threads on the various alternatives for valuing assets and liabilities are given at
http://www.trinity.edu/rjensen/Theory02.htm#BasesAccounting 
 
My main objection for entry or exit revaluation of fixed assets in going concerns is that these revaluations create earnings fictions if the unrealized gains and losses are posted to earnings. For example, ups and downs in the value of the land under a giant Boeing assembly plant are earnings fictions if there's zero chance that the land will be sold apart from the factory and zero chance that Boeing will sell the factory.

Revaluation makes more sense when when the probability of a factory sale in the near future becomes much greater --- hence the reason accounting rules call for exit valuation of non-going concerns.
 
Stock prices are of little use in revaluing booked assets and liabilities because stock prices reflect market values of the unbooked as well as the booked assets and liabilities such as the values of the human resources, reputation, contingencies, and off-balance sheet financing.

It's interesting to compare the history of theory debates over valuation of booked assets and liabilities in going concerns. Theorists that promoted historical costs like AC Littleton and Yuji Ijiri contended that historical costs is not valuation at all --- they are simply stewardship scorekeeping rules that have survived for over 500 years --- survival of the fittest so to speak.

"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
http://aaahq.org/AM2010/display.cfm?Filename=SubID_2022.pdf&MIMEType=application%2Fpdf


 
A very concise summary of the positions of various accounting theory experts in history since 1909 and authoritative bodies over the years since 1936:
"Asset valuation: An historical perspective"
Authors: Racliffe, Thomas A. (Thomas Arthur) and Munter, Paul
Accounting Historians Journal
1980
http://umiss.lib.olemiss.edu:82/record=b1000230
Jensen Comment:  I really liked this summary of the valuation literature prior to 1980.
For example, what was the main difference between exit value advocates Chambers versus Sterling?
 

 

Two of the most vocal advocates of replacing historical costs with exit values were the following members of the Accounting Hall of Fame:

Ray Chambers ---
http://fisher.osu.edu/departments/accounting-and-mis/the-accounting-hall-of-fame/membership-in-hall/raymond-john-chambers/

Bob Sterling ---
http://fisher.osu.edu/departments/accounting-and-mis/the-accounting-hall-of-fame/membership-in-hall/robert-raymond-sterling

Ray Chambers defined fair value accounting as the sum of the exit values of all of its parts as if they would be sold in a yard sale. He thus ignored any synergy value (value in use) of assets and liabilities in combination under existing management. Bob Sterling defined fair value as the exit value of groupings of assets and liabilities that captured synergy value (value in use) of assets and liabilities in combination under existing management.

Personally I think the Chambers valuation makes sense only when booked items are to be sold for a non-going concern in a yard sale. Sterling's arguments make more sense for going concerns, but estimates of such values of booked items is usually quite impractical. Stock prices and valuations of segments of the company are eof little help for booked item valuations if those valuations include unbooked as well as booked items such as the values of the human resources, reputation, contingencies, and off-balance sheet financing.

Both the Chambers and Sterling exit value arguments add fictions to earnings if the unrealized gains and losses of remeasurement are posted to earnings.

Famous Historical Cost Theorists
Probably the best known historical cost advocate of all time is AC Littleton followed by mathematician Yuji Ijiri. Both argued that historical cost balance sheets do not pretend to be valuations beyond the original dates on which the transactions were booked into the ledgers. Balance sheet numbers are simply residuals in from the calculation of income statement numbers under the Realization Principle for revenues and the Matching Principle for costs and expenses. Although Littleton and Ijiri also advocate price level adjustments, they are not advocates of current value adjustments beyond supplementary disclosures of exit values or entry values.

The most famous publication of the American Accounting Association is the 1941 monograph on historical cost theory by Paton and Littleton ---
http://www.trinity.edu/rjensen/theory02.htm#Paton
The biggest selling monographs in the AAA's Studies in Accounting Research series are the double/triple bookkeeping monographs by Yuji Ijiri that were rooted in historical cost accounting ---
http://aaahq.org/market/display.cfm?catID=5

Famous Exit Value (Disposal Value) Theorists
In history, the strongest advocates of exit value replacement of historical costs in financial statements included Kenneth MacNeal, Bob Sterling, and Australia's famous Ray Chambers. Their main arguments boiled down to very simple wash sale illustrations. Suppose Company H and Company S begin with identical balance sheets of A=$1000 Corn Inventory and E=$1.000 Equity where each company paid $1 for 1,000 bushels of corn. In order to dress up the financial statements before closing its books, Company S sells its corn for $2 per bushel in an intended wash sale. Then immediately after closing its books Company S buys back corn for $2 per bushel. Company S now has a balance sheet of A=$2,000 Corn Inventory and E=$1000 Invested Capital + $1,000 retained earnings.

In the above example Company S looks like it performed twice as well as Company H even though in the final outcome both remain identical in terms of all economic criteria. Company H has simply undervalued its historical cost inventories and did not realize any revenue from sales. In real life, however, the situation is not so simple. In 1981 when Days Inns of America wanted to dress up its historical cost balance sheet (for an IPO) the transactions cost of selling each of its 300+ hotels would've been immense for selling and then buying back each hotel. Accounting rules did not permit departing from historical cost valuations for each of these hotels in its main Price Waterhouse-audited financial statements.. However, nothing prevented Days in from hiring a large real estate appraisal firm from deriving 1981 unaudited exit value estimates of each of the 300+ hotels.

To make matters worse, the "value in use" of these 300+ plus hotels most likely plunged dramatically the day its dynamic President had a sudden heart attack and died at a very young age. A "value in use" estimate is much more volatile than historical cost or replacement cost valuations.

The 1981 Days Inns Annual Report (for which I have three copies in my barn remaining from my days of teaching in which I loaned a copy of this 1981 Annual Report to each of my students) would've made MacNeal, Chambers, and Sterling ecstatic. The historical cost book values of these 300+ hotels aggregated to $87,356,000 whereas the exit values aggregated to an unaudited amount of $194,812,000. Wow!

This is probably value added when it comes to financial analysts and investors willing to trust these unaudited estimates from a real estate appraisal firm. The numbers of course are much more subjective and easy to manipulate for devious purposes than the cost numbers. Ande even if totally accurate, there's a huge problem of having measured current hotel values of a company's assets in there worst possible economic uses --- disposing each asset separately in assumed liquidation of the company. The $194,812,000. sum of disposal values of Days Inns hotels  totally ignores the synergy value of these when grouped together under the management of Days Inns. Exit value theorists have never provided us with a way of measuring the value of the whole other than by summing the exit disposal values of the parts. In reality the "value in use" of these 300+ hotels might've been $294,812,000, $394,812,000, or $494,812,000. We will never know because exit theorists cannot measure "value in use" of grouped assets of one company let alone the "value in use" if these hotels are sold to other companies like Holiday Inns of America where "value in use" is probably very different than "value in use" for Days Inns.

Famous Replacement Cost (Entry Value) Theorists
I think the best known theorists advocating entry values (replacement costs) are John Canning (in a published doctoral thesis) and William A Paton (in a lifetime of writing and speaking). Although Paton's most famous book is probably the 1941 Paton and Littleton monograph on historical cost theory this was more of an academic exercise for Bill Paton since his heart was truly in replacement cost fixed asset valuations ---
http://www.trinity.edu/rjensen/theory01.htm#Paton

Whereas the exit value of a 20 year old hotel might be $1 million in a liquidation sale, the replacement cost (entry value) of a new hotel might be $5 million. In entry value theory this $5 million would have to be adjusted for 20 years of hypothetical depreciation to arrive at its $2 million replacement cost estimate. Exit value theorists are proud of their not having to resort to arbitrary depreciation calculations. Entry value theorists are proud of being able to estimate current values when exit values are meaningless.

 Many older assets may have $0 exit value even though their value in use is still considerable. This is especially the case when costs of dismantling an old and large piece of equipment and re-installing it in another factory is so prohibitive that nobody will pay to re-install the item. There's also the problem of the way exit value markets work even for new assets. If a farmer pays $500,000 for a new diesel tractor the exit value may decline by 100,000 before the tractor is moved from tractor dealer's show room. Such is the nature of "new" versus "used" equipment exit values even when used is still or almost new.. Entry values are not quite so flaky since the replacement cost of that tractor might remain constant between the date of purchase and a month later after the tractor was used vigorously.

Also in the case of exit values of 300+ hotels, exit values of a New Orleans Days Inn versus a Fargo Days Inn (of identical age, style, and sizes) may differ greatly due to variations resale markets  in local economies. This is not generally true of replacement costs since the cost of constructing new hotels is not so variable in terms of local economies.

Thus replacement costs overcome the flaky nature of many exit value estimates. But replacement costs suffer from the same maladies of historical cost valuations in that arbitrary formulas for such things as depreciation and amortization.

To put my Bill Paton quotations into perspective it should be noted that most accounting historians describe him as a "replacement cost" man ---
http://www.trinity.edu/rjensen/theory01.htm#Paton

Also Paton's writings are best known from the days before we had accounting standard setting bodies like the APB, FASB, and IASB. The AICPA and its ARB committees seldom set accounting rules on really controversial issues. Instead GAAP, like common law, was drawn from "generally accepted" practices of accounting in industry and practices acceptable to accounting system auditors. The SEC was formed in 1933 with powers to dictate accounting standards for corporations listed on major stock exchanges in the U.S. However, the SEC was then and still is reluctant to take standard setting away from professional accountants.

In 1932 corporations and their auditors had much more flexibility than today in how to value current and fixed assets than the have today. For example in 2010 both the FASB and IASB rules virtually require historical cost inventory valuation for the majority of inventories reported globally in balance sheets. But in 1932 it was much easier for a company to report inventories at current values if its shareholders did not make a big fuss over exit value or entry value reporting of inventories.

But in since the crash of 1929, most companies stuck with historical cost valuation. Beside my desk I always keep the Second Edition of Accountants' Handbook edited by and heavily written by William A. Paton. The First Edition is dated 1923, and my copy is the Second Edition dated 1932.

Market Value Accounting: Entry Value (Current Cost, Replacement Cost) Accounting

One of the most popular Excel spreadsheets that Bob Jensen ever provided to his students ---
www.cs.trinity.edu/~rjensen/Excel/wtdcase2a.xls

Beginning in 1979, FAS 33 required large corporations to provide a supplementary schedule of condensed balance sheets and income statements comparing annual outcomes under three valuation bases --- Unadjusted Historical Cost, Price Level Adjusted (PLA) Historical Cost, and Current Cost Entry Value (adjusted for depreciation and amortization). Companies complained heavily that users did not obtain value that justified the cost of implementing FAS 33. Analysts complained that the FASB allowed such crude estimates that the FAS 33 schedules were virtually useless, especially the Current Cost estimates. The FASB rescinded FAS 33 when it issued FAS 89 in 1986.

Current cost accounting by whatever name (e.g., current or replacement cost) entails the historical cost of balance sheet items with current (replacement) costs. Depreciation rates can be re-set based upon current costs rather than historical costs. 

Beginning in 1979, FAS 33 required large corporations to provide a supplementary schedule of condensed balance sheets and income statements comparing annual outcomes under three valuation bases --- Unadjusted Historical Cost, PLA-Adjusted historical cost, and Current Cost Entry Value (adjusted for depreciation and amortization). Companies are no longer required to generate FAS 33-type comparisons. The primary basis of accounting in the U.S. is unadjusted historical cost with numerous exceptions in particular instances. For example, price-level adjustments may be required for operations in hyperinflation nations. Exit value accounting is required for firms deemed highly likely to become non-going concerns. Exit value accounting is required for personal financial statements (whether an individual or a personal partnership such as two married people). Economic (discounted cash flow) valuations are required for certain types of assets and liabilities such as pension liabilities. Hence in the United States and virtually every other nation, accounting standards do not require or even allow one single basis of accounting. Beginning in January 2005, all nations in the European Union adopted the IASB's international standards that have moved closer and closer each year to the FASB/SEC standards of the United States.

Advantages of Entry Value (Current Cost, Replacement Cost) Accounting

·     Conforms to capital maintenance theory that argues in favor of matching current revenues with what the current costs are of generating those revenues. For example, if historical cost depreciation is $100 and current cost depreciation is $120, current cost theory argues that an excess of $20 may be wrongly classified as profit and distributed as a dividend. When it comes time to replace the asset, the firm may have mistakenly eaten its seed corn.

 

·     If the accurate replacement cost is known and can be matched with current selling prices, the problems of finding indices for price level adjustments are avoided.

 

·     Avoids to some extent booking the spread between selling price and the wholesale "cost" of an item. Recording a securities “inventory” or any other inventory at exit values rather than entry values tends to book unrealized sales profits before they’re actually earned. There may also be considerably variability in exit values vis-ŕ-vis replacement costs.
 

Although I am not in general a current cost (replacement cost, entry-value) advocate, I think you and Tom are missing the main theory behind the passage of the now defunct FAS 33 that leaned toward replacement cost valuation as opposed to exit valuation.

The best illustration in favor of replacement cost accounting is the infamous Blue Book used by automobile and truck dealers that lists composite wholesale trading for each make and model of vehicle in recent years. The Blue Book illustration is relevant with respect to business equipment currently in use in a company since virtually all that equipment is now in the “used” category, although most of it will not have a complete Blue Book per se.

The theory of Blue Book pricing in accounting is that each used vehicle is unique to a point that exit valuation in particular instances is very difficult since no two used vehicles have the same exit value in a particular instances. But the Blue Book is a market-composite hundreds of dealer transactions of each make and model in recent months and years on the wholesale market.

Hence I don’t have any idea about what my 1999 Jeep Cherokee in particular is worth, and any exit value estimate of my vehicle is pretty much a wild guess relative to what it most likely would cost me to replace it with another 1999 Jeep Cherokee from a random sample selection among 2,000 Jeep dealers across the United States. I merely have to look up the Blue Book price and then estimate what the dealer charges as a mark up if I want to replace my 1999 Jeep Cherokee.

Since Blue Book pricing is based upon actual trades that take place, it’s far more reliable than exit value sticker prices of vehicles in the sales lots.

Conclusion
It is sometimes the replacement market of actual transactions that makes a Blue Book composite replacement cost more reliable than an exit value estimate of what I will pay for a particular car from a particular dealer at retail. Of course this argument is not as crucial to financial assets and liabilities that are not as unique as a particular used vehicle. Replacement cost valuation for accounting becomes more defensible for non-financial assets.

Disadvantages of Entry Value (Current Cost, Replacement Cost) Accounting

·     Discovery of accurate replacement costs is virtually impossible in times of changing technologies and newer production alternatives.  For example, some companies are using data processing hardware and software that no longer can be purchased or would never be purchased even if it was available due to changes in technology. Some companies are using buildings that may not be necessary as production becomes more outsourced and sales move to the Internet. It is possible to replace used assets with used assets rather than new assets. Must current costs rely only upon prices of new assets?

·     Discovering current costs is prohibitively costly if firms have to repeatedly find current replacement prices on thousands or millions of items.

·     Accurate derivation of replacement cost is very difficult for items having high variations in quality. For example, some ten-year old trucks have much higher used prices than other used trucks of the same type and vintage. Comparisons with new trucks is very difficult since new trucks have new features, different expected economic lives, warranties, financing options, and other differences that make comparisons extremely complex and tedious. In many cases, items are bought in basket purchases that cover warranties, insurance, buy-back options, maintenance agreements, etc. Allocating the "cost" to particular components may be quite arbitrary.

·     Use of "sector" price indices as surrogates compounds the price-index problem of general price-level adjustments. For example, if a "transportation" price index is used to estimate replacement cost, what constitutes a "transportation" price index? Are such indices available and are they meaningful for the purpose at hand? When FAS 33 was rescinded in 1986, one of the major reasons was the error and confusion of using sector indices as surrogates for actual replacement costs.

·     Current costs tend to give rise to recognition of holding gains and losses not yet realized.

Tom Selling wrote the following at
http://accountingonion.typepad.com/theaccountingonion/2009/04/replacement-cost-rebound.html

 

***********Begin Quote
The most straightforward way to determine replacement cost to meet the wealth measurement objective is to ask oneself what would be the least amount one would have to pay for an asset (or a similar asset that provided the same utility), if one did not actually already own it. It seems to me that real estate appraisers make estimates for specific properties on that basis as a matter of course. Often, their best estimate is the result of making somewhat objective adjustments to 'comparables' for age, floor space and even location.

Having said that, I would allow for any number of approaches to approximating replacement cost, so long as they adequately answered the question I posed in the previous paragraph.  Like FAS 157, the greater the subjectivity in the estimates, the more detailed would be the disclosures.  However, in all cases, I would require reconciliations of the changes in balance sheet accounts in sufficient detail to make all assumptions, and changes in assumptions, transparent.
***********End Quote

 

True Story
Bob Jensen has a Sears Craftsman snow thrower purchased in 2006 for $1,800 with a five-year onsite warranty for all parts and labor. If he decides to replace the machine every five years, he’s really not concerned with physical deterioration if he assumes that the salvage value is after five years is $300 for a perfectly working machine maintained by Sears mechanics at his beckoning call. There is historical cost depreciation of $300 per year assuming the decline in value on the used snow machine market is strictly linear. Assume that replacement cost depreciation is $$350 per season.

Bob’s good friend Helmut Gottwick survived four years as an engineer and machinist on a German U-Boat in World War II. After arriving in New Hampshire in 1950 he bought a used snow thrower for $24. It was made by Studebaker in 1937. Unlike Bob Jensen who has no mechanical skills whatsoever, Helmut can make most old machines work perfectly as long as he is still of sound mind and body to work in the machine shop in his garage. He’s totally rebuilt the Studebaker snow thrower engine two times, including the making of virtually all new parts in his shop. Assuming that his remaining life expectancy was 60 years in 1950, the depreciation on his snow thrower is $0.40 per year for the rest of his life. Assume replacement cost depreciation is $350 per season.

Fiction Added
Suppose Bob and Helmut clear driveways for neighbors for an average of $1,000 per season net of gasoline expense (there’s a lot of snow in these mountains). Replacement cost write ups of Bob Jensen’s snow machine and depreciations of $350 per year make some sense on Capital Maintenance Theory. If Bob Jensen used historical cost accounting and declared a $700 dividend to himself each season, he would not have sufficient retained earnings to cover the cost of a new snow thrower every five years. It makes some sense, therefore, for Bob to only declare a $650 dividend for wild women and booze. If he saves an amount of cash equal to retained earnings each season, he will have sufficient savings to buy that new snow thrower after every five year period.

But suppose we impose a replacement cost accounting rule on Helmut Gottwick’s snow throwing business. If he can only declare a $650 dividend every year the fact of the matter is that for 60 years he’s have been deprived of a lot of wild women and booze (in reality he’s a very devoted husband and grandfather). His reported earnings also distort the fact that, because of his machinist skills, he's a heck of a lot better business man than Bob Jensen who must settle for older women and younger whiskey.

The Point of the Story
Replacement cost accounting can distort reported assets and earnings under totally different maintenance and replacement policies. Over 60 years, the CPA auditing firm might uselessly force Helmut Gottwick to retain $350 per year for a machine that cost him $24 in 1950 and has a useful life of 60 years in his situation, Capital maintenance theory makes no sense in Helmut’s case since during his lifetime the old Studebaker snow thrower will work as well or better than a new snowthrower. In Bob Jensen’s situation, capital maintenance theory makes much more sense.

In truth Helmut would not be required to take $350 replacement cost depreciation for 60 years, because he would only be required to bring book value up to depreciated replacement value each year. But I thought my exaggeration above made a better story.

 

A very concise summary of the positions of various accounting theory experts in history since 1909 and authoritative bodies over the years since 1936:
"Asset valuation: An historical perspective"
Authors: Racliffe, Thomas A. (Thomas Arthur) and Munter, Paul
Accounting Historians Journal
1980
http://umiss.lib.olemiss.edu:82/record=b1000230
Jensen Comment:  I really liked this summary of the valuation literature prior to 1980.
For example, what was the main difference between exit value advocates Chambers versus Sterling?
 




 

Humor August September 1-30, 2014

Robin Williams as an American Flag --- https://www.youtube.com/embed/Q_L1vLv84vs

2014 Final Conference on Aging ---
https://www.youtube.com/watch?v=LR2qZ0A8vic&feature=em-share_video_user 

 David Bowie and Klaus Nomi’s Hypnotic Performance on SNL (1979) ---
http://feedproxy.google.com/~r/OpenCulture/~3/NHEZI2v7oVE/david-bowie-and-klaus-nomis-hypnotic-performance-on-snl-1979.html?utm_source=feedburner&utm_medium=email

The Football Game Coin Toss is a Simple Thing --- Except for the Faltering University of Texas ---
UCLA receives ball to start both halves ---
http://sports.yahoo.com/blogs/ncaaf-dr-saturday/texas-goofs-on-coin-toss--ucla-will-receive-ball-to-start-both-halves-005744963.html

Ten Worst Opening Lines --- http://theamericanscholar.org/ten-worst-opening-lines/?utm_source=emai#.VCq8HPldWSo


Forwarded by Gene and Joan

Many people had tried.... over time: weightlifters, longshoremen, etc., but nobody could do it.

One day, this scrawny little fellow came into the bar, wearing thick glasses and a polyester suit, and said in a small voice, "I'd like to try the bet."

After the laughter had died down, the bartender said, "OK"; grabbed the lemon; and squeezed away. Then he handed the wrinkled remains of the rind to the little fellow. But the crowd's laughter turned to total silence.... as the man clenched his little fist around the lemon.... and six drops fell into the glass.

As the crowd cheered, the bartender paid the $1,000, and asked the little man, "What do you do for a living? Are you a lumberjack, a weight-lifter, or what?"

The little fellow quietly replied: "I work for the IRS."




 

Humor Between September 1-30, 2014, 2014 --- http://www.trinity.edu/rjensen/book14q3.htm#Humor093014

Humor Between August 1-31, 2014, 2014 --- http://www.trinity.edu/rjensen/book14q3.htm#Humor083114

Humor Between July 1-31, 2014, 2014 --- http://www.trinity.edu/rjensen/book14q3.htm#Humor073114

Humor Between June 1-31, 2014 --- http://www.trinity.edu/rjensen/book14q2.htm#Humor063014

Humor Between May 1-31, 2014, 2014 --- http://www.trinity.edu/rjensen/book14q2.htm#Humor053114

Humor Between April 1-30, 2014 --- http://www.trinity.edu/rjensen/book14q2.htm#Humor043014

Humor Between March 1-31, 2014 --- http://www.trinity.edu/rjensen/book14q1.htm#Humor033114

Humor Between February 1-28, 2014 --- http://www.trinity.edu/rjensen/book14q1.htm#Humor022814

Humor Between January 1-31, 2014 --- http://www.trinity.edu/rjensen/book14q1.htm#Humor013114

Humor Between December 1-31, 2013 --- http://www.trinity.edu/rjensen/book13q4.htm#Humor123113

Humor Between November 1-30, 2013 --- http://www.trinity.edu/rjensen/book13q4.htm#Humor113013,

Humor Between October 1-31, 2013 --- http://www.trinity.edu/rjensen/book13q4.htm#Humor103113

Humor Between September 1 and September 30, 2013 --- http://www.trinity.edu/rjensen/book13q3.htm#Humor093013

Humor Between July 1 and August 31, 2013 --- http://www.trinity.edu/rjensen/book13q3.htm#Humor083113

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

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

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




And that's the way it was on September 30, 2014 with a little help from my friends.

 

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

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

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

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

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

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


 

For an elaboration on the reasons you should join a ListServ (usually for free) go to   http://www.trinity.edu/rjensen/ListServRoles.htm

AECM (Accounting Educators)  http://listserv.aaahq.org/cgi-bin/wa.exe?HOME
The AECM is an email Listserv list which started out as an accounting education technology Listserv. It has mushroomed into the largest global Listserv of accounting education topics of all types, including accounting theory, learning, assessment, cheating, and education topics in general. At the same time it provides a forum for discussions of all hardware and software which can be useful in any way for accounting education at the college/university level. Hardware includes all platforms and peripherals. Software includes spreadsheets, practice sets, multimedia authoring and presentation packages, data base programs, tax packages, World Wide Web applications, etc

Roles of a ListServ --- http://www.trinity.edu/rjensen/ListServRoles.htm
 

CPAS-L (Practitioners) http://pacioli.loyola.edu/cpas-l/  (closed down)
CPAS-L provides a forum for discussions of all aspects of the practice of accounting. It provides an unmoderated environment where issues, questions, comments, ideas, etc. related to accounting can be freely discussed. Members are welcome to take an active role by posting to CPAS-L or an inactive role by just monitoring the list. You qualify for a free subscription if you are either a CPA or a professional accountant in public accounting, private industry, government or education. Others will be denied access.

Yahoo (Practitioners)  http://groups.yahoo.com/group/xyztalk
This forum is for CPAs to discuss the activities of the AICPA. This can be anything  from the CPA2BIZ portal to the XYZ initiative or anything else that relates to the AICPA.

AccountantsWorld  http://accountantsworld.com/forums/default.asp?scope=1 
This site hosts various discussion groups on such topics as accounting software, consulting, financial planning, fixed assets, payroll, human resources, profit on the Internet, and taxation.

Business Valuation Group BusValGroup-subscribe@topica.com 
This discussion group is headed by Randy Schostag [RSchostag@BUSVALGROUP.COM

 


 

Concerns That Academic Accounting Research is Out of Touch With Reality

I think leading academic researchers avoid applied research for the profession because making seminal and creative discoveries that practitioners have not already discovered is enormously difficult. Accounting academe is threatened by the twin dangers of fossilization and scholasticism (of three types: tedium, high tech, and radical chic)
From http://www.trinity.edu/rjensen/395wpTAR/Web/TAR395wp.htm
 

“Knowledge and competence increasingly developed out of the internal dynamics of esoteric disciplines rather than within the context of shared perceptions of public needs,” writes Bender. “This is not to say that professionalized disciplines or the modern service professions that imitated them became socially irresponsible. But their contributions to society began to flow from their own self-definitions rather than from a reciprocal engagement with general public discourse.”

 

Now, there is a definite note of sadness in Bender’s narrative – as there always tends to be in accounts of the shift from Gemeinschaft to Gesellschaft. Yet it is also clear that the transformation from civic to disciplinary professionalism was necessary.

 

“The new disciplines offered relatively precise subject matter and procedures,” Bender concedes, “at a time when both were greatly confused. The new professionalism also promised guarantees of competence — certification — in an era when criteria of intellectual authority were vague and professional performance was unreliable.”

But in the epilogue to Intellect and Public Life, Bender suggests that the process eventually went too far. “The risk now is precisely the opposite,” he writes. “Academe is threatened by the twin dangers of fossilization and scholasticism (of three types: tedium, high tech, and radical chic). The agenda for the next decade, at least as I see it, ought to be the opening up of the disciplines, the ventilating of professional communities that have come to share too much and that have become too self-referential.”

 

What went wrong in accounting/accountics research? 
How did academic accounting research become a pseudo science?
http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong

Avoiding applied research for practitioners and failure to attract practitioner interest in academic research journals ---
"Why business ignores the business schools," by Michael Skapinker
Some ideas for applied research ---
http://www.trinity.edu/rjensen/theory01.htm#AcademicsVersusProfession

 

Clinging to Myths in Academe and Failure to Replicate and Authenticate Research Findings
http://www.trinity.edu/rjensen/theory01.htm#Myths

 

Poorly designed and executed experiments that are rarely, I mean very, very rarely, authenticated
http://www.trinity.edu/rjensen/theory01.htm#PoorDesigns
 

Discouragement of case method research by leading journals (TAR, JAR, JAE, etc.) by turning back most submitted cases --- http://www.trinity.edu/rjensen/000aaa/thetools.htm#Cases
 

Economic Theory Errors
Where analytical mathematics in accountics research made a huge mistake relying on flawed economic theory and interval/ratio scaling

http://www.trinity.edu/rjensen/theory01.htm#EconomicTheoryErrors

 

Accentuate the Obvious and Avoid the Tough Problems (like fraud) for Which Data and Models are Lacking
http://www.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious

 

Financial Theory Errors
Where capital market research in accounting made a huge mistake by relying on CAPM

http://www.trinity.edu/rjensen/theory01.htm#AccentuateTheObvious

 

Philosophy of Science is a Dying Discipline
Most scientific papers are probably wrong
http://www.trinity.edu/rjensen/theory01.htm#PhilosophyScienceDying

 

Accountancy, Tax, IFRS, XBRL, and Accounting History News Sites  --- http://www.trinity.edu/rjensen/AccountingNews.htm

Accounting Professors Who Blog --- http://www.trinity.edu/rjensen/ListservRoles.htm

Cool Search Engines That Are Not Google --- http://www.wired.com/epicenter/2009/06/coolsearchengines

Free (updated) Basic Accounting Textbook --- search for Hoyle at
http://www.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks

CPA Examination --- http://en.wikipedia.org/wiki/Cpa_examination
Free CPA Examination Review Course Courtesy of Joe Hoyle --- http://cpareviewforfree.com/
 


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

 

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

 

 

August 31, 2014

Bob Jensen's Additions to New Bookmarks on July 15, 2015

Bob Jensen's New Bookmarks for August 1-31, 2014

New Bookmarks August 1-31, 2014
Bob Jensen at Trinity University 

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

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

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

 

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

 

All my online pictures --- http://www.cs.trinity.edu/~rjensen/PictureHistory/

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:  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2398296 

 

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

Hasselback Accounting Faculty Directory --- http://www.hasselback.org/

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

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

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

"CONVERSATION WITH DENNIS BERESFORD," by Joe Hoyle, Teaching Blog, March 26, 2013 ---
http://joehoyle-teaching.blogspot.com/2014/03/conversation-with-dennis-beresford.html

"CONVERSATION WITH BOB JENSEN," by Joe Hoyle, Teaching Blog, October 8, 2013 ---
http://joehoyle-teaching.blogspot.com/2013/10/conversation-with-bob-jensen.html

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

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

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

Find comparison facts on most any Website ---
http://reviewandjudge.org/HOME.html
For example, enter "www.trinity.edu/rjensen/" without the http:\\

Find Accounting Software (commercial site) --- http://findaccountingsoftware.com/

Galt Travel Reviews and Guides --- http://www.galttech.com/

Quandl:  over 8 million demographic, economic, and financial datasets from 100s of global sources ---
http://www.quandl.com/

David Giles Econometrics Beat Blog ---
http://davegiles.blogspot.com/

Common Accountics Science and Econometric Science Statistical Mistakes ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsScienceStatisticalMistakes.htm

Citations: Two Selected Papers About Academic Accounting Research Subtopics (Topical Areas) and Research Methodologies http://www.cs.trinity.edu/~rjensen/temp/AccounticsScienceCitations.htm 

Alliance for Financial Inclusion (financial literacy initiative funded by Bill and Melinda Gates) ---  http://www.afi-global.org/
Also see Bob Jensen's related helpers at http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

Find Real Estate for Sale ---
http://www.trulia.com/

Humor Between July 1-31, 2014, 2014 --- http://www.trinity.edu/rjensen/book14q3.htm#Humor073114

Humor Between June 1-30, 2014, 2014 --- http://www.trinity.edu/rjensen/book14q2.htm#Humor063014

Humor Between May 1-31, 2014, 2014 --- http://www.trinity.edu/rjensen/book14q2.htm#Humor053114

Humor Between April 1-30, 2014 --- http://www.trinity.edu/rjensen/book14q2.htm#Humor033114

Humor Between March 1-31, 2014 --- http://www.trinity.edu/rjensen/book14q1.htm#Humor033114

Humor Between February 1-28, 2014 --- http://www.trinity.edu/rjensen/book14q1.htm#Humor022814

Humor Between January 1-31, 2014 --- http://www.trinity.edu/rjensen/book14q1.htm#Humor013114

Humor Between December 1 and December 31, 2013 --- http://www.trinity.edu/rjensen/book13q4.htm#Humor123113

Humor Between November 1 and November 30, 2013 --- http://www.trinity.edu/rjensen/book13q4.htm#Humor113013

Humor Between October 1 and October 31, 2013 --- http://www.trinity.edu/rjensen/book13q4.htm#Humor103113

Humor Between September 1 and September 30, 2013 --- http://www.trinity.edu/rjensen/book13q3.htm#Humor093013

Humor Between July 1 and August 31, 2013 --- http://www.trinity.edu/rjensen/book13q3.htm#Humor083113

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

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

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

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

 




How 3D Printing Will Revolutionize Our World ---
http://www.businessinsider.com/the-next-industrial-revolution-is-here-3d-printing-2014-8

I like this 3-D Printing Video ---
https://www.youtube.com/watch?v=G0EJmBoLq-g

How It Works: 3D Printing with Fused Deposition Modeling --- Click Here
http://thejournal.com/whitepapers/2014/07/stratasys-3d-printing-with-fdm-073014.aspx?pc=e844em01&utm_source=webmktg&utm_medium=E-Mail&utm_campaign=e844em01 

Education Technology
Bob Jensen's Threads on Tricks and Tools of the Trade ---

http://www.trinity.edu/rjensen/000aaa/thetools.htm

Bob Jensen's Threads on Education Technology ---
http://www.trinity.edu/rjensen/000aaa/0000start.htm


The International Review of Research in Open and Distance Learning --- http://www.irrodl.org/index.php/irrodl/index

Bob Jensen's threads on Open (free) learning materials, MOOCs, and tutorials from prestigious universities ---
http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI

Bob Jensen's treads on fee-based distance education alternatives around the world ---
http://www.trinity.edu/rjensen/CrossBorder.htm


Technology Integration (integrating education technology into the classroom) ---  http://www.edutopia.org/technology-integration

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

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


"The 15 Most Common Presentation Mistakes," by Richard Feloni, Business Insider, August 25, 2014 ---
http://www.businessinsider.com/most-common-presentation-mistakes-2014-8?op=1

What not to do in PowerPoint (video) --- http://www.youtube.com/watch?v=ORxFwBR4smE

"LESSONS FROM DILBERT (about PowerPoint)," by Joe Hoyle, Teaching Blog, September 28, 2011 ---
http://joehoyle-teaching.blogspot.com/2011/09/lessons-from-dilbert.html

"Seven tips to beautiful PowerPoint," by Eugene Cheng  ---
http://www.slideshare.net/itseugene/7-tips-to-beautiful-powerpoint-by-itseugenec

"The Battle Against Bad PowerPoint," by Jeffrey R. Young, Chronicle of Higher Education, March 8, 2012 ---
http://chronicle.com/blogs/techtherapy/2012/03/08/episode-93-the-battle-against-bad-powerpoint/?sid=wc&utm_source=wc&utm_medium=

"Redesigning Mary Meeker's Ugly Internet Slideshow," by Belinda Lanks, Bloomberg Businessweek, May 30, 2014 ---
http://www.businessweek.com/articles/2014-05-30/redesigning-mary-meekers-ugly-internet-slideshow

Video Tips on How to Improve Laptop Presentations ---
http://chronicle.com/blogs/profhacker/improving-powerpoint-style-presentations/32126?sid=wc&utm_source=wc&utm_medium=en

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


Deloitte's CEO is retiring --- http://www.businessinsider.com/r-deloitte-ceo-joe-echevarria-to-retire-and-pursue-public-service-2014-15

Francine never had a good word to say about him or Deloitte in general.


Teaching Case
"The Gatekeepers: A Case on Allocations and Justifications," by David Hurtt, Bradley E. Lail, Michael A. Robinson, and Martin T. Stuebs, SSRN, August 18, 2014 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2482610

Abstract
This case provides an opportunity for you to make accounting allocation choices, justify those choices, and subsequently consider the ramifications of those choices. Two different scenarios – one in the academic setting and one in the business setting – examine the incentives and reporting issues faced by managers and accountants – the gatekeepers in these reporting environments. For each scenario, you will read the case materials, related tables, and then answer the Questions for Analysis. Each scenario presents you with an allocation task. In the first scenario, you will need to assess group members’ contributions to a project and allocate points across the group. These point allocations contribute to the determination of individual group members’ grades. The second scenario is also an allocation task but in a business setting, specifically the segment reporting environment. Here the task is to allocate common costs across reporting segments. For advanced reading, you will want to consider Accounting Standards Codification (ASC) topic 820 which addresses segment reporting, as this can help guide you in the degree of flexibility, if any, allowed in determining how to allocate costs.

Arbitrary Allocation and Accounting for Vegetable Nutrition ---
http://www.trinity.edu/rjensen/FraudConclusion.htm#BadNews

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

Bob Jensen's threads on case writing and teaching ---
http://www.trinity.edu/rjensen/000aaa/thetools.htm#Cases


"The Trueblood Study Group on the Objectives of Financial Statements (1971-73): A Historical Study," by Stephen A. Zeff, SSRN, August 23, 2014 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2485887

Abstract:
This paper examines the background and work of the AICPA’s Accounting Objectives Study Group, chaired by Robert M. Trueblood, which issued its important report in October 1973. In particular, the research is informed by interviews with three members of the Study Group and with four of the principal members of its research staff. Evidence is presented on the members of the Study Group who supported, or did not support, various positions in the report, including their apparent reasons, as well on the influential role of the staff in shaping the report. The conclusion is that the full-time staff, abetted by the financial analyst member of the Study Group, played the key role in driving the thrust of the final report, which recommended that financial statements should provide users with information about the cash-generating ability of the enterprise, and eventually the cash flow to the users themselves.
This recommendation resonated with the FASB and with standard setters around the world.

"The SEC Rules Historical Cost Accounting: 1934 to the 1970s," by Stephen A. Zeff, SSRN, January 2007 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=956163

Abstract:
From its founding in 1934 until the early 1970s, the SEC and especially its Chief Accountant disapproved of most upward revaluations in property, plant and equipment as well as depreciation charges based on such revaluations. This article is a historical study of the evolution of the SEC's policy on such upward revaluations. It includes episodes when the private-sector body that established accounting principles sought to gain a degree of acceptance for them and was usually rebuffed. In the decade of the 1970s, the SEC altered its policy. Throughout the article, the author endeavors to explain the factors that influenced the positions taken by the parties.

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

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

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


"Identifying Accounting Quality," by Valeri V. Nikolaev (University of Chicago - Booth School of Business), SSRN, August 20, 2014 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2484958

Abstract:
I develop an econometric strategy that allows identification of accounting quality. The strategy relies on a new way of characterizing the dynamics of accounting accruals. The characterization is intuitive and does not hinge on strong assumptions about the earnings and accrual processes, or about managerial preferences. The identifying assumptions derive from two accounting properties, namely, that both earnings and cash flows reflect the same underlying performance and that accruals and accounting errors must reverse over time. My approach discriminates between the accounting error and the part of accruals that captures the underlying economic performance. The proposed framework also offers a new way of testing for the presence of earnings management. Implementation issues and empirical evidence are discussed in a companion paper (Nikolaev 2014).

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


"Ernst & Young 2013 Audit Deficiency Rate 49%, Regulators Say," by Michael Rapoport, The Wall Street Journal, August 28, 2014 ---
http://online.wsj.com/articles/ernst-young-2013-audit-deficiency-rate-49-regulators-say-1409247901?tesla=y&mod=djemCFO_h&mg=reno64-wsj

Auditing regulators have found deficiencies in 28 of the Ernst & Young LLP audits they evaluated in their latest annual inspection of the Big Four accounting firm's work.

The 28 deficient audits the Public Company Accounting Oversight Board found in its 2013 inspection of the firm were out of 57 audits or partial audits conducted by Ernst & Young that the PCAOB evaluated—a deficiency rate of 49%. In the previous year, the board's inspectors found deficiencies in 25 of 52 audits inspected, a rate of 48%.

A deficiency cited by the inspectors doesn't mean that the subject of the audit needs a restatement, or that the problems found remained unaddressed after the inspectors found them.

Still, certain of the deficiencies found were significant enough that it appeared that Ernst & Young hadn't obtained enough evidence to support its audit opinions giving its clients a clean bill of health, the PCAOB said in the inspection report it issued Thursday.

In a statement responding to the report, Ernst & Young said it was "fully committed to audit quality" and that the PCAOB's inspection process "assists us in identifying areas where we can continue to improve."

Continued in article

"EY Hits 50% Failure Rate on PCAOB Inspection, Gets a Grade of LOL on AS5," by Adrienne Gonzalez, Going Concern, August 28, 2014 ---
http://goingconcern.com/post/ey-hits-50-failure-rate-pcaob-inspection-gets-grade-lol-as5

"All The Auditors Are Above Average: Jay Hanson Allergic To 'Audit Failure'," by Francine McKenna, re:TheAuditors, March 26, 2014 ---
http://retheauditors.com/2014/03/26/all-the-auditors-are-above-average-jay-hanson-allergic-to-audit-failure/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+ReTheAuditors+%28re%3A+The+Auditors%29

"Does Big 4 Consulting Revenue Impair Audit Quality?" by Ling Lei Lisic, Robert J. Pawlewicz, and Timothy A. Seidel, SSRN, June 1, 2014 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2460102

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


Fees = Transactions Costs (when buying or selling shares) plus Fund Management Fees (paid annually to professionals who manage your portfolio like the managers at TIAA/CREF, Fidelity, Vanguard, etc.). manage your retirement funds.

Taxes = Capital Gains Taxes (that apply even on retirement funds like CREF when you make eventual withdrawals). Note that capital gains taxes must be paid by your estate on the balances left in your retirement funds. Most of us won't get hit with estate taxes (due to high estate tax exemptions), but we all get hit with capital gains taxes on the retirement funds and farms we leave behind for heirs.

Inflation = Loss in Buying Power of Saving Dear Money That Turns Into Cheap Money (even under your mattress)
The government is now misleading us about inflation by taking price increases for food and fuel out of its reported  inflation index so you think that your dollars are still dear when they are cheap in terms of things that you buy day-by-day. Economists are whores for politicians. Government deficit spending and obligations for $100 trillion in unfunded entitlements (like Medicare and Medicaid) make inflation the biggest worry of the three diseases on retirement savings --- fees, taxes, and inflation.

"Here's How Little You Earn On Stocks After You Pay The Man, Uncle Sam, And The Invisible Hand," by Myles Udland, Business Insider, August 29, 2014 ---
http://www.businessinsider.com/thornburgs-real-real-equity-returns-2014-8

Fees, taxes, and even inflation just kill your investment returns.

A Thornburg Investment Management study of "real, real returns," which was alerted to us by Cullen Roche at Pragmatic Capitalism, shows how various costs eat into your stock market returns. 

Real, real returns take into account expenses (the man), taxes (Uncle Sam), and inflation (the invisible hand).

Thornburg's study notes that "nominal returns are a misleading driver of an investor's investment and asset-allocation planning... because they are significantly eroded by taxes, expenses and inflation." The risk then, as Thornburg sees it, is that a failure to understand real, real returns could lead to investment decisions that miss potential diversification opportunities. 

This chart from Thornburg shows how the annualized nominal return of $100 invested in the S&P 500 between 1983 and 2013 is about 11%, making that investment worth $2,346.

However, on a real, real basis that investment returns 6%, making it worth just $570.

A pretty stark difference between expectations and reality.


Read more: http://www.businessinsider.com/thornburgs-real-real-equity-returns-2014-8#ixzz3BsAo2wrR
 

Jensen Comment
There are ways of partly beating the tax man by investing a portion of your retirement funds in a tax-exempt mutual fund that holds bonds of school districts, towns, cities, counties, and states. However, I say "partly beats" in the sense that value changes in those funds are subject to capital gains taxes even if the interest on those bonds that builds up your savings are not taxed while your earn that interest or when you withdraw that interest. A second  drawback is that there is relatively more risk in investing in a given tax-free municipal bond versus a taxable high-grade corporate bond. But huge diversified tax-free mutual funds like those of Fidelity and Vanguard. A third drawback in theory is that tax-free bonds should earn less interest than corporate bonds. This is not always the case in this era of stupid quantitative easing by the Federal Reserve that keeps interest rates on CDs and high-grade corporate bonds close to zero. Tax-free interest rates have held up batter in this idiotic era of quantitative easing since the crash of 2007.

Remember that higher return investments also carry higher financial risks beyond the savings killers of fees, taxes, and inflation. For example land investments have less inflation risks but are subject to many other financial risks. For example, think of paying a million dollars for an Iowa farm that sold ten years ago $500,000 and doubled in value because of the corn ethanol government mandate for gasoline. The added financial risk for your new farm is that one day soon the government will come to its senses and remove the ethanol mandate for fuel, thereby leaving the corn for cows and hogs. Your million dollar farm may plunge in value --- thus the added investment risk beyond the retirement savings killers of fees, taxes, and inflation.

Bob Jensen's Personal Finance Helpers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers


"5 Little-Known Ways To Save Money On Amazon ," by Grayson Bell, Debt Roundup via Business Insider, August  29, 2014 ---
http://www.businessinsider.com/ways-to-save-money-on-amazon-2014-8

Jensen Comment
If you are an active buyer like me on Amazon it probably pays to become a Prime member.

One advantage of living in the boon docks is home delivery when you're not at home. I know the rural mail carrier (Mary), the UPS driver (Joe), and the FedEx drivers all by name. They leave the deliveries in our unlocked garage in rain, snow, or shine. When I lived in San Antonio I would've not dared to leave our garage unlocked. City living is just more scary and a hassle in many other ways.

Don't forget to use your accumulated payment credits on Amazon. Amazon makes it really easy to use those points when making a payment.

Bob Jensen's Personal Finance Helpers ---
http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers


Tax professionals who are unaware of the new form is called a 1095-A that "lists who in each household has health coverage and how much the government paid each month to subsidize their premiums. Nearly 5 million people have gotten subsidies through HealthCare.gov" ---
http://www.masslive.com/politics/index.ssf/2014/08/tax_forms_could_pose_challenge.html#incart_river

Taxpayers who received health insurance from Obamacare need to file Form 1095-A with their tax returns in 2014 and every year thereafter.

. . .

Funneling subsidies through the income-tax system was once seen as a political plus for Obama and the law's supporters. It allowed the White House to claim that the Affordable Care Act is "the largest tax cut for health care in American history." But it also promises to make an already complicated tax system more difficult for many consumers.

Supporters of the law are also concerned about a related issue: People who got too big a subsidy for health care in 2014 will have to pay it back next year. And docking refunds will be the first way the IRS seeks repayment.

That can happen if someone's income for 2014 ends up being higher than estimated when he or she first applied for health insurance. Unless such people promptly reported the change to their health insurance marketplace, they will owe money.

"If someone wound up having more overtime than they projected, or they received a bonus for good work, these are the kind of changes that have an impact on subsidies," said Ron Pollack, executive director of the advocacy group Families USA.

Since the whole system is brand-new, experts are predicting that millions will end up having to repay money.


Electric Car Owners Contribute Nothing or Almost Nothing to Road Repairs While Gasoline and Diesel Fuel Vehicles Foot the Road Repair Bills

"Electric-Car Owners Get Taxed ($64 per year) for Not Paying Gas Taxes," by Alison Vekshin, Bloomberg Businessweek, June 6, 2013 ---
http://www.businessweek.com/articles/2013-06-06/electric-car-owners-get-taxed-for-not-paying-gas-taxes

Jensen Comment
Tesla Model S owners now have a trillion mile warranty (of eight years) where all those miles are a free ride to Tesla owners in terms of the road and bridge  depreciation they help cause. This is a wealth transfer that nobody seems to talk about where poor people in old gas guzzlers are paying for the road and bridge repairs enjoyed as a free good by rich Model S owners.

In Virginia electric car owners pay $64 per year for road repairs. Big deal.


"You’ll Never Eat Lunch… A Review of 'This Town'," by Mark Leibovich, by Francine McKennon, re:TheAuditors, August 24, 2014 ---
http://retheauditors.com/2014/08/24/you%E2%80%99ll-never-eat-lunch%E2%80%A6-a-review-of-%E2%80%9Cthis-town%E2%80%9D-by-mark-leibovich/

In Julia Phillips’ 2002 People magazine obituary, Joni Evans, her editor for the raucous 1991 memoir, “You’ll Never Eat Lunch In This Town Again,” says,

“Where some of us glow, she burned.”

Phillips, an Oscar winner at age 29 as a producer of The Sting, and the first women to do so, burned bridges for sure. But she died, at age 57 of cancer, with no regrets, according to her daughter Kate. I read Phillips’ book in 1991. The paperback is still on my shelves. I remember thinking that someday I wanted to write with the same ferociousness and the same freedom.

Mark Leibovich’s “This Town” is billed in the flap copy of the dust jacket as, “a blistering, stunning —and often hysterically funny— examination of our ruling class’s incestuous ‘media industrial complex.’” Others have written tell-all books about Washington DC, lobbyists, and the revolving door between the legislative and executive branches of government and the media, regulators and industry—especially “shadow regulator” consulting firms.

I previously reviewed Dean Starkman’s book, “The Watchdog That Didn’t Bark. It’s got plenty of criticism of “access journalism” and what he believes was a softening of coverage by the business press leading up to the financial crisis. That couldn’t have made him too popular amongst his journalism peers, although his position as an editor of the Columbia Journalism Review means they have to talk to him.

Jeff Connaughton, who is mentioned briefly in Liebovich’s book, wrote a book about Washington DC and the negative influence of lobbyists and their client’s money that even he, a former lobbyist, said was a bridge-burner. Connaughton’s book, The Payoff: Why Wall Street Always Wins”, reviewed here, has more mentions of the auditors and their role in the crisis, although not by name or related to a specific case, than any other post-crisis book I’ve read.

I’m as guilty as anyone of looking for my name and the names of the Big Four audit firms in the index of any business book about the financial crisis. Few mentioned the auditors at all but my name has started showing up. However, the back of the Leibovich book jacket has a warning to readers: The book contains no index.

“Those players wishing to know how they came out have to read the book.

Cheeky.

I guess Leibovich, like Starkman, is confident they’ll have to talk to him anyway and maybe even continue to break bread with him. That’s because Mark Leibovich is the chief national correspondent of the New York Times Magazine. He came to the Times in 2006 from the Washington Post, where he spent nine years.

His book is notable for how current it is—it was published in 2013— and yet how out of date it is already. Leibovich mentions many key players who moved from media to industry, government to industry, and even government to media. In less than two years since the book was published, however, several more have gone through the revolving door.

The Wall Street Journal on August 22, 2014:

Everyone has to make a living, so far be it from us to complain that David Plouffe, President Obama’s former chief political strategist, is joining a private business [Uber] to fight government regulation.

Many of Leibovich’s New York Times colleagues, mentioned in the acknowledgements, are already gone from the paper. His opening vignette about “Meet the Press” host Tim Russert’s memorial service “networking opportunity” in June of 2008 puts his replacement, David Gregory, front and center in the narrative. Gregory just lost that job, without even an “Ann Curry moment” to say goodbye.

It’s like Gregory died, too.

“This Town” utilizes two techniques that were widely used by journalists writing about the financial crisis:

Leibovich organizes his meta-narrative around some colorful characters.

(Selfish aside: I recently heard the term “narrative” described, in a “Law and Order: Criminal Intent” episode, as a postmodern concept. I did not know that so I looked it up. From the “Encyclopedia of Marxism”:

Grand narrative or “master narrative” is a term introduced by Jean-François Lyotard in his classic 1979 work The Postmodern Condition: A Report on Knowledge, in which Lyotard summed up a range of views which were being developed at the time, as a critique of the institutional and ideological forms of knowledge.

Narrative knowledge is knowledge in the form of story-telling.

Keep this in mind when an editor tells you that an investigative piece or whitepaper has to tell a story.)

Richard Holbrooke, one of Leibovich’s vignette subjects, died in December 2010, two years into the Obama presidency. James Mann’s The Obamians, published in 2012 and excerpted in Slate, said Holbrooke was “of the wrong generation, serving at the wrong time” in the Obama administration. Another vignette tells the story of a top press aide for Rep. Darrell Issa, R-Calif. He lives a Cinderella story, becoming a top advisor to the congressman, but leaves in a scandal about his own loose lips, only to get his job back before the book ends. That staffer, Kurt Bardella, is now CEO of his own “crisis communications” firm, Endeavor Strategic Communications.

The vignette I like best, though, is about Tammy Haddad and her “Tam Cam”. Haddad is a former cable TV producer who now acts as a Washington “social convener”, in Leibovich’s words, on behalf of paying clients like Politico, Bloomberg, Condé Nast and HBO.

From her website:

Haddad’s “Tam Cam” handheld video interview series, launched for Newsweek and appeared in Politico, has made headlines and Drudge sirens.  Her guests include major public figures from candidate Senator Barack Obama to Robert DeNiro. She is the Co-Founder and Editor-in-Chief of WHCInsider.com, the White House Correspondents Insider website covering political and media culture.

Haddad is such a Washington, DC institution that Christopher Buckley made her a character in his best selling novel about Washington, Thank You for Smoking, calling her “a force of nature.”

Haddad is still doing what she does, most notably hosting one of the hottest tickets during Correspondent’s Dinner Weekend in Washington. But Haddad is one of those Leibovich softly parodies when he says, “You know you’ve made it in D.C. when someone says … ‘It isn’t clear what he does’ about you.”

Continued in article

 


A Possible Teaching Case to Either "dial up financial risk" (speculate) or "dial down financial risk" (hedge)

Jensen Comment
Derivative financial instruments are used in two ways --- to speculate with high (leveraged) financial risk or to hedge financial risk. For example, an investor with no corn crop might buy put options at relatively low premium prices to sell corn in at a future (strike) price in a speculation that the contracted strike price at the maturity of the option will be higher than the spot price on that date with the difference also being greater than the price paid for the option. .The option holder who has no corn to sell can net settle the speculation option for cash and never really has to buy and resell the corn at the strike price.  This is a speculation in what is known as a naked option because the investor has no corn to back the contracted sale amount (the notional).

On the other hand a farmer with harvested corn in storage can purchase a put option to sell the corn at a future (strike) price. This is not a naked option because the farmer has the corn to cover the future sale. The put option simply locks in the sale's strike price. This is one way to hedge against unknown spot prices in the future. Actually the farmer can sell the corn inventory at the spot price and the net-settled put option will either increase or decrease the combined sales price to the strike price. The hedge in reality locks in the future sales price of the corn to the strike price in the put contract.

There are of course various other types of financial derivative contracts including futures contracts (exchange traded), forward contracts (not exchange traded), and swaps that are portfolios of forward contracts. These other contracts differ fundamentally in that some require no purchase prices like options require purchase prices (premiums) but face greater risks in speculations.

Hence an investor can use financial instrument derivatives to either "dial up financial risk" (speculate) or "dial down financial risk" (hedge). The actual process can become very complicated with investors changing positions over time with the acquisition of successive counter positions in risk exposure.

"San Diego Pension Dials Up the Risk to Combat a Shortfall San Diego County's Pension Manager Is Extreme Example of Those Using Leverage to Boost Performance," by By Dan Fitzpatrick, The Wall Street Journal, August 13, 2014 ---
http://online.wsj.com/articles/san-diego-pension-dials-up-the-risk-to-combat-a-shortfall-1407974779

A large California pension manager is using complex derivatives to supercharge its bets as it looks to cover a funding shortfall and diversify its holdings.

The new strategy employed by the San Diego County Employees Retirement Association is complicated and potentially risky, but officials close to the system say it is designed to balance out the fund's holdings and protect it against big losses in the event of a stock-market meltdown.

San Diego's approach is one of the most extreme examples yet of a public pension using leverage—including instruments such as derivatives—to boost performance.

The strategy involves buying futures contracts tied to the performance of stocks, bonds and commodities. That approach allows the fund to experience higher gains—and potentially bigger losses—than it would by owning the assets themselves. The strategy would also reduce the pension's overall exposure to equities and hedge funds.

The pension fund manages about $10 billion on behalf of more than 39,000 active or former public employees.

San Diego County's embrace of leverage comes as many pensions across the U.S. wrestle with how much risk to take as they look to fulfill mounting obligations to retirees. Many remain leery of leverage, which helped magnify losses for pensions and many other investors in the financial crisis. But others see it as an effective way to boost returns and better balance their holdings.

"We think we'll see a lot more people look at risk the way we do in the not-too-distant future," said Lee Partridge, chief investment officer of Houston-based Salient Partners LP, the firm hired to manage the county's money. "Yes, we are an outlier, but that is not a bad thing."

Mr. Partridge said one of the main goals is to avoid an overreliance on the stock market for returns.

Like many public plans around the country, San Diego County's fund doesn't currently have enough assets to meet its future obligations. The plan is about 79% funded, it says. It gained 13.4% last year.

As a group, state pension funds across the U.S. have enough assets to cover just 75% of future benefits for their members, according to Wilshire Associates, an investment consultant in Santa Monica, Calif.

San Diego board members haven't yet set a limit on how much leverage would be used, but one estimate floated at an April board meeting is the bet could involve an amount equal to as much as 95% of the fund's assets. Simply put, it could have a market exposure of $20 billion despite only managing half that amount.

Wilshire Associates Managing Director Andrew Junkin said more pension funds are now "examining leverage" as they seek to add balance to their portfolios, meet return targets and reduce their reliance on stocks.

San Diego's new approach is comparatively complex at a time when some big pension plans are moving in the opposite direction. The country's biggest pension, California Public Employees' Retirement System, is weighing a number of changes to its investment strategy designed in part to simplify the portfolio, The Wall Street Journal reported this week.

San Diego's plan was approved by the county in April but didn't receive much attention until this week, when a local newspaper columnist wrote criticizing the strategy. In response, the pension fund posted a letter on its website to answer questions on the issue.

Some local residents said they were wary.

"Larger [pension] systems are moving away from risk, and try to be a little more conservative. We don't need to see our systems move in the opposite direction," said Chris Cate, a taxpayer advocate in San Diego, who is running for city council.

San Diego-area residents are well-acquainted with pension problems. A decade ago, the city's pension, which is separate from the county's, endured a scandal after its accounts were found riddled with errors, though the matter didn't involve sizable investment losses.

Then, in 2006, the collapse of Connecticut hedge fund Amaranth Partners LLC created tens of millions in losses for the county's fund. Amaranth made a series of risky bets on natural-gas futures.

"Leverage is a tool, and it can be used improperly. And if it's used improperly, you could suffer large losses, as shown in Amaranth," said Brian White, chief executive of the retirement system in San Diego County.

The CEO said there is a "huge difference" between Amaranth's approach and the one being employed by Salient. The investments being made by Salient, Mr. White said, are "highly liquid" and diverse, as compared with the illiquid, very concentrated bets made by Amaranth.

Salient is being paid $10 million annually for managing San Diego County's pension fund.

Public funds still have most of their assets in stocks, but many funds that were burned by the tech-stock bust and the 2008 financial crisis have turned to private equity, real estate and hedge funds as alternatives.

Public pensions for years have had indirect exposure to borrowed money through property or buyout funds, but most have steered clear of putting more money at risk than they have in their portfolios.

The State of Wisconsin Investment Board was one of the first to embrace the leveraged approach. Trustees in 2010 approved borrowing an amount equivalent to 20% of assets for purchases of futures contracts and other derivatives tied to bonds.

Wisconsin staff members initially thought putting 100% of assets at risk might protect the fund against a variety of economic scenarios, but they concluded that such an amount "could be considered to be a substantial amount of explicit leverage for a pension fund," according to a December 2009 report.

Wisconsin's fund has remained among the healthiest public pensions in the country and currently has enough assets to meet all future obligations to retirees.

A spokeswoman said the Wisconsin system is moving slowly on its strategy because of concerns about adding leverage at a time when economists expect interest rates to rise as the U.S. economy strengthens. That would cause bond prices to fall, and leverage could magnify the impact of those declines on the fund's assets. The current amount at risk on Wisconsin's strategy is roughly 6% of the fund's $90.8 billion in assets.

Jensen Comment
The accounting rules for accounting for derivatives vary greatly in terms of whether the unsettled outstanding contracts are deemed speculations or hedges. For business firms those rules are dictated by FAS 133 and its FASB amendments in the USA. The international rules were dictated by IAS 39 soon to be replaced by IFRS 9 of the IASB.

Bob Jensen's helpers in accounting for derivative financial instruments ---
http://www.trinity.edu/rjensen/caseans/000index.htm


Billions in European Bank Fraud:  KPMG Implicated

From the CFO Journal's Morning Ledger on August 29, 2014

KPMG faces criticism over Espírito Santo collapse ---
http://online.wsj.com/articles/kpmg-faces-criticism-for-espirito-santo-audit-work-1409227480?mod=djemCFO_h
Espírito Santo Group
‘s collapse raises questions about whether its auditor KPMG LLP should have detected problems before the bank’s unraveling sent shock waves across European markets this summer. KPMG was the auditor of Espírito Santo Financial Group SA, which filed for creditor protection in July, Banco Espírito Santo SA, which was bailed out in August, and of dozens of related companies. It was also the auditor of three offshore investment vehicles that trafficked in Espírito Santo debt. Critics say the scope of the audit work could have put it in a position to identify the billions of euros that were secretly flowing amount group companies.

 

From the CFO Journal's Morning Ledger on August 29, 2014

A former detective working for Austria’s struggling Hypo Alpe-Adria-Bank International Group AG is teasing out the details of a lending catastrophe that has already cost taxpayers in Europe billions of euros, and is likely to cost billions more. Six of the bank’s former bosses have already received criminal convictions, and the investigation has turned up seedy details including land purchased from the wrong owner, leased sports cars that were never delivered, and a missing yacht that was later found, abandoned, with North Korean currency aboard.

The small bank’s downfall has cost the governments of Austria and Germany $11.93 billion so far. Now, Austria’s plan to wind down the nationalized bank has set Vienna up for a new struggle with former investors, including a Bavarian bank that bought it in 2007 and one of the hedge funds that recently pushed Argentina to default.

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


Going Concern Trouble Disclosures are Management's Responsibility

From the CFO Journal's Morning Ledger on August 28, 2015

New accounting rules in the U.S. are going to hold corporate managers’ feet to the fire over disclosures regarding the ability of businesses to continue to fund their operations, CFOJ’s Emily Chasan and Maxwell Murphy report. The Financial Accounting Standards Board’s updated rules, effective by the end of 2016, will force executives to disclose serious risks even if management has a credible plan to alleviate them.

Previously there were no specific rules under Generally Accepted Accounting Principles and disclosures were mostly up to the auditors. But supporters of the changes argued that corporate managers have better information about a company’s ability to operate as a “going concern” than auditors.

Only about 40% of companies that filed for bankruptcy in the past two decades have explicitly disclosed the possibility that they could cease to operate before running into trouble, according to a recent study from Duke University’s Fuqua School of Business.

Does Big 4 Consulting Revenue Impair Audit Quality?" by Ling Lei Lisic, Robert J. Pawlewicz, and Timothy A. Seidel, SSRN, June 1, 2014 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2460102

Abstract:
Over the past decade, the Big 4 public accounting firms have steadily increased the proportion of their revenue generated from consulting services (consulting revenue hereafter), primarily from nonaudit clients. Regulators and investors have expressed concerns about the potential implications of accounting firms’ expansion of consulting services on audit quality. We examine the associations between Big 4 audit firm consulting revenue and various measures of audit quality, including auditor going concern reporting errors, client misstatements, and client probability of meeting or just beating analyst earnings forecasts. Overall, our results suggest that a higher proportion of firm-level consulting revenue is not associated with impaired audit quality for the Big 4 firms. However, results of earnings response coefficient tests suggest that investors perceive a deterioration of audit quality when a higher proportion of the firms’ revenue is generated by consulting services.

Jensen Comment
Given the repeated deficiencies in Big Four audits as reported in PCAOB inspection reports year after year perhaps cost cutting is more of a problem in Big 4 audit professionalism than independence. In some cases the Big Four firms are flagged for poor audit supervision of inexperienced staff auditors. In most instances, however, the problem is one of failure to do enough detail testing.

 


 

Corporate Tax Inversions:  The Beautiful and the Ugly

From the CFO Journal's Morning Ledger on August 27, 2015

More corporate finance divisions are looking into the details of what an inversion would actually do for their tax bill, even if their companies ultimately aren’t willing to take the plunge and decamp for a foreign country, CFOJ’s Emily Chasan reports. A foreign domicile often will mean a lower overall tax rate, but a thorough analysis must also factor the cost of moving some management overseas, reorganizing the company, the sustainability of a move and its political consequences.

And the political consequences, though at this point mostly limited to accusations of unpatriotic behavior, could become more serious if legislators make good on their threats. The Treasury Department is currently reviewing its options for limiting the tax benefits of an inversion. And since Burger King Worldwide Inc. announced its intention to relocate to Canada through a merger with Tim Hortons Inc., the iconic burger chain has come under direct criticism from lawmakers. Sen. Dick Durbin (D., Ill.) said, “I’m disappointed in Burger King’s decision to renounce their American citizenship” and added that “with every new corporate inversion, the tax burden increases on the rest of us to pay what these corporations won’t.” The companies say the deal is not about taxes, but about growth (more on that below).

But the Burger King deal highlights what chief financial officers are learning in their investigations of inversion deals: that the tax benefits are not so straightforward, and often lurk in the details. Writing for Heard on the Street, John Carney notes that Canada offers a generous tax break for profits from countries with which it has a tax treaty. These get counted as “exempt surplus,” which isn’t taxed at all by Canada. And in some of Burger King’s fastest-growing markets, a Canadian domicile would also give it the benefit of “tax sparing”—a system that credits companies even for taxes that aren’t actually paid as part of a complex incentive to invest in developing countries.

 

"Microsoft Has Nearly $93 Billion In Overseas Cash, And It's Reduced Its Tax Bill By Almost $30 Billion," by Julie Bort, Business Insider, August 23, 2014 ---
http://www.businessinsider.com/microsofts-offshore-cash-2014-8

Whopper Deal --- Burger King Headquarters May Move to Canada:  There are tax savings in addition to a purchase of Canada's Tim Horton's Inc.
From the CFO Journal's Morning Ledger on August 25, 2015

The inversion wave that overtook the pharmaceutical and drug retail industries continues to spread, and now one of America’s most storied hamburger chains is looking to decamp for a lower-tax domicile to the north.

Burger King Worldwide Inc. is in talks to buy Canadian coffee-and-doughnut chain Tim Hortons Inc. in a tax inversion that would shift the hamburger seller’s base to Canada. Canada’s federal corporate tax rate was lowered to 15% in 2012.

And despite the saber-rattling from American lawmakers who fear that such moves will drain U.S. tax coffers, Burger King is planning to make the move without the protection of a provision that would let it walk away from the deal even if the tax benefits are taken away through new legislation. That may suggest that American big business perceives the U.S. government as unwilling, or incapable, of making any serious moves to restrain inversions.

"One Way to Fix the Corporate Tax: Repeal It," by by N. Gregory Mankiw (Harvard), The New York Times, August 23, 2014 ---
http://www.nytimes.com/2014/08/24/upshot/one-way-to-fix-the-corporate-tax-repeal-it.html?rref=upshot&abt=0002&abg=1&_r=0

“Some people are calling these companies ‘corporate deserters.’ ”

That is what President Obama said last month about the recent wave of tax inversions sweeping across corporate America, and he did not disagree with the description. But are our nation’s business leaders really so unpatriotic?

A tax inversion occurs when an American company merges with a foreign one and, in the process, reincorporates abroad. Such mergers have many motives, but often one of them is to take advantage of the more favorable tax treatment offered by some other nations.

Such tax inversions mean less money for the United States Treasury. As a result, the rest of us end up either paying higher taxes to support the government or enjoying fewer government services. So the president has good reason to be concerned. Continue reading the main story Related Coverage

Walgreen on Wednesday said it would take over the British pharmacy retailer Alliance Boots but would not, after all, move its headquarters overseas to save on taxes. Tax Reform: Inverting the Debate Over Corporate InversionsAUG. 6, 2014

Yet demonizing the companies and their executives is the wrong response. A corporate chief who arranges a merger that increases the company’s after-tax profit is doing his or her job. To forgo that opportunity would be failing to act as a responsible fiduciary for shareholders.

Of course, we all have a responsibility to pay what we owe in taxes. But no one has a responsibility to pay more.

The great 20th-century jurist Learned Hand — who, by the way, has one of the best names in legal history — expressed the principle this way: “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes.”

If tax inversions are a problem, as arguably they are, the blame lies not with business leaders who are doing their best to do their jobs, but rather with the lawmakers who have failed to do the same. The writers of the tax code have given us a system that is deeply flawed in many ways, especially as it applies to businesses.

The most obvious problem is that the corporate tax rate in the United States is about twice the average rate in Europe. National tax systems differ along many dimensions, making international comparisons difficult and controversial. Yet simply cutting the rate to be more in line with norms abroad would do a lot to stop inversions.

A more subtle problem is that the United States has a form of corporate tax that differs from that of most nations and doesn’t make much sense in the modern global economy.

A main feature of the modern multinational corporation is that it is, truly, multinational. It has employees, customers and shareholders around the world. Its place of legal domicile is almost irrelevant. A good tax system would focus more on the economic fundamentals and less on the legal determination of a company’s headquarters.

Most nations recognize this principle by adopting a territorial corporate tax. They tax economic activity that occurs within their borders and exclude from taxation income earned abroad. (That foreign-source income, however, is usually taxed by the nation where it is earned.) Six of the Group of 7 nations have territorial tax systems.

Continued in article

Hi again Richard,
Perhaps you can clear up my misunderstanding of how large LLP partnerships may be taxed as corporations in the U.K.

United Kingdom

The new form of limited liability partnership (LLP), created in 2000, is similar to a US LLC in being tax neutral: member partners are taxed at the partner level, but the LLP itself pays no tax. It is treated as a body corporate for all other purposes including VAT. Otherwise, all companies, including limited companies and US LLCs, are treated as bodies corporate subject to United Kingdom corporation tax if the profits of the entity belong to the entity and not to its members.
http://en.wikipedia.org/wiki/Limited_liability_company

 

I said something incorrect about Accenture. Accenture is now headquartered in Ireland under a "never-here" loop hole in the USA corporate tax code ---
http://fortune.com/2014/07/07/taxes-offshore-dodge/

We’ve also got a second, related problem, which I call the “never-heres.” They include formerly private companies like Accenture ACN 0.17% , a consulting firm that was spun off from Arthur Andersen, and disc-drive maker Seagate STX , which began as a U.S. company, went private in a 2000 buyout and was moved to the Cayman Islands, went public in 2002, then moved to Ireland from the Caymans in 2010. Firms like these can duck lots of U.S. taxes without being accused of having deserted our country because technically they were never here. So far, by Fortune’s count, some 60 U.S. companies have chosen the never-here or the inversion route, and others are lining up to leave.

Miscellaneous Links:

Offshore Corporate Tax Loophole ---
http://www.americansfortaxfairness.org/files/ATF-Offshore-Corporate-Tax-Loopholes-Fact-Sheet.pdf

Tax avoidance: The Irish inversion ---
http://www.ft.com/intl/cms/s/2/d9b4fd34-ca3f-11e3-8a31-00144feabdc0.html#axzz3BiBwi9as

Tax avoidance:  The Netherlands Version ---
http://www.pkf.com/media/387161/the netherlands_2012.pdf

What is a PAYE umbrella company?
http://www.contractorcalculator.co.uk/paye_umbrella.aspx


From the CFO Journal's Morning Ledger on August 26, 2015

More accounting deficiencies linked to inventory
Taxes have long been a top accounting bugaboo, but keep an eye on the inventory, reports
CFOJ’s Maxwell Murphy. Large companies disclosed deficiencies in their procedures to account for inventory, vendors and cost of sales 38 times last year, putting the category just behind tax. In 2012, inventory ranked third on the list and was sixth as recently as 2011, according to Audit Analytics.


"Two Super Articles About College Teaching," by Joe Hoyle, Teaching Blog, August 15, 2014 ---
http://joehoyle-teaching.blogspot.com/2014/08/two-super-articles-about-college.html


Two Teaching Cases Featuring Proposed Major Differences (FASB versus IASB) in Lease Accounting

IASB Says the Tentative FASB Lease Accounting Model is Too Complicated

From the CFO Journal's Morning Ledger on August 11, 2014

About $2 trillion in off-balance sheet leases needs to be brought onto companies’ books, U.S. and international rule makers agree. But that’s about where the agreement ends. When the final version of their lease accounting overhaul arrives next year, it’s likely to involve different models for lease expensing, creating a potential headache for corporate financial staff in applying the divergent rules.

The U.S. Financial Accounting Standards Board plans to stick with its proposed dual model for lease accounting, which treats some leases as straight-line expenses and others as financings. But the International Accounting Standards Board said last week that it has tentatively decided to go with just one model for all lease expenses, because it views the FASB’s plan as too complicated, CFOJ’s Emily Chasan reports.

But it’s also possible that the differences won’t be too difficult to reconcile. “While it looks like we won’t have one complete joint solution in the end, the actual impact of the differing models over time may not be as dramatic as one might first think,” said Nigel Sleigh-Johnson, head of the Institute of Chartered Accountants of England and Wales’ financial reporting faculty.

Teaching Case
From The Wall Street Journal's Weekly Accounting Review on March 21, 2014

Rule Makers Still Split on Lease Accounting
by: Emily Chasan
Mar 18, 2014
Click here to view the full article on WSJ.com
 

TOPICS: Financial Accounting Standards Board, International Accounting Standards Board, Lease Accounting

SUMMARY: On Tuesday and Wednesday, March 18 and 19, 2014, the U.S. Financial Accounting Standards Board (FASB) and London-based International Accounting Standards Board (IASB) met to further their "aim to issue a final standard later this year that would move about $2 trillion dollars of lease obligations onto corporate balance sheets." According to the article, their differences have to do with the amortization of the lease cost into the income statement: straight-line presentation of the rental cost in the income statement or presentation as a long-term financing of an asset which involves depreciation expense and interest expense on the lease obligation. The former treatment is argued to be more appropriate for, say, storefront rental leases. The latter system can show higher expenses in the early years of a lease obligation.

CLASSROOM APPLICATION: The article is an excellent one to introduce impending changes in lease accounting in financial accounting classes.

QUESTIONS: 
1. (Advanced) Summarize accounting by lessees under current reporting requirements.

2. (Advanced) How do current requirements lead to lack of comparability among financial reports? How do they result in financial statements which often lack representational faithfulness? In your answer, define the qualitative characteristics of comparability and representational faithfulness.

3. (Introductory) Summarize the two proposed methods of accounting for all leases as described in this article. Identify a timeline over which these proposals have been made.

4. (Introductory) Summarize company reactions to these proposed accounting changes.

5. (Advanced) Are company arguments and reactions based on accounting theory? Support your answer.
 

Reviewed By: Judy Beckman, University of Rhode Island

"Rule Makers Still Split on Lease Accounting," byEmily Chasan, The Wall Street Journal, March 18, 2014 ---
http://blogs.wsj.com/cfo/2014/03/18/rule-makers-still-split-on-lease-accounting/?mod=djem_jiewr_AC_domainid

U.S. and international rule makers remained divided Tuesday in the first of two days of meetings aimed at resolving differences on lease accounting.

The U.S. Financial Accounting Standards Board and London-based International Accounting Standards Board aim to issue a final standard later this year that would move about $2 trillion dollars of lease obligations onto corporate balance sheets. But they are still split on the fundamental model companies should use to measure those liabilities.

“We have been struggling with this standard for many years,” Hans Hoogervorst, chairman of the IASB said at the meeting in Norwalk, Conn. “There is no simple answer.”

The major difference is whether to restrict companies to one method to account for leases, or to let them choose between two. The debate will continue Wednesday.

Since 2005, the Securities and Exchange Commission has recommended an overhaul of lease accounting because large off-the-books lease obligations can obscure a company’s true finances.

Under current rules, lease accounting is based on rigid categories that let companies keep operating leases for items such as airplanes, retail stores, computers and photocopiers off the books, mentioning them only in footnotes. In other cases, where the present value of lease payments represents a very large portion of the asset’s value, they are called capital leases and treated more like debt.

In their efforts to revamp the rules, accounting standard setters have gone back to the drawing board several times. In 2010, they proposed a method aimed at bringing leases on-the-books by categorizing them as “right of use” assets, which would treat them like financings.

Companies pushed back, claiming it would be costly to implement and could unnecessarily front-load lease expenses.

So the rule makers agreed to compromise in 2012 on a two-method approach: The first would let companies treat some leases like financings, such as when a company can purchase the asset at the end of a lease. The second would treat other leases as straight-line expenses, such as rental payments for retail storefronts.

That move also drew criticism from analysts, who were concerned they wouldn’t get comparable financial information because the choice would be left up to companies.

On Tuesday, some board members said they preferred to return to the “right of use” approach because they think the compromise is weak. Others were in favor of the two-method approach because it would be easier to implement.

The dual method approach is the “more operational one, at least initially,” said FASB Vice Chairman Jim Kroeker.

To speed a resolution, the boards also generally agreed to eliminate potential changes to lessor accounting from the proposal.

The boards had received feedback from investors and analysts that the current lessor model works well and that changes could result in more work.

Continued in article

Teaching Case
From The Wall Street Journal's Weekly Accounting Review on August 15, 2014

Accounting Rule Makers Diverge on Lease Expensing
by: Emily Chasan
Aug 08, 2014
Click here to view the full article on WSJ.com
 

TOPICS: FASB, IASB, Lease Accounting

SUMMARY: U.S. and international accounting rule makers are getting closer to a final version of their long-awaited lease accounting overhaul, but the two boards are unlikely to use the same lease expensing model in their final rules. The London-based International Accounting Standards Board published an update saying it has tentatively decided to propose a single model for lease expenses, rejecting a 2013 compromise with the U.S. Financial Accounting Standards Board for a dual model amid concerns that it is too complex.

CLASSROOM APPLICATION: This article is a good update regarding accounting for leases.

QUESTIONS: 
1. (Introductory) What is FASB? What is IASB? What do they have in common? How do they differ?

2. (Advanced) What are the current rules regarding accounting for leasing? Will this be changing? If so, how?

3. (Advanced) Why do some parties take issue with the current model of accounting for leases? Do you agree that this is a problem? Why or why not?

4. (Advanced) What is the reasoning behind the idea that there is no real difference between the FASB and IASB methods? Do you agree?
 

Reviewed By: Linda Christiansen, Indiana University Southeast

"Accounting Rule Makers Diverge on Lease Expensing," by Emily Chasan, The Wall Street Journal, August 8, 2014 ---
http://blogs.wsj.com/cfo/2014/08/08/accounting-rule-makers-diverge-on-lease-expensing/?mod=djem_jiewr_AC_domainid

U.S. and international accounting rule makers are getting closer to a final version of their long-awaited lease accounting overhaul by next year, but the two boards are unlikely to use the same lease expensing model in their final rules.

The London-based International Accounting Standards Board this week published an update saying it has tentatively decided to propose a single model for lease expenses, rejecting a 2013 compromise with the U.S. Financial Accounting Standards Board for a dual model amid concerns that it is too complex.

FASB has tentatively decided to retain the dual model, because it believes it better reflects the economics of different types of leases, such as real estate and equipment leases. The models may not result in significant financial differences, but it could have big operational differences for corporate financial staff applying the standards, industry analysts say.

The primary goal of the joint lease accounting overhaul has long been to push companies to bring about $2 trillion in off-balance sheet leases onto the books. Investors complain that today’s off-balance sheet leases obscure a company’s true liabilities, and that they often have to adjust calculations to include these expenses. Off-balance sheet leases may be understating the long-term liabilities of companies by 20% in Europe, by 23% in North America, and by 46% in Asia, according to IASB research.

But the overhaul has been delayed by disagreements over how companies should measure leased assets and liabilities.

The IASB’s single model would treat all leases like financings, requiring companies to recognize a so-called “right of use” asset and amortize it over time. FASB’s dual model would treat some leases like financings, such as when a company has the option to purchase equipment at the end of a lease term, and treat other leases, such as store rental payments, as straight-line expenses.

“While it looks like we won’t have one complete joint solution in the end, the actual impact of the differing models over time may not be as be dramatic as one might first think,” said Nigel Sleigh-Johnson, head of the Instituted of Chartered Accountants of England and Wales’ financial reporting faculty.

The real estate industry has primarily been concerned that the single financing model for lease accounting would force them to front-load lease expenses. But when companies include the additional lease service components or tenant improvements into the straight-line expensing model, the final result is often similar to the financing model, according to a study of dozens of real-world leases earlier this year by leasing firm LeaseCalcs LLC.

“In practice, the difference in the IASB and FASB positions is expected to result in little difference,” the IASB said in its update.

Jensen Comment
Neither the FASB nor the IASB will ever make headway with short-term lease accounting rules until they factor in probabilities of lease renewals.

Bob Jensen's Document on How to Avoid Booking Leases Under FAS 13 and the Dual Model ---
http://www.cs.trinity.edu/~rjensen/temp/LeaseAccounting.htm

Also see
http://www.trinity.edu/rjensen/Theory02.htm#Leases


Book Review of a Memoir by Bob Herz

Bob Herz --- http://www.fasb.org/facts/factsrhh.shtml
Accounting Hall of Fame Module ---
http://fisher.osu.edu/departments/accounting-and-mis/the-accounting-hall-of-fame/membership-in-hall/robert-henry-herz/

Jensen Comment
I never met a person who, after a close encounter with Bob Herz, did not really like Bob Herz. I had only one encounter when Bob was still a partner with PwC and one encounter when Bob was Chairman of the FASB. Both times I can away better informed and entertained by his clever wit (truly like Will Rogers) and humble style (also like Will Rogers).

I wish somebody who knew Bob Herz better than me would write a Wikipedia module about him.

The module below appears under the Book Review Section of The Accounting Review,
Volume 89, Issue 4 (July 2014)
http://aaajournals.org/doi/full/10.2308/accr-10398
Since the Book Review Section is free to the public, I quoted the entire module below:

BOB HERZ, Accounting Changes: Chronicles of Convergence, Crisis, and Complexity in Financial Reporting (No place: AICPA, 2013, ISBN 978-1-93735-210-3, pp. xx, 268).

FLOYD NORRIS
Chief Financial Correspondent
The New York Times

 

Robert H. Herz always seemed like the Will Rogers of the accounting world. He sounded down to earth even when discussing arcane accounting rules, and he appeared to get along with everybody, even those who did not get along with him.

Then he quit.

In 2010, he suddenly stepped aside as chairman of the Financial Accounting Standards Board, with two years left in his second term. If he had previously mentioned to anyone he was thinking of such a step, that person has yet to mention it publicly.

Was he pushed? He insisted the departure was his choice.

Was he angry over the congressional upbraiding he had suffered the year before, when it became clear that the congressmen who planned the “hearing” had no interest in hearing his views, only in assuring he heard and obeyed the demand of the banks that the Board back away from fair value accounting enough to let the banks look as healthy as they wished to appear?

If you long to hear the inside story of his sudden retirement, or to hear what he really thought of the people who forced the Board's rapid retreat after that congressional circus, Herz's memoir, Accounting Changes: Chronicles of Convergence, Crisis and Complexity, is not the place to turn.

If, unlike Rogers, he ever met a man he did not like, that man is left out of the book.

Start with the story of the congressional lynching. He chooses to remember comments from the one congressman who showed any sympathy to the Board's position.

Over the next few weeks, the Board rushed out changes to the accounting rules that he defends.

The principal change enacted then enabled banks to treat impaired securities as being worth more than they were, at least for earnings purposes, while the rest of the impairment was put in “other comprehensive income.” This was a classic accounting rule-maker approach, one that I wish Mr. Herz would have discussed in more detail. In it, those who have gained political support forcing rule-makers to back down get what they said they wanted—avoiding a hit to earnings—but are forced to disclose the unfortunate truth to those who are willing to read the footnotes.

Instead, he makes it sound like helping out the banks was a byproduct of a perfectly reasonable decision, albeit one that was rushed through in record time.

Although not one of our specific goals in establishing this approach, an important practical effect of it for the banks was to take some pressure off their regulatory capital because only the portion of the impairments in debt securities relating to credit would now be charged to regulatory capital. (p. 175)

As for his departure from the Board, he simply reprints an interview with The CPA Journal. “It was time to move on,” he says (p. 238).

He is a little more inclined to discuss what was probably the single biggest mistake of his tenure: the failed attempt to deal with special purpose entities in the aftermath of the Enron scandal. The Board's narrow solution set the stage for later—and much larger—abuse by the banks.

“Knowing what I know now about how the use of this device was sometimes stretched and became an important element in the growth of the ‘shadow' banking system leading up to the financial crisis,” he writes, “I would certainly have worked to eliminate it from the standards much earlier” (p. 249). That episode, he says, “serves as an example of the perils of creating exemptions that grant highly coveted financial reporting outcomes.”

Herz is more interesting when discussing his early life and career. He grew up in New Jersey and Argentina, where his maternal grandparents lived and where his father was transferred when he was 14. He chose to go to college at the University of Manchester in Britain, and went to work for Price Waterhouse in Manchester after he graduated in 1974, and later moved to the United States, where he ended up at Coopers & Lybrand.

The result was a highly unusual résumé for a young accountant, one that required him to know both British and American accounting rules, something that would serve him well as he became the top technical partner for the merged PricewaterhouseCoopers and a part-time member of the International Accounting Standards Board before leaving both jobs to take over the FASB in 2002.

Early in his career he had a job at Coopers that perhaps should be mandatory for those who would write accounting rules. In what he calls his “Bad Bob” years, his job in the firm's corporate finance advisory service involved finding ways around accounting rules to inflate profits.

He writes, “my experiences in transaction structuring taught me that the areas that were most ripe for designing transactions and arrangements to achieve desired accounting outcomes were those where the accounting rules departed from basic principles of economics and finance and areas where, because of the detailed requirements and many exceptions and bright lines present in the accounting rules, minor changes in the form of a transaction or arrangement could produce a large change in the resulting accounting treatment” (p. 13).

That sounds like a plea for a “principles based,” rather than “rules based” set of accounting standards, something Herz says he would like. But he seems resigned to the idea such a system would not work in the United States, due in part to what he called, in a 2004 speech, the “real fear of being second-guessed by regulators, enforcers, the trial bar, and the business press” (p. 207). Whatever they say, he writes, companies and accountants often want “detailed rules, bright lines, and safe harbors” (p. 209).

It turns out that Herz really is what he always seemed to be: a nice guy with a sense of fair play. That does not help the book much. He goes out of his way to explain all sides of some accounting issues, without necessarily making clear his own opinions.

His memoir does an excellent job of making some complicated accounting issues accessible. But it would be nice if the author were not so nice to those who opposed—and ultimately defeated—some of his efforts.

August 18, 2014 reply from Tom Selling

Hi, Bob:

Thanks for forwarding this. I want to share a couple of reactions to your observations and to Floyd’s review:

I consider myself fortunate to have interacted with Bob Herz on a handful of occasions. One of the most memorable was when he called me to clarify his views about one of my earliest Accounting Onion postings. I don’t even remember which post it was. I was still pretty new to blogging, and Herz didn’t call to complain, only to clarify. As you said, Bob, he was extremely patient and cordial. One thing we did agree on, I remember, is a preference for the IFRS impairment model for long-lived tangible assets over U.S. GAAP. I still smart from the invective that Denny Beresford directed toward me via a post to AECM (“outrageous and unsupported assertions,” and more) after I published my view that Herz did not resign of his own accord. (If anyone is interested, see here.) I took a measure of satisfaction reading that Floyd is as skeptical as I continue to be about the stated reasons for Bob having suddenly departed the FASB. Floyd focuses on the loan measurement controversy, and he also recently published a column in the NYT on the topic. His NYT piece was much more charitable to the anti-fair value forces than the book review. It’s available here: Why a Rule on Loan Losses Could Squeeze Credit. Related to that last bullet point, Floyd quotes Bob Herz: “My experiences in transaction structuring taught me that the areas that were most ripe for designing transactions and arrangements to achieve desired accounting outcomes were those where the accounting rules departed from basic principles of economics and finance…” Evidently, Bob Herz —unlike Bob Jensen— is no defender of historic cost. Based on comments to me by others closer to the FASB at the time, I think that Bob Herz was coming around to the measurement approach that I favor, replacement cost, just before he departed from the FASB. Given that FAS 157 had already been promulgated, I imagine that there was no way that the FAF could have abided the shift in thinking toward the “the basic principles of economics and finance."

I should have done so earlier, but I will be purchasing a copy of Bob’s book tonight. I very much look forward to reading it

Best,
Tom

August 18, 2014 reply from Dennis Beresford

Tom,

I’m sorry that you still smart from the “invective” I directed toward you re: Bob Herz’ resignation from the FASB. For the record, the definition of invective that popped up on my email program is “the harsh denunciation of some person or thing in abusive speech or writing, usually by a succession of insulting epithets.” Suggesting that you had made what I called “outrageous and unsupportable assertions” about such a serious matter can hardly be called, in my opinion, abusive speech or a succession of insulting epithets. Neither then nor now has there been any evidence of which I am aware that Bob’s decision to leave the FASB was other than a completely voluntary action by him. I urge that you be more careful about your choice of word selection in future postings.

I have actually read Bob Herz’ book and I recommend it highly to anyone who wants to understand more about the politics of the standard setting process and much of the day to day activity. However, as Floyd Norris observes, Bob doesn’t really break much new ground and certainly doesn’t disclose any “Deep Throat” type information or enemies list that wouldn’t have already been obvious. As Floyd states (and as you, Tom, agree) Bob is just too nice a guy to write that kind of book.

I interacted with Bob in many professional capacities before, during, and after my time at the FASB so our relationship goes back at least 30 years. I always found him to be the consummate professional – extremely bright on accounting matters but also a well-rounded business person. And he has a wonderful sense of humor. While all of these interactions were positive, I most enjoyed the year in which Bob and I overlapped on the board of directors of Fannie Mae. I chaired the Audit Committee and he was a new member of the board and of the Audit Committee. He “hit the ground running” as both a board member and Committee member and made a great contribution. But he was able to do so in a constructive way that didn’t bruise any egos of board members or senior management who had been working hard to deal with extremely challenging issues long before he got there. In summary, he was a joy to work with.

Denny


"IASB confirms line-up of IFRS 9 implementation group," by Richard Crump, Accountancy Age, August 27, 2014 ---
http://www.accountancyage.com/aa/news/2362035/iasb-confirms-line-up-of-ifrs-9-implementation-group

The international accounting standards setter has set up the group to support stakeholders in adopting the new reporting standard, which forces banks to take a forward view of losses incurred from bad debts.

The 12-strong panel includes members of the Big Four, along with representatives from Barclays, Bank of China and Deutsche Bank. A full list can be seen here.

Last month, the IASB replaced its discredited incurred-loss model in favour of a forward-looking impairment model that requires banks and financial institutions to provision for bad loans much earlier under changes to IFRS accounting rules that will force organisations to better accurately represent their financial health.

The new model will create challenges for preparers of accounts, particularly because of the increased need for judgement. For instance, a major issue for banks and investors will be how adoption of the new standard will affect regulatory capital ratios. Banks will need to factor this into their capital planning and users are expected to look for information on the expected capital impacts.

The objective of the Impairment Transition Resource Group is to provide a forum for stakeholders to discuss emerging implementation issues arising from the new impairment requirements. The group will also provide information that will help the IASB to determine what, if any, action will be needed to resolve such diversity, although it will not itself issue guidance.

Meetings will be observed by regulatory bodies including members of the Basel Committee on Banking Supervision.

The IASB expects that the group will meet approximately two to three times a year, depending upon the volume and complexity of the issues raised. The first meeting is planned for the last quarter of 2014, with details to be announced in due course. All meetings will be public and chaired by IASB member Sue Lloyd.

Jensen Comment
One issue of loan impairment is that moving threshold where statistical prediction of bad debts gives way to an evaluation of each debtor. For example, predicting bad debt losses of millions of bad debts in each aging category of accounts receivable at Sears is a statistical estimation problem where individual accounts are not individually analyzed and compared for impairment prediction. The IASB's Impairment Transition Resource Group is more concerned with banks and other lenders having fewer very large investments that must be individually evaluated such as investments in a particular class of Argentina's long-term bonds.

The huge problem facing the Impairment Transition Resource Group is in achieving some sort of consistency between financial statements of lenders regarding loan impairment adjustments. As with most any principles-based judgment taking the place of a bright-line rule, there is great risk of inconsistencies between firms: 
Bright Lines Versus Principles-Based Rules ---
http://www.trinity.edu/rjensen/Theory01.htm#BrightLines

For example, given identical loan contracts such as a class of Argentina bonds, the IASB's new ruling faces a high probability that one company and its auditors may account for the contracts differently than another company and its auditors (even though the audit firm is the same for the two different companies).

"Why Balance Sheets Fall Short as Indicators of Credit Risk," ResearchRCAP, October 2010 --- Click Here
http://www.researchrecap.com/index.php/2010/09/27/why-balance-sheets-fall-short-as-indicators-of-credit-risk/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+researchrecap+%28Research+Recap%29

A company with a high ratio of assets to liabilities should, in theory, be better placed to service its debts than one with fewer assets supporting its obligations. However, the balance sheet – the primary record of an entity’s assets and liabilities – is rarely employed by credit analysts as a standalone indicator of credit risk.

The three main shortcomings which limit its usefulness are that:

  • Under the historical cost accounting convention, the amounts shown on the asset side are unlikely to be a good proxy for the real value of the entity’s resources;
  • Leased assets, and the related obligation to pay the lease rentals, are mostly off balance sheet; and
  • Pension obligations are not reported consistently.

However, these obstacles are not completely insurmountable because:

  • The value of the assets can be estimated by reference to the earning power of the business;
  • Off-balance-sheet leased assets can be factored in using either a multiple of the lease expense, or the estimated present value of the obligation to pay the lease rentals; and
  • Inconsistencies in the reporting of pension obligations can be rectified by including the actuarially-estimated defined benefit obligation as a liability, and by transferring pension assets to the asset side of the balance sheet where appropriate.

Using Western Europe’s 10 largest telecoms operators as an example, this report shows that it is possible to construct a metric – the ratio of total assets Go total liabilities – which not only correlates nicely with our credit ratings for the telcos concerned, but also provides additional insight into the strength of their balance sheets. However, the adjustments required are not entirely robust, and Moody’s will continue to focus on metrics which compare the cash generating capability of the entity with the level of its debt.

Continued in article

Jensen Comment
Some of the underlying faults are being corrected such as OBSF lease obligations. I would say that a much more overwhelming inability of accountants to deal with intangibles and contingencies ---
See below

Another problem is the tendency of auditors to go along with underestimation of bad debts and loan loss reserves ---
http://www.trinity.edu/rjensen/2008bailout.htm#AuditFirms

 


America's Disappearing Jobs ---
http://247wallst.com/special-report/2014/08/27/americas-disappearing-jobs-2/3/

Jensen Comment
The highest rate of decline in is "fallers" who cut down trees for paper, lumber, and energy uses. For a few days I watched lumberjacks at work cutting down a few acres of timber across from our cottage. I don't think the lumberjacks even owned a chain saw or an axe. They moved in about $3 million worth of logging machinery, including the cutting machine that downs the trees and the chipping machine that swallows up whole trees (sometimes three or four or more trees at a time) and fills an 18-wheel truck with wood chips in about 40 minutes on average. The trees themselves are untouched by the lumberjacks running the big machinery. The wood chips were hauled off to a power plant in nearby Whitefield, NH.

You can see my photographs of this logging operation at
http://www.trinity.edu/rjensen/tidbits/Trees/TimberHarvest/Set01/TimberHarvest01.htm


"Discussing (Revenue) Variance Analysis with the Performance of a Basketball Team," by William R. Strawser and Jeffrey W. Strawser, Issues in Accounting Education, August 2014 ---
http://aaajournals.org/doi/full/10.2308/iace-50671
This article is not a free download, but I think, like most AAA journal articles, I think it can be distributed free to current students in accounting courses.

ABSTRACT:

While current cost and managerial accounting texts devote extensive coverage to comparisons of actual and expected costs, relatively scant attention is devoted to analyzing comparable differences in revenues. Methods commonly used to identify differences between actual and expected revenues include the calculation of variances such as the sales price (SPV), sales quantity (SQV), and the sales mix (SMV) variances. We decided to approach the discussion of these variances in an innovative setting by presenting the SQV and SMV in the context of analyzing the performance of a basketball team, providing a setting that is both appropriate and interesting for illustrating revenue variances. Also, there are trade-offs in the choice between two of these “revenue” sources, for example, should the shooter attempt a two- or a three-point shot? Other relevant questions propel the decomposition of the SQV into the market size (MSV) and market share (MShV) variances. Was the game an offensive showdown, tallying numerous shots, or a defensive lock-down with relatively few shots? How effective was the team in controlling the ball and scoring a dominant proportion of shots? Feedback from students indicates that this illustration provides an interesting and comprehensive discussion of revenue variances. Using this and similar settings, a better understanding of quantity and mix variances, and the impact of these variances on improving performance, may be obtained.

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

PS
Except for the Strawser and Strawser article, the teaching cases in IAE for August 14, 2014 are devoted to famous recent frauds ---
http://aaajournals.org/toc/iace/current

  • Satyam Fraud: A Case Study of India's Enron by Veena L. Brown, Brian E. Daugherty and Julie S. Persellin

    Grand Teton Candy Company: Connecting the Dots in a Fraud Investigation by Carol Callaway Dee, Cindy Durtschi and Mary P. Mindak

    Blurred Vision, Perilous Future: Management Fraud at Olympus by Saurav K. Dutta, Dennis H. Caplan and David J. Marcinko

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


    From EY on August 28, 2014 ---
    https://americas.ey-vx.com/email_handler.aspx?sid=1092bc47-640f-4acd-bb2d-1570cbb2c50f&redirect=http%3a%2f%2fwww.ey.com%2fUL%2fen%2fAccountingLink%2fAccounting-Link-Home

  • New revenue standard: Industry focus

     

    The new revenue recognition standard issued by the FASB and the IASB creates a comprehensive source of revenue guidance for all entities in all industries. Our Technical Lines consider certain implications for the following industries:

     

     


    "MIT Sloan Kept Madoff-Linked Professor on Staff for Years After Fraud," by Natalie Kitroeff, Bloomberg Businessweek, August 14, 2014 ---
    http://www.businessweek.com/articles/2014-08-14/mit-sloan-didnt-fire-professor-who-funneled-cash-to-madoff-scheme 

    Prosecutors announced that Gabriel Bitran, a former associate dean at Massachusetts Institute of Technology’s Sloan School of Management, has agreed to plead guilty to criminal charges of conspiracy to commit fraud for using a hedge fund to secretly funnel investors’ cash into Bernard Madoff’s Ponzi scheme. His son, Marco, will also plead guilty in the case. Bitran’s misdeeds were made public as early as 2009, yet he stayed on Sloan’s faculty until 2013.

    Bitran and his son paid almost $5 million in April 2012 to settle Securities and Exchange Commission charges that they lied to investors. Years earlier, a Reuters report detailed his fund’s involvement in the Madoff scheme. Bitran remained on Sloan’s staff until he retired in January 2013, teaching classes on operations and management. His lawyer did not return a call seeking comment.

    The elder Bitran was sued unsuccessfully in 1992 for sexual harassment by a woman who worked as an assistant in his office on Sloan’s campus. While her case failed, the decision spurred widespread protest and prompted the school to overhaul its policies on such incidents.

    Continued in article

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


    "Lessons from an $8 million fraud:  What the criminal was thinking and what can be done to prevent or uncover similar crimes," by Mark J. Nigrini, Ph.D. and Nathan J. Mueller, Journal of Accountancy, August 2014 ---
    http://www.journalofaccountancy.com/Issues/2014/Aug/fraud-20149862.htm

    In hindsight, it seems obvious: Nathan J. Mueller’s pilfering of financial services giant ING should have never been allowed to start, much less last as long as it did. 

    First, it was an accident that gave Mueller, an employee in ING’s reinsurance division, the authority to approve company checks of up to $250,000.  

    Then, the check his credit card company returned to ING could have exposed his theft in the first year, but the accounts payable department simply returned the check to him.

    Finally, the evidence that he was living far beyond his means—the expensive cars and watches, the lavish nightlife, the frequent trips from Minnesota to Las Vegas—could have raised a few eyebrows among his co-workers, but nobody voiced any concerns for years.

    In the end, Mueller embezzled nearly $8.5 million from ING over four years and three months. When he was caught, he was sentenced to 97 months in prison—a term that he began in February 2009 at the Federal Prison Camp in Duluth, Minn.

    Why should anyone care about Nathan J. Mueller? His case is noteworthy because of the millions of dollars involved and the length of time that his scheme went undetected and because his scheme was made possible by a breach of controls. This article describes the fraud in Mueller’s own words and examines the lessons learned with strategies for management on how to prevent and detect similar schemes.

    THE PATH TO ING

    Mueller grew up in a small town in south central Minnesota. A high school friend remembers that Mueller was popular in school, decent at athletics, and competent at his schoolwork, and that he liked to play rap music “pretty loud in his car” whenever he could. The friend also remembers that Mueller’s family was always on a tight budget and that Mueller didn’t like living that way.

    Mueller attended a private liberal arts college and graduated with an accounting degree in 1996. He enjoyed the inner workings of accounting systems, and in 2000 he found himself part of ING after his employer, life insurance company ReliaStar, was acquired for more than $6 billion.

    Mueller played a lead role in transitioning his old employer onto a new enterprise resource planning (ERP) system. A mistake by his new employer created an opportunity for Mueller to steal company funds. In the next section of the article, Mueller describes the fraud scheme in his own words.

    WE OFTEN LOGGED ON AS SOMEONE ELSE

    As a part of the changeover team, I became an expert on all aspects of the ERP system including financial reporting, journal entries, and, most importantly, checks and wire payment processing. I was also, by mistake, along with a co-worker, given the authority to approve checks up to $250,000. I discovered this permission quite by accident some two years after the takeover.

    Our accounting department consisted of a controller, assistant controller, accounting manager (me), and three people under me. Together with a co-worker (CW) and a subordinate (SUB), I was one of three of us in my division who could request checks. CW and I also could approve checks. In our small accounting department, we knew everyone else’s system passwords. This was a practical workaround for when we needed to get something done when someone was out of the office. We often logged on as someone else to get the job done. One morning, while sitting at my desk, I realized that I could log in as someone else, request a check, and then log in as myself and approve my own request. I went to work every day for the next year tempted by the pot of gold that was there for the taking.

    Continued in article

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


    July 2014
    The CFO Guide to Budgeting Software: 10 Key Elements Companies Should Look For --- Click Here
    http://pages.cfo.com/Centage---Budgeting-Software_download.html?mkt_tok=3RkMMJWWfF9wsRojuqnAZKXonjHpfsXx6%2B4rW6Cg38431UFwdcjKPmjr1YcHScd0aPyQAgobGp5I5FENTrDYUKhrt6EPWQ%3D%3D

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


    From the CPA Newsletter on August 20, 2014

    AICPA reaches membership milestone
    The AICPA announced Tuesday that its membership has eclipsed the 400,000 mark. The accounting profession's largest membership organization worldwide has seen its number of members grow by more than 70,000 since 2005. Watch AICPA President and CEO Barry Melancon, CPA, CGMA, reflect on this exciting achievement and what it means for members in this short video. Journal of Accountancy online (8/19)


    From the CPA Newsletter on August 19, 2014

    How is your knowledge of individual tax statistics? ---
    http://r.smartbrief.com/resp/gabXBYbWhBCIsFAUCidKtxCicNINEV?format=standard
    Do you know how many individual income tax returns were filed using Form 1040EZ, Income Tax Return for Single and Joint Filers With No Dependents, or the percentage of individual tax returns the IRS audited? Take this quiz to get the answers to those and other questions. Tax Insider (8/14)


    Employment Increases Mostly in High Paying Skilled Jobs

    From the CPA Newsletter on August 18, 2014

    Higher-paying jobs return to U.S. labor market ---
    http://r.smartbrief.com/resp/fXzOBYbWhBCIsagLCidKtxCicNBAQW?format=standard
    As the U.S. economy recovers, almost 40% of jobs created over the past six months have been in sectors where the median wage is at least $20 an hour, the National Employment Law Project found in an analysis. However, growth among low-paying jobs has plateaued or decreased. The Washington Post (tiered subscription model) (8/17), eCreditDaily.com (8/17)

    Manufacturers Adding Robots to Factory Floors in Record Numbers ---
    http://www.technologyreview.com/graphiti/529971/robots-rising/?utm_campaign=newsletters&utm_source=newsletter-daily-all&utm_medium=email&utm_content=20140818

    Jensen Comment
    Robots are replacing skilled and well as unskilled workers. For example, welding and surgery are popular areas for robotics, although the nature of the robotics may differ. Specialty surgeons in rural areas may be replaced by robots controlled by highly skilled surgeons in urban specialty hospitals. Specialty welders on a factory floor may be replaced by robots that are not controlled by skilled welders.

    The advantages of robots in surgery include allowing surgeons to do more surgeries per day and allowing specialty surgeries in remote locations that do not attract as many specialty surgeons. There are of course medial risks, and general surgeons must be present when the surgeries are being performed to cover emergencies such as hemorrhaging.

    The advantage of robots in welding are primarily operating leverage where variable labor costs (wages and benefits) are eliminated by adding fixed costs. Also robots are not as subject to labor strife, although unions often influence the extent to which their members can be replaced by robots. Concessions are often made for for troubled factories on the verge of being closed down if variable costs are not reduced. Robots may allow some skilled workers to remain employed with high wages and benefits. For example, robots may allow factories in the USA to compete with less costly labor in Mexico and Asia.


    From PwC
    IFRS news - July/August 2014 --- Click Here
    http://www.pwc.com/us/en/cfodirect/publications/ifrs-news/july-august-2014.jhtml?display=/us/en/cfodirect/publications/ifrs-news&j=542590&e=rjensen@trinity.edu&l=824816_HTML&u=20693741&mid=7002454&jb=0


    Activity Based (ABC) Costing --- http://en.wikipedia.org/wiki/Activity-based_costing

    "A Review of ABC Implementations in Chinese Industries," by Kanitsorn Terdpaopong, Omar Al Farooque, Tomasz Wnuk-Pel, and Dhurakij, SSRN, August 18, 2014 ---
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2482345

  • Abstract:
    In a competitive environment, accurate costing information is crucial for every business including manufacturing and service firms, fishing and farming enterprises, and educational institutions. The Activity-Based Costing (ABC) system, argued to be superior to the traditional volume-based costing system, has increasingly attracted the attention of practitioners and researchers alike as one of the strategic tools to aid managers in better decision making. The benefits of the ABC system and its impact on corporate performance have motivated numerous empirical studies on ABC; it is considered to be one of the most-researched management accounting areas in developed countries. China, an emerging market with a growing rate of manufacturing industries, is no exception, as ABC entered China as a choice for an innovative accounting system. Previous research on ABC conducted in China examined pertinent issues related to ABC implementation, such as the levels of ABC adoption in various countries, the reasons for implementing ABC, the problems related to ABC and the critical success factors influencing ABC. In their case studies, several authors declared ABC implementation to be successful, but many have been reluctant to support this seemingly novel system for many reasons. This paper reviews 48 research studies on ABC carried out within the past decade in China, both case studies and questionnaire-based research, from 2000 to 2013. We found that ABC has been adopted in most manufacturing firms, many of which claim success in cost reduction and performance improvement since its implementation; in some service corporations, especially in logistics and hospitals; and in only a few firms in the construction sector. In our study, it should be noted that large firms with more than 1,000 employees were the dominant group (65.58 per cent) applying ABC. Even though many firms in China supported ABC’s use, many factors hindered its implementation: 1) difficulty in establishing activities and linkages to existing systems for gathering information to enter into an ABC system; 2) lack of adequate IT resources; 3) insufficient knowledge of ABC among employees, which leads to the fourth reason; 4) lack of management support. Despite these obstacles, our research review leads us to believe that the rate of ABC implementation in an emerging market like China will continue to rise.

  • Jensen Comment
    I'm not certain that "accurate costing information" is the main goal of ABC costing. Perhaps a better phrase is "comprehensive costing information." For example, ABC costing declined in popularity in product costing in the USA due to derivation costs and limitations of ABC costing for product costing ---
    http://en.wikipedia.org/wiki/Activity-based_costing#Tracing_Costs

     The value of ABC costing may come more from the process of investigating activity costs than from the dubious inaccurate product costs using ABC models. One problem is that the benefits from a quality ABC costing effort often do not exceed the costs of the effort. The above Terdpaopong et al. paper suggests this may also be the case in China.

    Academics love ABC costing because it is relatively easy to teach and is one of the great 20th Century innovations (developed initially by practitioners) in cost accounting. But academics may pass over the decline in popularity in real-world implementations in practice.

    "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 ---
    http://aaajournals.org/doi/full/10.2308/acch-50658 (Not Free)

    Bob Jensen's threads on ABC Models
    Search for ABC at
    http://www.trinity.edu/rjensen/Theory02.htm#ManagementAccounting


    From EY on August 15, 2014
    GASB proposes changes in accounting for other postemployment benefits
    http://www.ey.com/Publication/vwLUAssetsAL/TechnicalLine_BB2797_OPEBPlans_14August2014/$FILE/TechnicalLine_BB2797_OPEBPlans_14August2014.pdf

    What you need to know

    • The GASB has proposed chang ing how state and local governments calculate and report the costs and obligations associated with defined benefit other postemployment benefit (OPEB) plans .

    • Government employers that fund their OPEB plans through a trust that meets the specified criteria would have to record a net OPEB liability in their accrual - basis financial statements for defined benefit plans that would be based on the plan fiduciary net position rath er than plan funding.

    • The proposal would make a government’s obligations more transparent, and m any governments would likely report a much larger OPEB liability than they do today.

    • The guidance would be effective for fiscal years beginning after 15 December 2016 , and early application would be encouraged.

    • Comments are due by 29 August 2014 . Public hearings are s et for September 2014.

    Overview
    The Governmental Accounting Standards Boa rd (GASB) has proposed changing how state and local governments calculate and report the cost of other postemployment benefits , which consist of retiree health insurance and defined benefits other than pensions and termination benefits that are provided to retirees .

    Accounting Change Will Expose ...
    http://www.statedatalab.org/news/detail/accounting-change-will-expose

    JUNE 25, 2014 | FORT WAYNE NEWS-SENTINEL (INDIANA)

    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. …

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

    Welcome to the World of 'Pension Smoothing'
    by: Vipal Monga
    Aug 12, 2014
    Click here to view the full article on WSJ.com
     

    TOPICS: Pension Accounting, Pension Smoothing

    SUMMARY: A government accounting maneuver to pay for road repairs, subways and buses will allow many U.S. businesses to delay billions of dollars in pension contributions for retirees. President Barack Obama signed a $10.8 billion transportation bill that extends a "pension-smoothing" provision for another 10 months. In short: companies can delay making mandatory pension contributions, but because those payments are tax-deductible some businesses will pay slightly higher tax bills, which will help pay for the legislation. But the accounting tactic is controversial. The government's moves could undermine its own efforts to shore up the pension system. Some worry about the strain it could put on the government agency tasked with protecting the retirement of 44 million workers.

    CLASSROOM APPLICATION: This is useful for coverage of accounting for pensions. The article also shows how politics can impact tax planning and business decisions.

    QUESTIONS: 
    1. (Introductory) What extension is discussed in the article? What is the reason for this extension?

    2. (Advanced) What are the possible positive results of these extension? What are the potential negative ripple effects of this extension? Do the possible benefits outweigh the possible problems? Please explain the reasoning behind your answer.

    3. (Advanced) How are pensions entered into the accounting records? How are pension liabilities calculated?

    4. (Advanced) How are obligations to current and further retirees affected by the extension? How is the accounting of those obligations affected? How do the pension obligations differ from the accounting of those pension obligations? (legal liability vs. cash flow vs. accounting rules)

    5. (Advanced) What is the importance of properly accounting for pension obligations? How are the financial statements impacted by accounting for pensions? Why would this be of interest to users of the financial statements?
     

    Reviewed By: Linda Christiansen, Indiana University Southeast

    "Welcome to the World of 'Pension Smoothing'," by Vipal Monga, The Wall Street Journal, August 12, 2014 ---
    http://online.wsj.com/articles/welcome-to-the-world-of-pension-smoothing-1407800119?mod=djem_jiewr_AC_domainid

    A government accounting maneuver to pay for road repairs, subways and buses will allow many U.S. businesses to delay billions of dollars in pension contributions for retirees.

    President Barack Obama on Friday signed a $10.8 billion transportation bill that extends a "pension-smoothing" provision for another 10 months. In short: companies can delay making mandatory pension contributions, but because those payments are tax-deductible some businesses will pay slightly higher tax bills, which will help pay for the legislation.

    Companies with 100 of the country's largest pensions were expected to contribute $44 billion to their plans this year, but that could be slashed by 30% next year, estimated John Ehrhardt, an actuary at consulting firm Milliman.

    International Paper Co. IP -0.25% , for example, had planned to set aside $1 billion by 2016 to fund its $12.5 billion U.S. defined benefit plan. The paper company says it now expects to funnel that money into other projects, including share buybacks or investments in new plants.

    "It means more cash for us," says Chief Financial Officer Carol Roberts.

    But the accounting tactic is controversial. The government's moves could undermine its own efforts to shore up the pension system. Some worry about the strain it could put on the government agency tasked with protecting the retirement of 44 million workers.

    "To use the federal pension insurance program to pay for wholly unrelated spending initiatives is just bad public policy," said Brad Belt, former executive director of the Pension Benefit Guaranty Corporation, the government's pension insurer. "It has adverse implications for the funding of corporate pension plans."

    Companies have struggled to keep up with mounting pension bills since 2008.

    The present-day value of those promises increases when interest rates decline. Currently, the largest pensions have a $252 billion funding deficit, which has increased by $66 billion since the beginning of the year, according to Milliman.

    The accounting maneuver was introduced in Congress's last highway bill in 2012, and was backed by large business groups, such as the Business Roundtable. The new bill, which expires in May, will extend the method.

    The bill essentially allows companies to base their pension liability calculations on the average interest rate over the past 25 years, instead of the past two. The 25-year average is larger, because interest rates were much higher before the financial crisis.

    The accounting technique doesn't actually reduce companies' obligations to retirees. Instead, it artificially lowers the present-day value of future liabilities by boosting the interest rate companies use to make that calculation.

    The risk is that pension smoothing will ultimately increase corporate pension deficits by encouraging executives to delay payments, says the Congressional Budget Office. For instance, more companies could default on their obligations to retirees.

    PBGC executives and labor unions aren't worried about the impact of the new transportation bill. "Even with this smoothing provision, we'll be in a vastly better position," says Marc Hopkins, an agency spokesman.

    The financial health of the government's PBGC is improving. The agency has mapped out different scenarios of economic growth and estimated its fund to cover defaults will have an average deficit of $7.6 billion in 2023, down from $27.4 billion late last year.

    Pension smoothing measures will only add $2.3 billion to its estimated deficit, the agency says.

    The AFL-CIO, the nation's biggest labor union federation, says it supports pension smoothing because it reduces volatility to balance sheets, which makes the prospect of offering pensions less daunting.

    "We've been supportive of greater smoothing in pension funding generally," said Shaun O'Brien, assistant policy director for health and retirement at the AFL-CIO. "While we would prefer a longer-term permanent change in the rules, we're supportive of the approach Congress has taken."

    Under a 2006 law, companies need to make their plans whole over time. Pension smoothing provisions both artificially and temporarily make funding levels look healthier, so companies can lower their contributions.

    Exelis Inc., XLS +0.23% a defense contractor, now expects to cut its pension contributions by as much as $350 million by 2017. Chief Executive David Melcher told investors earlier this month that Exelis would use the money to fund dividend payments, buybacks and to invest in the company.

    Some companies will continue to finance their pension plans. Boeing Co. BA +0.37% says it won't change its strategy and still expects to make a discretionary $750 million payment to its $68.6 billion in pension obligations.

    "All you're really doing is deferring payments," said Jonathan Waite, chief actuary at SEI Investments Co., an asset manager. "It has to be put in someday."

     

    Bob Jensen's threads on pensions and post-retirement benefits ---
    http://www.trinity.edu/rjensen/Theory02.htm#Pensions

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


    "The New Federal Budget Forecast Is Completely Unrealistic," by Peter Coy, Bloomberg Businessweek, August  28, 2014 ---
    http://www.businessweek.com/articles/2014-08-28/the-new-federal-budget-forecast-uses-pre-wwii-spending-levels?campaign_id=DN082814

    The long-term outlook for the federal budget is worse than you would gather from Wednesday’s update from the Congressional Budget Office (PDF), and the CBO’s report is worrisome enough to start with. It says that “if current laws generally remain unchanged,” budget deficits will start growing again in a few years, and by 2024, debt held by the public will equal 77.2 percent of gross domestic product.

    The reality could be bleaker yet. The CBO is required by Congress to assume in its baseline forecast that current laws remain the same, even if that seems unlikely to happen. As a result, the baseline forecast bakes in some unlikely projections. As the CBO notes, it is assuming that three of the biggest items in the federal budget will decline by 2024 to their smallest share of GDP since 1940*.

    The three expenditure categories that are supposed to wither away are discretionary spending on defense, discretionary spending on everything other than defense, and mandatory spending on everything other than interest payments, Social Security, and major health programs. Just to be clear, that broad group includes the Pentagon, the federal courts, the interstate highways, the prisons, immigration, agriculture, education, and really just about everything the government does except transfer payments and debt payments.
     
    Here’s the chart that shows what the CBO is projecting. Again, this is not what the CBO predicts will happen, but what it’s required to assume by order of Congress.

    The biggest cut that’s penciled in is to discretionary spending. Here’s what the CBO has to say about that:

    Discretionary Spending. Discretionary spending encompasses a wide array of federal activities funded or controlled through annual appropriations—including, for example, most defense spending and outlays for highway programs, elementary and secondary education, housing assistance, international affairs, and administration of justice. Measured as a share of GDP, discretionary outlays are projected to drop from 6.8 percent in 2014 to 5.2 percent in 2024; over the past 40 years, they have averaged 8.3 percent.

    Could happen. But if you doubt that the federal government will shrink to its pre-Pearl Harbor size, then you should be even more concerned about the long-term outlook for balancing the federal budget.

     

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


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

    IRS Relaxes Renewable Energy Project Tax Credit Rule
    by: Ted Mann
    Aug 08, 2014
    Click here to view the full article on WSJ.com
     

    TOPICS: Tax Credits, Tax Planning, Tax Strategy, Taxation

    SUMMARY: The Internal Revenue Service lowered a threshold for renewable-energy projects to qualify for federal tax credits, potentially providing a boon to developers and investors in the wind-power industry who had been uncertain how heavily they could rely on them for financing. The IRS and the Treasury Department said renewable-energy projects could qualify for a pair of tax credits if they had incurred at least 3% of the total project cost before the beginning of 2014, down from the previous threshold of 5%. The guidance also clarified what sort of construction qualified as work of a "significant nature," another test by which project developers - and their investor partners - can be assured that they have qualified for the credits, which provide the financial backbone of most major wind-farm projects. This bulletin was the third attempt by the federal government to clarify how projects could qualify for the tax-credit program, which expired at the end of 2013 but is still open to developers, provided they began installation in that year.

    CLASSROOM APPLICATION: This is a good example of a tax credit intended to encourage certain business activities. One of the most important points in this article is that it shows how business decisions, strategy, and planning are impacted by uncertainty about tax law.

    QUESTIONS: 
    1. (Introductory) What are the details of the guidance issued by the IRS and Treasury Department? What is the specific tax issue?

    2. (Advanced) In the article, one person was quoted as saying, "the whole industry is waiting on it." What did he mean by that? Why were businesses waiting? Who made them wait? What are the ramifications of business in the industry having to wait on this information? How could this wait and the related implications have been prevented?

    3. (Advanced) What will be the impact of the announced changes? What ripple effects could occur? Do you think the IRS and Treasury Department realize these ripple effects could occur?

    4. (Advanced) Has the uncertainty about these rules been resolved? Why or why not? Is tax uncertainty good or bad for business? Why do businesses sometime face uncertainty regarding tax law? How can uncertainty impact tax and business planning?
     

    Reviewed By: Linda Christiansen, Indiana University Southeast

    "IRS Relaxes Renewable Energy Project Tax Credit Rule," by Ted Mann, The Wall Street Journal, August 8, 2014 ---
    http://online.wsj.com/articles/irs-relaxes-renewable-energy-project-tax-credit-rule-1407522492?mod=djem_jiewr_AC_domainid

    The Internal Revenue Service lowered a threshold for renewable-energy projects to qualify for federal tax credits, potentially providing a boon to developers and investors in the wind-power industry who had been uncertain how heavily they could rely on them for financing.

    In guidance released Friday, the IRS and the Treasury Department said renewable-energy projects could qualify for a pair of tax credits if they had incurred at least 3% of the total project cost before the beginning of 2014, down from the previous threshold of 5%. Credits would be proportionally reduced in value below the 5% threshold, the IRS said.

    The guidance also clarified what sort of construction qualified as work of a "significant nature," another test by which project developers—and their investor partners—can be assured that they have qualified for the credits, which provide the financial backbone of most major wind-farm projects.

    Friday's bulletin was the third attempt by the federal government to clarify how projects could qualify for the tax-credit program, which expired at the end of 2013 but is still open to developers, provided they began installation in that year.

    "The whole industry is waiting on it," said Bruce Hamilton, a director in the energy practice at Navigant Consulting Inc. NCI -0.42% "There are thousands of megawatts that are on hold as far as the financing goes."

    Developers and investors in the wind industry have been awaiting the federal guidance since this spring, people in the industry said, when a number of the large-scale investors that provide much of the cash to fund major wind-power projects began demanding more explicit assurance that projects would qualify.

    One uncertainty: what it means to have begun work of a "significant nature" on a wind project. The IRS on Friday cited examples of construction that would help qualify wind-power developers for credits, including having begun excavating foundations for wind towers, installing the anchor bolts that hold towers in place, and pouring the enormous concrete pads on which the towers sit.

    Uncertainty over which projects would qualify for tax credits—and a resulting reluctance of investors to sign financing agreements—has been felt for months throughout the wind-power industry, according to developers, investors and equipment manufacturers.

    General Electric Co. GE +0.31% told investors on its second-quarter earnings call last month that the company had delayed booking between 400 and 500 expected orders for wind equipment, totaling roughly $1 billion, as a result of uncertainty about the credit.

    Periodic uncertainty about whether federal tax credits would still apply to wind-power development has been a drag on the industry, according to data from the American Wind Energy Association, a trade group.

    A record of more than 13,000 megawatts of new wind-power capacity was installed in 2012, as the industry raced to finish installations before the production tax credit expired at the end of that year. While Congress eventually stepped in with a one-year extension of the credit, installation of wind power fell 92%. Just a single wind turbine was installed during the first six months of 2013, the association said.

    The wind industry is trying to extend the tax-credit program, arguing that the credits support billions of dollars in construction work and are helping support innovation that will ultimately bring the costs of wind power down.

    The change in the 5% threshold is "relevant to more than just wind farms," said Keith Martin, an attorney Chadbourne & Parke LLP specializing in tax and project finance. Allowing the credits to apply to projects that didn't reach the 5% threshold could allow other forms of renewable energy to take advantage of the credits, including geothermal, biomass, landfill gas and some kinds of hydroelectric and ocean energy projects, he said.

    Developers and equipment makers are focused on extending the credits as a part of an omnibus tax "extenders" bill during a lame-duck session of Congress later this year, after the midterm elections.

     

     


    Egads! This is depressing.
    College recruiters tell us colleges cannot get top students without promising them A grades in their courses.

    Purportedly Princeton university in 2004 started doing more than the other Ivy League universities to limit the number of A grades somewhat, although participation by faculty is voluntary. Cornell's efforts to embarrass faculty about grade inflation by publishing grading distributions of all courses each term was deemed a failure in curbing grade inflation. The program was dropped by Cornell. Princeton's program for capping the number of A grades to 35% in most classes may now be rescinded.

    "Harvard Students Told College Applicants Not To Go To Princeton Because They Wouldn't Get As Many 'A's'," by Peter Jacobs, Business Insider, August 8, 2014 ---
    http://www.businessinsider.com/harvard-students-college-applicants-not-to-go-to-princeton-2014-8

    Students at top colleges across the country — including Harvard, Yale, and Stanford — used Princeton University's limit on A range grades to dissuade potential applicants from attending the New Jersey Ivy, according to a new report from Princeton.

    A 2004 policy adopted by Princeton sought to end grade inflation at the university by recommending that departments place a 35% cap on A-range grades for each academic course. However, The New York Times reports, students have resisted the policy since it was implemented a decade ago, saying that it devalued their work and potentially gave their peers at rival schools a competitive edge with post-graduate opportunities.

    Now, Princeton may change its grading policy following the release this week of a report commissioned by Princeton President Christopher Eisgruber. The report recommends that Princeton remove the "numerical targets" from their grading policy, as they are often misunderstood as quotas or inflexible caps.

    The report also found that this policy inadvertently led potential applicants and their families to question whether they should apply to Princeton, with students at other highly ranked schools citing the policy to recruit applicants elsewhere:

    The perception that the number of A-range grades is limited sends the message that students will not be properly rewarded for their work. During the application process, students and parents consider the possible ramifications in terms of reduced future placement and employment potential ... Janet Rapelye, Dean of Admission, reports that the grading policy is the most discussed topic at Princeton Preview and explains that prospective students and their parents see the numerical targets as inflexible. The committee was surprised to learn that students at other schools (e.g., Harvard, Stanford, and Yale) use our grading policy to recruit against us.

    Harvard made news last December when it confirmed that the most common grade given to undergraduates is an "A" and the median grade is an "A-." The Yale Daily News has also reported that 62% of students' grades were in the A-range.


    Read more: http://www.businessinsider.com/harvard-students-college-applicants-not-to-go-to-princeton-2014-8#ixzz39tw6d8Wh
     

    "Type-A-Plus Students Chafe at Grade Deflation," by Lisa Foderaro, The New York Times, January 29, 2010 ---
    http://www.nytimes.com/2010/01/31/education/31princeton.html?hpw

    When Princeton University set out six years ago to corral galloping grade inflation by putting a lid on A’s, many in academia lauded it for taking a stand on a national problem and predicted that others would follow.

    But the idea never took hold beyond Princeton’s walls, and so its bold vision is now running into fierce resistance from the school’s Type-A-plus student body.

    With the job market not what it once was, even for Ivy Leaguers, Princetonians are complaining that the campaign against bulked-up G.P.A.’s may be coming at their expense.

    “The nightmare scenario, if you will, is that you apply with a 3.5 from Princeton and someone just as smart as you applies with a 3.8 from Yale,” said Daniel E. Rauch, a senior from Millburn, N.J.

    The percentage of Princeton grades in the A range dipped below 40 percent last year, down from nearly 50 percent when the policy was adopted in 2004. The class of 2009 had a mean grade-point average of 3.39, compared with 3.46 for the class of 2003. In a survey last year by the undergraduate student government, 32 percent of students cited the grading policy as the top source of unhappiness (compared with 25 percent for lack of sleep).

    In September, the student government sent a letter to the faculty questioning whether professors were being overzealous in applying the policy. And last month, The Daily Princetonian denounced the policy in an editorial, saying it had “too many harmful consequences that outweigh the good intentions behind the system.”

    The undergraduate student body president, Connor Diemand-Yauman, a senior from Chesterland, Ohio, said: “I had complaints from students who said that their professors handed back exams and told them, ‘I wanted to give 10 of you A’s, but because of the policy, I could only give five A’s.’ When students hear that, an alarm goes off.”

    Nancy Weiss Malkiel, dean of the undergraduate college at Princeton, said the policy was not meant to establish such grade quotas, but to set a goal: Over time and across all academic departments, no more than 35 percent of grades in undergraduate courses would be A-plus, A or A-minus.

    Early on, Dr. Malkiel sent 3,000 letters explaining the change to admissions officers at graduate schools and employers across the country, and every transcript goes out with a statement about the policy. But recently, the university administration has been under pressure to do more. So it created a question-and-answer booklet that it is now sending to many of the same graduate schools and employers.

    Princeton also studied the effects on admissions rates to top medical schools and law schools, and found none. While the number of graduates securing jobs in finance or consulting dropped to 169 last year from 249 in 2008 and 194 in 2004, the university attributed the falloff to the recession. (Each graduating class has about 1,100 students.)

    But the drop in job placements, whatever the cause, has fueled the arguments of those opposed to the policy. The grading change at Princeton was prompted by the creep of A’s, which accelerated in the 1990s, and the wildly divergent approaches to grading across disciplines. Historically, students in the natural sciences were graded far more rigorously, for example, than their classmates in the humanities, a gap that has narrowed but that still exists.

    Some students respect the tougher posture. “What people don’t realize is that grades at different schools always have different meanings, and people at Goldman Sachs or the Marshall Scholarship have tons of experience assessing different G.P.A.’s,” said Jonathan Sarnoff, a sophomore who sits on the editorial board of The Daily Princetonian. “A Princeton G.P.A. is different from the G.P.A. at the College of New Jersey down the road.”

    Faye Deal, the associate dean for admissions and financial aid at Stanford Law School, said she had read Princeton’s literature on the policy and continued “to view Princeton candidates in the same fashion — strong applicants with excellent preparation.”

    Goldman Sachs, one of the most sought-after employers, said it did not apply a rigid G.P.A. cutoff. “Princeton knows that; everyone knows that,” said Gia Morón, a company spokeswoman, explaining that recruiters consider six “core measurements,” including achievement, leadership and commercial focus.

    But Princetonians remain skeptical.

    “There are tons of really great schools with really smart kids applying for the same jobs,” said Jacob Loewenstein, a junior from Lawrence, N.Y., who is majoring in German. “People intuitively take a G.P.A. to be a representation of your academic ability and act accordingly. The assumption that a recruiter who is screening applications is going to treat a Princeton student differently based on a letter is naďve.”

    Stuart Rojstaczer, a retired professor at Duke who maintains a Web site dedicated to exposing grade inflation, said that Princeton’s policy was “something that other institutions can easily emulate, and should emulate, but will not.” For now, Princeton and its students are still the exception. “If that means we’re out in a leadership position and, in a sense, in a lonelier position, then we’re prepared to do that,” Dr. Malkiel said. “We’re quite confident that what we have done is right.”

    Jensen Comment
    Some of the pressure to limit the number of A grades comes from the very best students admitted to an Ivy League university. They feel that it is no longer possible to demonstrate that they are cream of the crop graduates when 80% of the graduating class graduates cum laude, as in the case of Harvard University.

    The very best students in graduate professional programs like prestigious MBA programs. voice the same complaints if most of the students in every course receive top grades.

    Faculty no longer can be relied upon for tougher grading in virtually all colleges and universities since, in most instances, student teaching evaluations are now shared with administrators and promotion/tenure committees ---
    http://www.trinity.edu/rjensen/HigherEdControversies.htm#GradeInflation
    As a result, grade inflation is rampant across the USA with median course grades now in the A- to B+ range ---
    http://www.trinity.edu/rjensen/Assess.htm#RateMyProfessor

    It's a national disgrace in the USA both in higher education and K-12 education.

    I was hoping that there were enough genius students applying to Princeton such that it could hang tough in its program to limit the proportion of A grades in undergraduate courses. Apparently this is no longer the case!.

     

    "Who Needs an A, Anyway? A Lot of Folks on Campus Do," by By Beckie Supiano, Chronicle of Higher Education, August 8, 2014 ---
    http://chronicle.com/article/Who-Needs-an-A-Anyway-A-Lot/148333/?cid=at&utm_source=at&utm_medium=en

    Back in 2004, Princeton University took a stand against grade inflation with a policy recommending that academic departments’ classes award grades in the A range no more than 35 percent of the time. The policy was intended to standardize grading across departments and give students a better sense of the distinction between "their ordinarily good work and their very best work."

    Now we’ve gotten a glimpse of how it all worked. A faculty committee assembled to review the policy has issued a widely discussed report describing the ways the anti-inflation plan has played out—and recommending some big changes.

    Among the committee’s findings: Around the time that the faculty was discussing grade inflation, the distribution of grades changed, as the graph below illustrates. Not surprisingly, the fraction of A-range grades dropped, and the fraction of B-range grades grew. Most grades at Princeton, though, continued to be A’s and B’s.

    [Graph Not Quoted Here]

    So, mission accomplished: The university stopped awarding so many A’s. But now the Princeton committee advocates removing the 35-percent target. Why? In part because the committee found that the grading policy also had a number of unintended consequences.

    When an institution decides to take on grade inflation, who exactly is affected? Let’s have a look at what the Princeton professors found. The Losers

    The admissions office: To the outside observer, Princeton doesn’t seem to have much trouble in this department. We’re talking about a place that admitted just 7 percent of its applicants and saw close to 70 percent of those it admitted decide to enroll. Even so, the grading policy is apparently a concern among prospective students and their parents, putting the university at a competitive disadvantage.

    What the report says: "Janet Rapelye, dean of admission, reports that the grading policy is the most discussed topic at Princeton Preview and explains that prospective students and their parents see the numerical targets as inflexible."

    The athletics department: Prospective students’ fears are of particular concern for the coaching staff.

    What the report says: "Coaches find the perception of the grading policy a significant obstacle to recruitment, making it more difficult for them to attract the best student-athletes."

    Engineering majors: While the policy was intended to standardize grading across departments, there’s a wrinkle. Some departments have more large introductory classes than others. If those departments give out grades lower than A in introductory classes, they have more of a cushion to award A’s to their own majors in upper-division classes.

    That phenomenon may be a double whammy for engineering majors, the report explains. Those students are likely to find themselves in large introductory physics and mathematics classes, exactly the type of courses in which many non-A grades will be handed out. Their own department, meanwhile, doesn’t offer the big intro classes that pull in lots of nonmajors. That means fewer A’s to go around in their engineering classes.

    What the report says: "Our view is grades within departments need to be meaningful in providing accurate feedback to students but that this does not require identical grade distributions across departments."

    Students’ sanity: The committee found that the grading policy adds to student anxiety, "in perception at least." Student responses to a survey also suggest that the policy makes the classroom environment more competitive and less collaborative.

    What the report says: "One of the negative side effects of the grading policy has been its contribution—in perception at least—to the anxiety about grades and indeed about themselves that many students experience while at Princeton."

    Members of the Reserve Officers Training Corps: New military officers commissioned through this program receive their first assignments based in large part on their college grades. Those first assignments set the stage for their military careers. For them, the difference between A’s and B’s could be pivotal.

    What the report says: "While it would be unreasonable for Princeton to change its grading policy as a result of a choice made by only a small number of students in each graduating class, ROTC comprises a special group of students whose issues deserve to be taken seriously."

    Faculty members: While the Princeton committee’s report did not delve into the issue, a recent journal article—this one evaluating Wellesley College’s somewhat different policy to curb grade inflation—said that students evaluated their professors in affected departments less favorably after the change was made.

    What the Wellesley study found: "It is the case at Wellesley that students in courses with higher average grades also tend to have higher evaluations of the quality of their professors’ instruction, but this correlation cannot be taken as evidence that higher grades yield higher evaluations." The Unaffected

    Graduate- and professional-school applicants: Aspiring Ph.D.’s and medical doctors may see the grading policy as a detriment to their chances at graduate-school admission. However, the committee found, "it is not evident that Princeton’s grading policy has any effect."

    What the report says: "While departments sometimes make first cuts in their applicant pool based on such factors as GPA, we have no reason to believe that Princeton students are failing to gain admission to Ph.D. programs."

    (Most) job applicants: Some employers ask job applicants for their GPAs—and not full transcripts. Some even have strict GPA cutoffs. For the rest, the Princeton name may carry the day.

    What the report says: "While it is possible that a few different Princetonians would get jobs at, say, Goldman Sachs if grades were higher, the committee heard evidence that the actual number of Princetonians in such jobs would be the same." Further, looking beyond the very top of the class, "Princetonians appear not to have unusual difficulty convincing potential employers to hire them for jobs at companies that are a notch below the most elite." The Big Winner

    Other colleges: If Princeton—along with its allies in the war on grade inflation, Wellesley and Boston University—has been harmed at all, it has been only by making other colleges, like those in Cambridge and New Haven, more competitive.

    What the report says: "The committee was surprised to learn that students at other schools (e.g., Harvard, Stanford, and Yale) use our grading policy to recruit against us."

    August 10 reply from Bob Jensen

    Hi David,
     
    The argument for grade inflation in Ivy League schools is that students that easily be straight-A students in most USA universities should not be penalized with lower grades due to grading caps in Ivy League universities.
     
    The argument against grade inflation in general is that students are not motivated to work as hard or learn as much if they are assured of A grades without extra blood, sweat, and tears.
     
    The most disturbing evidence of harm caused by grade inflation took place recently at Harvard in an undergraduate political science course where students were all assured of an A grade if they did the minimal work required. Because they were assured of an A grade, there was no incentive to even do the minimal work. Over 120 students in the course cheated because there was no incentive to even do the minimal work.
     
    To its credit Harvard expelled over half of the 120+ students. I don't know why the other half were allowed to carry on at Harvard.
     
    In reality being assured of an A-grade probably has varying impacts on student blood, sweat, and tears to learn. A pre-med student facing a tough MCAT medical school admission test probably works very hard in biology courses and could care less about most required courses in the social sciences and humanities.
     
    I would love to see Harvard students earning final grades in their courses face competency-based tests taken by students at the University of Wisconsin in a program where students are not required to take classes --- only competency-based examinations.
     
    That reminds me of an old Professor Snarf cartoon. Professor Snarf is sweating profusely when he exclaims:  "Is it true that faculty are going to make faculty take the student admission tests?"

    Respectfully,
    Bob Jensen

    Added Note
    Worried students will borrow more money and pay private school tuition to avoid the state-supported university competition for grades.
    One of my relatives gave up free tuition (I volunteered to pay) at a flagship university and went deeply into debt for assurances of top grades
    Bob Jensen's threads on Gaming for grades ---
    http://www.trinity.edu/rjensen/HigherEdControversies.htm#GamingForGrades


    PwC "lacking the objectivity and integrity expected of consultants but not actually breaking the law"

    "Bank Overseer PwC Faces Penalty and Sidelining of Regulatory Consulting Unit," by Ben Protess and Jessica Siver-Greenberg,  The New York Times, August 17, 2014 ---
    http://dealbook.nytimes.com/2014/08/17/pwc-faces-penalty-and-sidelining-of-regulatory-consulting-unit/?_php=true&_type=blogs&_r=0 

    The giant consulting firm PricewaterhouseCoopers occupies a position of trust on Wall Street, acting as a shadow regulator of sorts that promises the government an impartial look inside the world’s biggest banks.

    But the firm — hired and paid by the banks it examines — has now landed in the regulatory spotlight for obscuring some of the same misconduct it was supposed to unearth, according to confidential documents and interviews with people briefed on the matter.

    New York State’s financial regulator is poised to announce a settlement with PricewaterhouseCoopers, according to the interviews, taking aim at the consulting firm for watering down a report about one of the world’s biggest banks, Bank of Tokyo-Mitsubishi UFJ. The regulator, Benjamin M. Lawsky, will impose a $25 million penalty against PricewaterhouseCoopers and prevent one of its consulting units from taking on certain assignments from New York-regulated banks for two years, a reputational blow that could cause some banking clients to leave.

    The firm, which is accused of lacking the objectivity and integrity expected of consultants but not actually breaking the law, agreed to pay the fine and accept the two-year sidelining of its regulatory consulting unit. PricewaterhouseCoopers appeared to have had little choice: Mr. Lawsky’s office, which has the authority under a little-known New York law to censure erring consultants even without a legal violation, threatened to otherwise inflict a more sweeping and lengthy prohibition.

    Continued in article

    Bob Jensen's threads on other misdeeds of PwC ---
    http://www.trinity.edu/rjensen/Fraud001.htm


    Teaching Case
    From The Wall Street Journal Weekly Accounting Review on August 22, 2014

  • Regulator Says Rule to Identify Lead Audit Partners Ready in September
    by: Michael Rapoport
    Aug 14, 2014
    Click here to view the full article on WSJ.com
     

    TOPICS: Accounting Firms, Auditing, PCAOB

    SUMMARY: A new rule requiring accounting firms to tell investors exactly who is in charge of each company's audit is expected to be completed next month. The rule from the Public Company Accounting Oversight Board is aimed at giving investors more information and making auditors more accountable. It would require accounting firms to disclose the name of their lead "engagement partner" in charge of each audit the firms perform, every year.

    CLASSROOM APPLICATION: This article can be used for an auditing class or in other classes when discussing auditing.

    QUESTIONS: 
    1. (Introductory) What is the PCAOB? What is its purpose?

    2. (Advanced) What new rule was proposed by the PCAOB? Why is the requirement deemed to be valuable or necessary?

    3. (Advanced) What reasons do supporters offer for the rule? What are some concerns raised by other parties?

    4. (Advanced) How do other countries handle this issue? Why might there have been a difference in the past?
     

    Reviewed By: Linda Christiansen, Indiana University Southeast

    "Regulator Says Rule to Identify Lead Audit Partners:  Ready in September Measure Aimed at Giving Investors More Information and Making Auditors More Accountable," by Michael Rapoport, The Wall Street Journal, August 13, 2014 ---
    http://online.wsj.com/articles/regulator-new-rule-to-identify-lead-audit-partners-ready-in-september-1407961501?tesla=y&mod=djemCFO_h&mg=reno64-wsj

    A new rule requiring accounting firms to tell investors exactly who is in charge of each company's audit is expected to be completed next month, according to the chairman of the government's audit regulator.

    The rule from the Public Company Accounting Oversight Board is aimed at giving investors more information and making auditors more accountable. It would require accounting firms to disclose the name of their lead "engagement partner" in charge of each audit the firms perform, every year.

    PCAOB Chairman James Doty "anticipates that we will move forward with the transparency project to disclose the name of the engagement partner in September," Colleen Brennan, a PCAOB spokeswoman, said Wednesday. The PCABO proposed the rule last December.

    The rule's supporters, led by Mr. Doty, say identifying the lead audit partner will encourage auditors to perform better and help investors assess audit quality and performance, by making it possible to get a sense of an individual partner's track record.

    Some big accounting firms have opposed disclosing the lead partners' names, citing potential liability and other concerns.

    Previously, the PCAOB had said only that it expected the rule to be completed before the end of 2014.

    The PCAOB has said it is taking into account the responses it received to its initial proposal over matters such as liability and where the partner's name should be disclosed.

    The Big Four accounting firms — PricewaterhouseCoopers LLP, Deloitte & ToucheLLP, KPMG LLP and Ernst & Young LLP—either didn't have any immediate comment or couldn't immediately be reached.

    Some other countries, such as the U.K., already require disclosure of the lead audit partner's name in companies' audit reports.

    Hypothetical Illustration for Pacific Capital Bancorp Audit in 2012

    Partner in Charge
    Scott London
    KPMG, Los Angeles

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


    PCAOB Investigation Findings:  71 of 90 Broker-Dealer Audits Deficient
    "Problems Persist in Audits of Broker-Dealers, Audit Regulator PCAOB Says Audit Regulator Says 71 of 90 Broker-Dealer Audits Inspected in 2013 Were Deficient," Michael Rapoport, The Wall Street Journal, August 18, 2014 ---
    http://online.wsj.com/articles/problems-persist-in-audits-of-broker-dealers-audit-regulator-pcaob-says-1408393588?tesla=y&mod=djemCFO_h&mg=reno64-wsj

    Audits of broker-dealers improved slightly last year compared with previous years, but a high percentage of the audits were still deficient, had potential conflict-of-interest problems, or both, the government's audit regulator said Monday.

    Seventy-one of the 90 broker-dealer audits inspected by the Public Company Accounting Oversight Board in 2013, or 79%, had audit deficiencies or audit-independence problems, the PCAOB said. Fifty-six of the 60 audit firms inspected had problems in one or more of their broker-dealer audits, the board said.

    The PCAOB has been inspecting audits of broker-dealers for the past few years under an interim program after it was granted new powers by the Dodd-Frank financial-overhaul law. The board said it expects to make a proposal in 2016 for a permanent inspection program.

    The 2013 results are better than those of the previous two years, when virtually all of the broker-dealer audits the board inspected had some sort of deficiency. The PCAOB's reports don't identify the audit firms or the broker-dealers involved in the audits.

    But the PCAOB said it was still concerned over the extent and persistence of the deficiencies. High levels of deficiencies were found across the board, the PCAOB said, regardless of whether the audit firms also audited public companies, how many broker-dealer audits the firm performed, or the size of the broker-dealer involved.

    "Many of the observations noted during 2013 have not changed from prior inspections and relate to fundamental auditing principles," said Robert Maday, program leader of the PCAOB's inspection program for broker-dealer audits. He urged firms that audit broker-dealers to "re-examine their audit approaches."

    The most frequent audit deficiencies found were in areas including auditing revenue recognition, the auditor's response to the risk of financial errors due to fraud, and audit procedures to rely on reports from service organizations, the board said.

    With regard to the permanent program, the PCAOB said it is taking "a careful and informed approach" and will consider whether it should exempt any category of firms from the inspection program.

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


    "The Effect of Information on Uncertainty and the Cost of Capital," David James Johnstone, University of Sydney, July 31, 2014 ---
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2474950

    Abstract:     
     
    It is widely held that better financial reporting makes investors more confident in their predictions of future cash flows and reduces their required risk premia. The logic is that more information leads necessarily to more certainty, and hence lower subjective estimates of firm "beta" or covariance with other firms. This is misleading on both counts. Bayesian logic shows that the best available information can often leave decision makers less certain about future events. And for those cases where information indeed brings great certainty, conventional mean-variance asset pricing models imply that more certain estimates of future cash payoffs can sometimes bring a higher cost of capital. This occurs when new or better information leads to sufficiently reduced expected firm payoffs. To properly understand the effect of signal quality on the cost of capital, it is essential to think of what that information says, rather than considering merely its "precision", or how strongly it says what it says.

    August 3, 2014 reply from David Johnstone

    The idea is that we never know “true probabilities”, even if they “exist”, we only have subjective beliefs. These beliefs are the basis on which actions are chosen (i.e. by maximizing subjective expected utility, if we go to this next step). Observed frequencies feed into our beliefs, and sometimes they are the major influence. Similarly, subjective “symmetry” arguments (we think we see symmetry in a coin) might be a major influence in saying that “the probability of heads” is 0.5. But a coin does not have a probability, at least not in the sense that it has weight, metal content, and other physical attributes.

    Big names Bayesian authors with this general philosophy are Kadane (ex editor of J American Stat Assoc), Lindley, Savage, de Finnetti, Lad, O’Hagen, Bernardo, and others. The only rule in this world is that your beliefs must be “coherent” in the sense that they are mutually consistent in terms of the laws of probability. New evidence must therefore be used via Bayes theorem to get new probabilities.

    Cheers,
    David

    "Are Fair Value Estimates a Source of Significant Tension in the Auditor-Client Relationship? Evidence from Goodwill Accounting," by Douglas Ray Ayres. Terry L. Neal, Lauren C. Reid, and Jonathan E Shipman, SSRN, August 2, 2014 ---
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2474674

    Abstract:     
     
    In recent decades, there has been a substantial increase in the use of complex fair value estimates in financial reporting. These uncertain and forward-looking estimates pose additional challenges for auditors who are required to evaluate the reasonableness of accounting estimations. We extend prior literature by investigating whether or not uncertain estimates create significant tension between audit firms and their clients. Specifically, we use the context of goodwill estimations to examine the effect of accounting estimates on the auditor-client relationship. We find a positive and significant relation between a material goodwill write-off and a subsequent auditor change. In addition, our results indicate that the likelihood of an auditor switch increases as the impairment decision becomes less favorable to the client. Furthermore, we find that as the relative magnitude of a goodwill write-off increases, the greater the likelihood the auditor-client relationship will discontinue. In addition to providing important insights into the challenges faced by auditors in their evaluation of goodwill impairments, this study informs discussions regarding the audit of other complex estimates, which is particularly relevant given the continued expansion of fair value estimation in financial reporting.

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


    From the CPA Newsletter on July 31, 2014

    Avoid vendor fraud with these steps
    Without proper oversight, it's possible that vendors can be stealing from you in plain sight. Here are tips to avoid fraud from new and existing vendors.
    Corporate Finance Insider (7/2014)
    http://r.smartbrief.com/resp/fWdaBYbWhBCIerwzCidKtxCicNJFYx?format=standard

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

    Bob Jensen's threads on Fraud Reporting ---
    http://www.trinity.edu/rjensen/FraudReporting.htm


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

    Proposed Accounting Change Could Catch Lenders Unprepared
    by: Michael Rapoport
    Aug 12, 2014
    Click here to view the full article on WSJ.com
     

    TOPICS: Banking, FASB, Reserves

    SUMMARY: A proposed accounting change expected to force banks to boost the amount of reserves they hold against soured loans could catch many small and midsize lenders unprepared. The changes would require banks to book loan losses much more quickly than they do now and force them to dramatically increase their loan-loss reserves. Banks have some time to adapt. The expected FASB changes likely won't take effect until 2017 or 2018. Global accounting rule-makers at the International Accounting Standards Board already have enacted a similar change for banks outside the U.S., beginning in 2018.

    CLASSROOM APPLICATION: This article can be used for accounting in the banking industry, and it is also useful to show how accounting rules can and do change, as well as how rule changes can impact businesses. It is particularly interesting that more than a third surveyed had little or no familiarity with the coming changes, highlighting the importance for accountants, and business professionals in general, to stay current with accounting changes.

    QUESTIONS: 
    1. (Introductory) What are the details surrounding the change in accounting for bank reserves? What is the proposal?

    2. (Introductory) What is FASB? Why is it involved in banking rules?

    3. (Advanced) The article says the changes might catch some lenders unprepared. Why does the reporter make that statement? Why might some lenders be unprepared?

    4. (Advanced) How should bank management be preparing for these changes? What will banks need to properly account for reserves under the new rules?

    5. (Advanced) How are the new rules expected to impact bank financial statements? Will this impact the market values of the bank stock? How might it affect business strategy?

    6. (Advanced) How do the U.S. rules compare with rules for banks in other countries? How do those differences affect comparability of financial statements across the countries?
     

    Reviewed By: Linda Christiansen, Indiana University Southeast

     

    "Proposed Accounting Change Could Catch Lenders Unprepared Results Released as Part of New Bank Executive Survey," by Michael Rapoport, The Wall Street Journal, August 12, 2014 ---
    http://online.wsj.com/articles/proposed-accounting-change-could-catch-lenders-unprepared-1407868666 

    A proposed accounting change expected to force banks to boost the amount of reserves they hold against soured loans could catch many small and midsize lenders unprepared, according to a new survey of bank executives.

    More than half of the executives familiar with the Financial Accounting Standards Board's expected changes said they aren't planning to make significant modifications in their processes to cope with the changes until after they're completed, according to the survey from Sageworks, a financial-information company.

    More than a third of the executives surveyed have little or no familiarity with the changes that FASB, which sets accounting rules for U.S. companies, hopes to finalize before the end of the year, according to the survey.

    The changes would require banks to book loan losses much more quickly than they do now and force them to dramatically increase their loan-loss reserves.

    Banks have some time to adapt. The expected FASB changes likely won't take effect until 2017 or 2018.

    But banks should start preparing now because they'll need to amass a lot of data on their loans' performance to cope with the changes, and to make changes in their processes to store and use that data, Sageworks said. If they don't, the company said, the banks might not be able to assess and reserve for their loan losses as accurately.

    With the changes, banks are "going to need a lot more granular data for individual loans," perhaps three or four years' worth of performance data, said Libby Bierman, a Sageworks analyst. "To get that data, banks need to start today."

    There are "good reasons" many banks aren't yet prepared, said Donna Fisher, senior vice president of tax and accounting for the American Bankers Association. Notably, FASB has yet to make some decisions that could affect the final form of its new loan-accounting model, and the board needs to make sure all banks are on the same page in understanding what will be required of them, she said.

    Also, "a lot of bankers are not focused on it," said James Kendrick, vice president of accounting and capital policy for the Independent Community Bankers of America. So much is happening now in banking regulation that banks have to address that many aren't paying much attention yet to the loan-accounting changes, he said.

    Christine Klimek, a FASB spokeswoman, said the board is "considering the feedback" it's received in response to its loan-accounting proposal, and "will give banks and other lending institutions sufficient time to incorporate the changes."

    lFASB's changes, which the board has proposed and is working toward competing, are expected to require banks to record losses based on their future projections of loans going bad. Currently, banks don't book loan losses until the losses have actually occurred, an approach many observers think led banks to be too slow in taking losses during the financial crisis. Under the new rule, banks will have to record upfront all losses expected over the lifetime of a loan.

    The new method is expected to speed up the booking of losses and require banks to boost their loan-loss reserves significantly, possibly by as much as 50%, according to FASB and some industry estimates.

    Global accounting rule-makers at the International Accounting Standards Board already have enacted a similar change for banks outside the U.S., beginning in 2018.

    The IASB rule is softer, however, requiring to book upfront only those losses based on the probability that a loan will default in the next 12 months, not all lifetime losses.

    The survey, conducted for Sageworks by SourceMedia Research, polled 236 managers who deal with credit-risk management at banks and credit unions with between $250 million and $5 billion in assets. Of those surveyed, 37% had little or no familiarity with FASB's planned changes, though the proposal has been in the works and much-publicized over the past few years.

    Sixty-five percent of those surveyed use spreadsheets to calculate their loan-loss reserves, as opposed to external or proprietary software or other methods. But Sageworks says that may not be sufficient to handle the massive amount of data banks will have to collect to accurately predict future losses under the new model, and many banks aren't yet acting to update their processes.

    Of those surveyed, 34% plan to acquire new software to comply with the new requirements when they're completed. Another 21% say they'll acquire new software before the new model is enforced. Most of the other respondents either already have new software or don't know when they will acquire it.

     

    "Loan Accounting: It’s High Time for the SEC to Step Up to the Plate," by Tom Selling, The Accounting Onion, August 2, 2014 ---
    http://accountingonion.com/2014/08/time-for-the-sec-to-step-up-to-the-plate.html

    Jensen Comment
    I'm just not as confident in the profession of "independent valuation experts." You get ten such experts to give you a number, and you will get ten possibly widely divergent numbers to a point that management and/or auditors can selectively manage earnings by using carefully chosen valuation "experts." Most such valuations rely upon crucial assumptions that are highly uncertain, especially in the case of foreign debt like Argentine bonds.

    Secondly, I'm not certain about the benefit-cost of such valuations of banks having a lot of branches spread across the USA. This is the Ole-versus-Sven debate that I've used with Tom too often already and will not repeat in this message ---
    http://www.trinity.edu/rjensen/Theory02.htm#LoanLosses

    "Banks Outside U.S. Get New Rules on Accounting for Bad Loans:  IASB's Changes on Recording Losses Will Make It Harder to Compare Banks Inside and Outside the U.S.," by Michael Rapoport, The Wall Street Journal, July 24, 2014 ---
    http://online.wsj.com/articles/iasb-gives-non-u-s-banks-a-loan-accounting-overhaul-1406203202?mod=WSJ_LatestHeadlines

    European banks and other banks outside the U.S. will have to record losses on bad loans more quickly and set aside more reserves for loan losses under an overhaul of finance-accounting rules that global rule makers made final on Thursday.

    Under the new standard, non-U.S. banks will have to book loan losses based on their expectation that future losses will occur, beginning in 2018. That is expected to speed up the booking of losses and require greater loan-loss reserves.

    Currently, banks don't record losses until they have actually happened, but many observers believe that method led banks to be too slow in taking losses during the financial crisis.

    The move by the London-based International Accounting Standards Board, which has been in the works for years, could create a conundrum for the banking industry: Because U.S. and global rule makers haven't been able to agree on the same accounting approach for writing off bad loans, it could become more difficult to compare U.S. banks and those outside the U.S.

    U.S. and global rule makers have been striving for years to eliminate differences between their rules in some major areas of accounting, including loans and other financial instruments, but the effort has been plagued by problems and delays. The two systems have gotten more similar in some areas, but on this banking issue, some analysts say they are growing more different.

    The Financial Accounting Standards Board, the U.S. accounting rule-setter, has proposed U.S. banks switch from the incurred-loss model that both use now to the expected-loss approach, too. But the two disagree on just how rapidly banks should book their loan losses.

    The IASB will require non-U.S. banks to immediately book only those losses based on the probability that a loan will default in the next 12 months. If the loan's quality gets significantly worse, other losses would be recorded in the future. The IASB move will affect all financial assets on non-U.S. companies' balance sheets, but the treatment of bank loans is particularly important due to the role that soured loans and credit losses play in their businesses.

    The change "will enhance investor confidence in banks' balance sheets and the financial system as a whole," said Hans Hoogervorst, chairman of IASB, which sets accounting rules for most countries outside the U.S.

    The Institute of Chartered Accountants in England and Wales, a London-based accountants' group, estimated that the IASB changes will increase banks' loan-loss provisions by about 50% on average. Iain Coke, head of ICAEW's financial-services faculty, said the new rule, combined with tougher regulatory-capital requirements, may force banks to hold more capital for the same risks. "This may make banks safer but may also make them more costly to run," he said.

    The FASB proposal, however, would require all losses expected over the lifetime of a loan to be booked up front—so if it is enacted, U.S. banks would record more losses immediately than banks in other countries, and might have to set aside more reserves, hurting their current financial results and making them look worse compared with foreign banks, many banking and accounting observers believe. The FASB hasn't completed its proposed changes, though it hopes to do so by year-end.

    "It's unfortunate that we do have a different standard being issued," said Tony Clifford, a partner with Big Four accounting firm EY.

    The IASB said in documents laying out its proposal Thursday that although it and the FASB had made "every effort" to agree on the same approach, "ultimately those efforts have been unsuccessful."

    Christine Klimek, a FASB spokeswoman, said the FASB believes its approach "best serves the interests of investors in U.S. capital markets because it better reflects the credit risks of loans on an institution's balance sheet." IASB's approach likely would lead to lower loan-loss reserves than FASB's at U.S. banks, she said, "which would have been counterintuitive to the lessons learned during the recent financial crisis."

    In addition, Mr. Clifford said, the new IASB rule requires banks to use their own judgment to a greater extent than existing rules when determining their expected losses, and that could lead to differences between individual banks that could make it harder for investors to compare them.

    Among other provisions of the new rule the IASB issued Thursday, non-U.S. banks will no longer have to record gains to net income when their own creditworthiness declines, and losses when their creditworthiness improves—a counterintuitive practice known in the U.S. as "debt/debit valuation adjustments," or DVA. Those gains and losses will be stripped out of the banks' net income and be placed into "other comprehensive income," a separate measurement that doesn't affect the main earnings number tracked by most investors. Banks can adopt that change separately, before the rest of the IASB rule.

    The FASB has proposed a similar move for U.S. banks but has yet to enact it.


    Teaching Case
    From The Wall Street Journal Accounting Weekly Review on August 22, 2014

    FASB Looks to Uncomplicate Accounting:A Little, At Least
    by: Michael Rapoport
    Aug 15, 2014
    Click here to view the full article on WSJ.com
     

    TOPICS: Accounting, FASB, Financial Accounting

    SUMMARY: Accounting is complicated: but accounting rule-makers are trying to make it at least a little simpler. The Financial Accounting Standards Board, which sets accounting rules for U.S. companies, is expanding its effort to simplify some areas of accounting, to make financial reporting a little less complex and reduce costs for companies and their accountants. FASB has added five more projects it plans to tackle as part of that initiative, covering areas like how companies report their debt and when they record taxes on certain transactions.

    CLASSROOM APPLICATION: This article offers an opportunity to discuss the cost/benefit relationships between the costs of complex accounting vs. the value of the resulting additional detail to the users of the financial statements. You can also use this article for a general discussion of FASB and accounting standards.

    QUESTIONS: 
    1. (Introductory) What is the Financial Accounting Standards Board? What is its purpose?

    2. (Advanced) The article states that accounting will be getting less complex. How will a decrease in complexity impact financial reporting and financial statements?

    3. (Advanced) Why has accounting become complex? What value does that complexity offer to users of the financial statements? What are the benefits of decreasing complexity in accounting? What are potential problems or costs of decreasing complexity?

    4. (Advanced) What are the details of the various proposals? Please explain each of them and provide explanations how journal entries will change and how financial statements could be affected.

    5. (Advanced) Can you think of other areas of accounting that could be simplified without damaging the value of the financial statements? What areas or features of accounting should not be simplified? Why?
     

    Reviewed By: Linda Christiansen, Indiana University Southeast

    "FASB Looks to Uncomplicate Accounting–A Little, At Least," by Michael Rapoport, The Wall Street Journal, August 15, 2014
    http://blogs.wsj.com/law/2014/08/15/fasb-looks-to-uncomplicate-accounting-a-little-at-least/?mod=djem_jiewr_AC_domainid

    Accounting is complicated – but accounting rule-makers are trying to make it at least a little simpler.

    The Financial Accounting Standards Board, which sets accounting rules for U.S. companies, is expanding its effort to simplify some areas of accounting, to make financial reporting a little less complex and reduce costs for companies and their accountants. FASB has added five more projects it plans to tackle as part of that initiative, covering areas like how companies report their debt and when they record taxes on certain transactions.

    The projects are low-hanging fruit – relatively narrow, straightforward changes in accounting that clearly would help reduce complexity and that the board expects to be able to make relatively quickly, without the years of work that often accompany major revisions in accounting rules.

    “Complexity in accounting can be costly to both investors and companies,” FASB Chairman Russ Golden said. The simplification initiative, which FASB began in June, “is focused on identifying areas that we can address quickly and effectively, without compromising the quality of information provided to investors.”

    The accounting industry is cautiously applauding FASB’s effort. “The auditing profession welcomes initiative and efforts to provide further clarity to financial statements,” said Cindy Fornelli, executive director of the Center for Audit Quality, an industry group. But the details and execution of FASB’s projects “will be critical,” she added.

    One project the board has newly agreed to tackle would simplify how companies classify debt on their balance sheets. Currently, any debt coming due within the next 12 months is typically categorized as “current” and any debt due beyond that period is “non-current,” but accounting rules contain a lot of grey areas where that classification isn’t so straightforward. The aim is to eliminate those grey areas and make the 12-month standard more of a guiding principle that applies in all cases.

    In addition, FASB wants to simply the reporting of a company’s costs to issue debt. Under current rules, companies report their debt proceeds on one line of their financial statements and various debt-issuance costs on different lines. The board wants to have only one figure reported that would essentially be debt proceeds net of issuance costs.

    FASB also plans some tax-accounting changes. One would have companies classify all of their deferred tax assets and liabilities as non-current, instead of forcing them to determine whether they’re current or non-current, as they must now. The other would ease the process of recording taxes that result when one unit of a company sells goods to another unit.

    The five newly added projects follow the first two simplification proposals which FASB formally issued in July to simplify the measurement of inventory and eliminate the need for companies to break out one-time “extraordinary” items on their earnings statements. FASB is also researching about 70 other simplification ideas submitted by investors, companies and accountants.


    "Accounting for America: Students:  Helping Small Businesses Let's pair recent accounting grads with small firms that need help with bookkeeping," by Ami Kassar, The Wall Street Journal, August 13, 2014 ---
    http://online.wsj.com/articles/accounting-for-america-students-helping-small-businesses-1407946844?mod=WSJ_hpp_sections_smallbusiness

    The framework is already in place. Teach For America (TFA) is a highly successful nonprofit that enlists recent college grads to teach in low-income communities throughout the U.S. In a similar vein, Accounting For America would pair greenhorn accountants, presumably recent college graduates, with small businesses in desperate need of accounting services.

    Similarly to the TFA mission, Accounting For America would benefit both parties involved. The recent accounting grads would gain hands-on experience and valuable work references, while the small businesses would be able to get their bookkeeping in order at a presumably lower rate than hiring a seasoned professional.

    According to a 2012 study by the American Institute of CPAs, the number of students enrolling in accounting programs and graduating with accounting degrees has been steadily increasing over the past decade. For graduating accounting degree students, the Accounting For America program could provide a viable source of employment, while also aiding the small-business economy.

    In addition to providing jobs for recent grads, the proposed program could solve a major problem that I see in many small businesses – out-of-date financials and sloppy bookkeeping. A small-business owner who isn't current on financials is at a significant disadvantage. It's impossible to run a successful business without knowing where your money is coming from and where it is going.

    Many entrepreneurs fall into this trap because they get so caught up in day-to-day operations. They get enmeshed in the tiny details and simply run out of hours in the day to review and update balance sheets, accounts receivable and even payroll.

    Continued in article

    Jensen Comment
    Sometimes accounting students in top universities are less help than than other students who often have more training in accounting and taxation software. For example, top universities seldom provide training in the application of Quickbooks.


    "Confuse Students to Help Them Learn," by Steve Kolowich, Chronicle of Higher Education, August 14, 2014 ---
    http://chronicle.com/article/Confuse-Students-to-Help-Them/148385/?cid=at&utm_source=at&utm_medium=en

    Jensen Comment
    Most often the highest possible teaching evaluations go to teachers who make subject matter crystal clear and easy to understand.

    If you read my previous teaching evaluations you would find that I was a master of the opposite pedagogy. Often intentionally and sometimes unintentionally I confused my students, particularly my graduate students. I don't particularly recommend this pedagogy for introductory courses such as Principles of Accounting. But in graduate courses I think it's a mistake to make everything crystal clear --- at least in class. I also think it's a mistake in some case courses and other student participation courses such as when I taught sections of a Trinity University course called First Year Seminar where the subject matter was on troubles in the world (not an accounting course).

    It's important to note that I was careful about trying not to confuse students about technical rules such as FAS 133 rules about accounting for derivative financial instruments. Those were more like teaching mathematical derivations. For those I assigned Camtasia videos before class where I tried to make the videos crystal clear.

    But in class when we took up cases and applications I introduced complications to confuse students and make them think. A perfect example of what I would do in class is the following reply to a posting on the AECM by Tom Selling. This illustrates how I would intentionally confuse students while teaching Tom's posting. Tom always ipso facto assumes without proof that replacement cost accounting leads to more relevant accounting for investors. However, I repeatedly muddied the waters for my students when teaching historical cost versus exit value versus entry value accounting.

    Some of the replies on the AECM to my posting below indicates that I also confused veteran financial accounting professors.

    "The FASB Wants to Dumb Down Inventory Impairment," by Tom Selling, The Accounting Onion, August 10, 2014 ---
    http://accountingonion.com/2014/08/the-fasb-wants-to-dumb-down-inventory-impairment.html

    Jensen Comment
    Tom makes the following statement:

    "Since the company will inevitably have to replace the inventory after selling its present stock, the current cost of replacement is the best measure of its economic value."

    I might note that if you read Tom's blog regularly it's clear that the balance sheet is his priority in terms of defining "economic value." He does not seem to care if fair value or replacement cost adjustments to carrying value adjustments to the balance sheet will never be realized in net earnings calculations at a  future date.

    I am more concerned with the income statement than I am with the balance sheet.

    Consideration Must Be Given as To Why Companies Carry Inventory
    The above assertion by Tom is not necessarily true when companies hold inventories to avoid high marginal replacement costs of relatively small amounts in markets where they never deal. Companies sometimes carry large and long-term inventories to smooth out current spot price fluctuations of relatively small quantities.

    I carry a four-year supply of heating oil in a 4,000-gallon tank to smooth out "current" replacement costs of buying the typical homeowner amount of say 100 gallons at a time. I do get a rather sizeable volume discount when I infrequently replace this oil sometime between 1-4 years. The typical homeowner up here either takes the current (spot) replacement cost of each 100 gallons purchased on average for each delivery or pre-purchases at a futures price set by the oil dealer at the start of the season. However, the oil dealer will not allow more than pre-purchase of a one-year quantity to be delivered over the year.

    By carrying a huge 1-4 year inventory I have more flexibility as to timing over a four-year horizon plus more negotiating power for a volume discount. That is often the reason some companies carry what seems like an awful lot of inventory. I would argue that the day to day spot prices for replacement of fuel oil for me are not a good day-to-day measures of economic value. If I measured "profits" based upon such replacement prices my "profits" would be more fiction than fact based upon ups and down of daily fuel oil spot prices.

    And estimating my volume discount 1-4 years in advance is an unreliable vapor estimate since neither buyer nor seller can predict spot prices up to four years in advance.

    Here is My Main Point
    If Bob Jensen (with a 4,000-gallon tank) and his neighbor John Smith (with a 200-gallon tank) both valued fuel oil inventories at the identical current spot replacement costs they might both be declared equally profitable in each given month of a single year by Tom Selling ceteris paribus. But they are not likely to be equally profitable in aggregate 13-48 months. This is because Tom builds so much fiction into the calculation using monthly replacement costs into the fictional calculation of Bob Jensen's "profits." Bob Jensen, unlike John Smith, does not replace fuel oil in the tank every month or even every year.

    I'm not saying Bob Jensen will always do better than John Smith due more flexible market timing of purchases over a four-year time span, because there are other considerations such as cost of capital tied up in larger inventory and risks of carrying larger inventories such as leakage and contamination risks.

    Tom's reasoning about economic value might be more appropriate if Bob Jensen could sell some portion of his inventory of fuel oil. But there are regulations that prevent him from selling my inventory, and he can only use so much day-to-day on average over the course of four years. I would argue that economic value to him is the historic average cost of fuel currently in the tank. This is fact and not fiction! The inventory value in a business should be written down only when the inventory is in some way damaged such as when oil is contaminated with water leakage.

    What Does This Have to Do With the Current Blog Posting by Tom Selling?

    The title of Tom's August 10, 2014 posting is "The FASB Wants to Dumb Down Inventory Impairment." I consider impairment to be something other than temporary spot price declines. For example, if my fuel oil tank leaked to a point where water mixed with my fuel oil I would have "impaired" inventory. This is his Scenario B which I don't think the FASB is trying to change. I would have to write down my damaged inventory, possibly to zero or worse.

    But apparently the FASB wants to also consider "impairment" in terms of short-term price fluctuations as in Tom's Scenario A. I have trouble considering short-term replacement cost declines or NRV declines as "impairments." The key is whether such spot price declines are are "permanent" or temporary. I don't buy into inventory write downs unless they are indeed permanent impairments.

    As to whether they should be replacement costs or NRV in Scenario A, I'm in favor of NRV. Replacement costs are fiction unless we specify when the inventory will be replaced. It would be misleading to re-value Bob Jensen's remaining fuel oil at current spot prices if he does not have to replace the fuel oil for 47 months. And estimating fuel oil prices 47 months from now is best left to astrologers. If Bob could sell his inventory then I might consider NRV relevant for permanent reductions in spot prices. But I don't think inventories should be written down at all for short-term spot price declines.

    August 13. 2014 Reply to David Albrecht by Bob Jensen

    Hi David,

    I don't think anybody is arguing that inventory cannot become obsolete or damaged. Tom's Scenario B covered this with his fashion-industry illustration. The FASB is not trying to change accounting for Scenario B.

    Also I don't think anybody, including me, thinks that a four-year inventory is always a better or always a worse investment than a JIT-like alternative where the fuel truck fills a small tank at least once per month.

    My dispute with Tom is whether replacement cost accounting for a four-year inventory should be exactly the same as the inventory accounting for the JIT-like alternative. My dispute is that replacement cost accounting is misleading for four-year inventories.

    My accounting theory argument My argument is that accounting outcomes should be different for the company with four-year inventories versus an identical company with monthly inventory supplies. The reason is that these companies have different economic replacement strategies leading to different economic outcomes. Nobody can say the one strategy is ipso facto better than the other strategy.

    Current replacement cost accounting for four-year inventories at frequent reporting dates (say monthly or quarterly or even annually) adds fictional ups and downs in assets and earnings that will never be realized in fact. Also nobody can predict what volume discounts will be obtained years out in fuel oil pricing. By the way, the degree of competition among fuel dealers where I live is such that I get sizable volume discounts when I do eventually fill my big tank. The discounts themselves, however, are unpredictable.

    Advantages of the four-year inventories are volume price discounting and the ability to time prices paid rather than having to always take the spot price at each JIT-like delivery. Disadvantages include the cost of capital tied up in long-term inventories and greater risk of obsolescence and damage. I almost always buy oil in May when dealers want to reduce the amount of money tied up in their idle summer inventories.

    Rather than a owning a four-year tank it is theoretically possible to hedge fuel inventory pricing in the derivatives markets. However, these contracts have relatively short-term maturities rather than going out four years. No heating oil dealer up here will enter into prepaid contracts for more than one year.

    A neighbor is fond of saying that Bob Jensen is prepared for Armageddon. In the case of heating fuel there's an added safety that comes from a four-year inventory of heating oil. I live in a climate where pipes can freeze and burst in homes dependent upon heating fuel.

    In 1974 during the Iran Oil Crisis some homes in New England could not get their JIT deliveries of fuel oil at any price. Bob Jensen, then living in Maine, had a sufficient inventory of heating fuel to ride out the 1974 crisis in an always-heated home.

    In retirement here in the White Mountains I have both a four-year supply of heating oil for our furnace and a four-year supply of propane under ground for our four fireplace stoves. Some home owners up here with less inventory of heating oil and propane have supplemental wood heaters, chain saws, and timber that can be cut plus cords of wood beside their homes that is already cut, dried, and split.

    One of my neighbors down the road heats only with wood. Most all of his summer days are spent cutting, splitting, and stacking mountains of wood. I don't want to spend my summer days like that. And I think wood is a sooty way to heat day in and day out. Wood smoke smells great but is probably not healthy to breathe every day and night.

    Respectfully,
    Bob Jensen

    Have I sufficiently confused everybody on entry value (replacement cost) accounting?

     

    Bob Jensen's threads on the advantages and limitations of historical cost accounting versus exit value accounting versus entry value accounting ---
    http://www.trinity.edu/rjensen/Theory02.htm#BasesAccounting
    The above link includes quotations from my previous "confusing" debates with Tom Selling.

     


    "On Golden’s Con, Part III: Fixing the Disclosure Mess," by Tom Selling, The Accounting Onion, July 13, 2014 ---
    http://accountingonion.com/2014/07/on-goldens-con-part-iii-fixing-the-disclosure-mess.html

    Jensen Comment
    Although I tend to agree with Tom that Golden is taking the wrong tack on pension disclosures, I do take issue with the following quotation in Tom Selling's post:

    If FAS 87 (1985) had not been so thoroughly jury rigged to appease the country’s largest employers (and as a by-product to create jobs for accountants and their less gregarious actuary cousins), how many more employees would now be receiving their full pension benefits?

    I tend to not place such heavy responsibility on accounting standard setters. I don't think that the FASB has such tremendous economic power over USA business or government. Firstly, the pension funds are tremendously impacted by interest rates and monetary policies that are were heavily affected by Federal Reserve low interest rate and Treasury Department fiscal policies.

    Pension funds, especially municipal and state worker funds, were swamped in egregious frauds such as those in Detroit and Chicago and Stockton. I doubt that any GASB pension accounting rules would have stood in the way of those massive frauds.

    Be that as it may, pension accounting can certainly be improved and reduced disclosures contemplated by the FASB are not going to help matters. Tom's correct about this.


    How to Mislead With Statistics
    "How the Government Exaggerates the Cost of College," by David Lennhardt, The New York Times, July 29, 2014 ---
    http://www.nytimes.com/2014/07/29/upshot/how-the-government-exaggerates-the-cost-of-college.html?rref=upshot&_r=2

    The government’s official statistic for college-tuition inflation has become somewhat infamous. It appears frequently in the news media, and policy makers lament what it shows.

    No wonder: College tuition and fees have risen an astounding 107 percent since 1992, even after adjusting for economywide inflation, according to the measure. No other major household budget item has increased in price nearly as much.

    But it turns out the government’s measure is deeply misleading.

    For years, that measure was based on the list prices that colleges published in their brochures, rather than the actual amount students and their families paid. The government ignored financial-aid grants. Effectively, the measure tracked the price of college for rich families, many of whom were not eligible for scholarships, but exaggerated the price – and price increases – for everyone from the upper middle class to the poor.

    Here’s an animation that explains the difference succintly. It shows the government’s estimate of how college costs have changed since 1992 — and, for comparison, toggles between the changes in the colleges' published prices and actual prices, according to the College Board, the group that conducts the SAT.

    Continued in article

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


    From the CFO Journal on August 5, 2014

    How to Mislead With Statistics
    "How the Government Exaggerates the Cost of College," by David Lennhardt, The New York Times, July 29, 2014 ---
    http://deloitte.wsj.com/cfo/2014/08/05/a-look-at-how-cfos-and-their-companies-are-using-social-media/

    When it comes to social media North American CFOs say their companies have focused mostly on the risks so far rather than the opportunities, such as using it to get customer feedback or foster internal collaboration. They say most of their attention has been focused on establishing policies for employees' use of social media, providing education on related risks and managing the company's presence in key social media channels, according to Deloitte's second-quarter 2014 CFO Signals™ survey.


    From PwC on August 5, 2014
    In depth: Consolidation - A new standard is imminent --- Click Here
    http://www.pwc.com/us/en/cfodirect/publications/in-depth/us2014-04-new-consolidation-standard-imminent.jhtml?display=/us/en/cfodirect/publications/in-depth&j=537532&e=rjensen@trinity.edu&l=821227_HTML&u=20528750&mid=7002454&jb=0


    Oops - A billion-dollar forecasting error in Walgreen’s Medicare-related business:  Key executives lost their jobs

    From the CFO Journal's Morning Ledger on August 120, 2014

    Good morning. Trying to profit amid the complex web of regulations and pricing involved in Medicare is challenging enough. But a recent management shake-up at Walgreen Co. shows that it isn’t just risky for the bottom line—it can be hazardous for a finance chief’s career as well.

    A billion-dollar forecasting error in Walgreen’s Medicare-related business cost the jobs of Chief Financial Officer Wade Miquelon as well as its pharmacy chief Kermit Crawford, Michael Siconolfi on the WSJ’s front page. Mr. Miquelon said he wasn’t forced to leave, but people familiar with the matter say both he and Mr. Crawford were under pressure to step down.

    Walgreen had failed to take into account a spike in the price of some generic drugs that it sells as part of annual contracts, among other things, when it offered a rosier forecast in April. But once the price spike was included, an $8.5 billion forecast for pharmacy unit earnings before interest and taxes was chopped by $1.1 billion.


    From the CFO Journal's Morning Ledger on August 120, 2014

    PCAOB watchdog reviews auditing of estimates, mark-to-market accounting
    The U.S. government’s auditing watchdog will review audit procedures for complex accounting estimates and mark-to-market accounting, with the aim to improve current practices
    , CFOJ’s Emily Chasan reports. Auditors’ use of mark-to-market accounting and their reliance on management’s accounting estimates have raised frequent red flags.

    Jensen Comment
    The key to reviewing estimates is to conduct serious analysis of underlying assumptions.

    I once wrote a research monograph on this topic for the American Accounting Association

    Volume No. 19. Review of Forecasts: Scaling and Analysis of Expert Judgments Regarding Cross-Impacts of Assumptions on Business Forecasts and Accounting Measures
    AAA Studies in Accounting Research
    http://aaahq.org/market/display.cfm?catID=5
    By Robert E. Jensen. Published 1983, 235 pages.

    I think older AAA research and teaching monographs should be digitized and made available free to the public.

    Teaching Case
    From The Wall Street Journal Weekly Accounting Review on August 22, 2014

    Audit Regulator Considers Revamp of Rules on Accounting Estimates
    by: Michael Rapoport
    Aug 19, 2014
    Click here to view the full article on WSJ.com
     

    TOPICS: Auditing, Estimate, Fair Value, Financial Accounting, Financial Statements, PCAOB

    SUMMARY: The Public Company Accounting Oversight Board issued a staff paper seeking input on whether it should update its rules on auditing companies' use of estimates, as well as measurements of "fair value," in various parts of their financial statements. Estimates are widely used when companies determine matters like how much to set aside in reserves for bad loans, or how much assets should be written down. Fair value is the closest approximation of market value for a given asset or liability. But making the estimates can be difficult, and auditors often have problems in assessing them.

    CLASSROOM APPLICATION: This article can be used in financial accounting and auditing discussions of estimates and fair value.

    QUESTIONS: 
    1. (Introductory) What is the PCAOB? What is its function? What is it proposing in this article?

    2. (Advanced) What is the PCAOB considering changing? What are the reasons for these proposed changes?

    3. (Advanced) The article notes that the PCAOB issued a "staff paper." What is that? Why did the organization issue a staff paper instead of changing the rule?

    4. (Advanced) What challenges do auditors face when reviewing estimates and fair-value measurements? How does it impact clients?

    5. (Advanced) How important are estimates and fair-value measurements in financial reporting? How significant are those components of financial statements? Should there be cause for concern regarding how these are calculated? Why or why not?
     

    Reviewed By: Linda Christiansen, Indiana University Southeast

    "Audit Regulator Considers Revamp of Rules on Accounting Estimates," by Michael Rapoport, The Wall Street Journal, August 19,2014 ---
    http://online.wsj.com/articles/audit-regulator-considers-revamp-of-rules-on-accounting-estimates-1408481880?mod=djem_jiewr_AC_domainid

    Regulators took a first step Tuesday toward revamping how auditors review the use of key accounting estimates that can have a big effect on companies' financial statements.

    The Public Company Accounting Oversight Board issued a staff paper Tuesday seeking input on whether it should update its rules on auditing companies' use of estimates, as well as measurements of "fair value," in various parts of their financial statements.

    Estimates are widely used when companies determine matters like how much to set aside in reserves for bad loans, or how much assets should be written down. Fair value is the closest approximation of market value for a given asset or liability. But making the estimates can be difficult, and auditors often have problems in assessing them, said the PCAOB, the government's audit-industry regulator.

    The board, in introducing the paper, said it plans to use input from investors, auditors and others in formulating potential new rules on the auditing of estimates and fair value that would be more comprehensive and consistent than current rules. It would likely be years before any new rules on the matter were to take effect.

    Reviewing estimates and fair-value measurements has "proven challenging to auditors," the paper says—they require a company to exercise judgment, and so they may be more susceptible to misstatement and require more focus from auditors. The PCAOB has frequently found deficiencies in those areas when it inspects audits.

    "Accounting estimates and fair-value measurements can be subjective and complex, yet they can be an important part of a company's financial statements and critical to investors' decision-making," PCAOB Chairman James R. Doty said in a statement.

     


    Generalized Pareto Distribution --- http://en.wikipedia.org/wiki/Generalized_Pareto_Distribution

    The risk measures adopted in this paper are Value at Risk and Expected Shortfall. Estimates of these measures are obtained by fitting the Generalized Pareto Distribution
    "Risk Analysis for Three Precious Metals: An Application of Extreme Value Theory," Qinlu Chen and David E. Giles,  Department of Economics, University of Victoria Victoria, B.C., Canada V8W 2Y2 August, 2014 ---
    http://web.uvic.ca/~dgiles/blog/EWP1402.pdf

    Gold, and other precious metals, are among the oldest and most widely held commodities used as a hedge against the risk of disruptions in financial markets. The prices of such metals fluctuate substantially, introducing a risk of its own. This paper’s goal is to analyze the risk of investment in gold, silver, and platinum by applying Extreme Value Theory to historical daily data for changes in their prices. The risk measures adopted in this paper are Value at Risk and Expected Shortfall. Estimates of these measures are obtained by fitting the Generalized Pareto Distribution, using the Peaks ‐ Over ‐ Threshold method, to the extreme daily price changes. The robustness of the results to changes in the sample period is discussed. Our results show that silver is the most risky metal among the three considered. For negative daily returns, platinum is riskier than gold; while the converse is true for positive returns.

    A Plenary Session Speech at a Chartered Financial Analysts Conference
    Video: James Montier’s 2012 Chicago CFA Speech The Flaws of Finance ---
    http://cfapodcast.smartpros.com/web/live_events/Annual/Montier/index.html
    Note that it takes over 15 minutes before James Montier begins

    Major Themes

    1. The difference between physics versus finance models is that physicists know the limitations of their models.
       
    2. Another difference is that components (e.g., atoms) of a physics model are not trying to game the system.
       
    3. The more complicated the model in finance the more the analyst is trying to substitute theory for experience.
       
    4. There's a lot wrong with Value at Risk (VaR) models that regulators ignored.
       
    5. The assumption of market efficiency among regulators (such as Alan Greenspan) was a huge mistake that led to excessively low interest rates and bad behavior by banks and credit rating agencies.
       
    6. Auditors succumbed to self-serving biases of favoring their clients over public investors.
       
    7. Banks were making huge gambles on other peoples' money.
       
    8. Investors themselves ignored risk such as poisoned CDO risks when they should've known better. I love his analogy of black swans on a turkey farm.
       
    9. Why don't we see surprises coming (five excellent reasons given here)?
       
    10. The only group of people who view the world realistically are the clinically depressed.
       
    11. Model builders should stop substituting elegance for reality.
       
    12. All financial theorists should be forced to interact with practitioners.
       
    13. Practitioners need to abandon the myth of optimality before the fact.
      Jensen Note
      This also applies to abandoning the myth that we can set optimal accounting standards.
       
    14. In the long term fundamentals matter.
       
    15. Don't get too bogged down in details at the expense of the big picture.
       
    16. Max Plank said science advances one funeral at a time.
       
    17. The speaker then entertains questions from the audience (some are very good).

     

    James Montier is a very good speaker from England!

    Mr. Montier is a member of GMO’s asset allocation team. Prior to joining GMO in 2009, he was co-head of Global Strategy at Société Générale. Mr. Montier is the author of several books including Behavioural Investing: A Practitioner’s Guide to Applying Behavioural Finance; Value Investing: Tools and Techniques for Intelligent Investment; and The Little Book of Behavioural Investing. Mr. Montier is a visiting fellow at the University of Durham and a fellow of the Royal Society of Arts. He holds a B.A. in Economics from Portsmouth University and an M.Sc. in Economics from Warwick University
    http://www.gmo.com/america/about/people/_departments/assetallocation.htm

    There's a lot of useful information in this talk for accountics scientists.

    Bob Jensen's threads on what went wrong with accountics research are at
    http://www.trinity.edu/rjensen/theory01.htm#WhatWentWrong


    From the CFO Journal's Morning Ledger on August 15, 2014

    A Snapshot of New Revenue Standard Implementation Topics ---
    http://deloitte.wsj.com/cfo/2014/08/15/a-snapshot-of-new-revenue-standard-implementation-topics/

    The IASB and FASB's joint revenue transition resource group met recently to explore a number of topics related to the implementation of the new revenue accounting standard. Issues discussed include the principal-agent assessment; shipping and handling costs related to the definition of transaction price; royalty constraints in light of contracts that contain multiple performance obligations; and potential economic benefits of renewal periods when assessing the impairment of capitalized contract costs.

    Bob Jensen's threads on revenue reporting ---
    Revenue Accounting Controversies --- http://www.trinity.edu/rjensen/ecommerce/eitf01.htm 


    More Fiction in Misleading Pension Deficit Underreporting

    From the CFO Journal's Morning Ledger on August 8, 2014

    A transportation bill signed by President Obama on Friday will likely boost tax receipts that can then be used to pay for road repairs, subways and buses. But that money has to come from somewhere, and for the next 10 months at least, that somewhere is corporate pension funds that were about to be subject to mandatory contributions, CFOJ’s Vipal Monga reports. With those contributions made optional for the time being, some companies say that money previously earmarked for pension funds will now go to dividends, buybacks or company investments.

    The transportation bill achieved this by extending a “pension-smoothing” provision, which allows companies to calculate their liabilities based on the average interest rate over the past 25 years, instead of the past two. The 25-year average is larger, because rates were higher before the financial crisis.

    Many companies are understandably pleased to have a freer hand in what they do with their cash for now. But that bill will come due eventually, and the risk is that pension smoothing will ultimately increase corporate pension deficits by encouraging firms to delay making contributions.


    Shareholder Value --- http://en.wikipedia.org/wiki/Shareholder_value

    From the CFO Journal's Morning Ledger on August 8, 2014

    Boston Globe: Is Shareholder Value Bad For Business?
    The decision this week by drugstore chain Walgreens to go against the will of shareholders and remain domiciled in the U.S. following its merger with a European outfit, is just one of many acts in the ongoing morality tale about what it means to run a corporation in latter-day America. Does one do ‘the right thing’ by opting for what’s best for ‘shareholder value’ or for wider ‘society’? That question is threatening to rip apart Massachusetts-based, family-owned grocery store chain Market Basket, whose unfolding story is being told in the
    Boston Globe.  Operating across three New England states, Market Basket board members dismissed the popular company CEO Arthur T. Demoulas and two executives on June 23. Loyal staff and sympathetic customers didn’t like that: so now the staff are on strike and customers have boycotted the stores, threatening the business’ very existence. “This controversy is the tip of an iceberg,” said James Post, coauthor of the 2002 book “Redefining the Corporation” and a professor emeritus at Boston University School of Management. “And what’s below the iceberg is a much larger debate about the relationship between shareholders and all of the other parties that help account for the success of a company.”

    "Is ‘shareholder value’ bad for business?" by Leon Neyfaldi, Boston Globe, August 3, 2014 ---
    http://www.bostonglobe.com/ideas/2014/08/02/shareholder-value-bad-for-business/3O4MYxjWgmJ2DOPwkeYxyN/story.html

    It sounds like great management philosophy—but critics say we need to get back to a broader vision of the purpose of corporations

    The uprising against the owners of Market Basket that’s been unfolding over the past several weeks looks at first like a classic showdown between the powers that be and the little guys who would. In one corner stands a coalition of board members and major shareholders who think it should be returning higher profits; in the other, a crowd of employees fiercely devoted to the recently fired CEO, who won their loyalty by paying high wages, providing generous benefits, and handing out regular bonuses. Amazingly, even customers have joined the revolt, turning Market Basket stores into ghost towns and costing the company millions of dollars in losses.

    There’s something heartwarming about workers risking their necks in the name of a beloved former boss. But to observers who know how modern corporations work, the protests can seem a little naive: After all, everybody knows that a corporation is an entity whose first job is to maximize profits and deliver the highest return possible to its owners. As some commentators have noted, Market Basket is a business, and demanding that its investors forgo profits in service of some greater good goes against everything we know about the natural laws of capitalism.

    Unless, of course, it doesn’t. Related

    Timeline of Market Basket events

    Experts on the history of business say the Market Basket saga is a window onto something deeper than a power struggle among the Demoulas clan that owns it. They see it as emblematic of a war over the future of the American corporation—what its purpose is, how it should be run, and whom it should be engineered to benefit. They argue that maximizing profit and shareholder value—an approach to running companies that drives investment on Wall Street and serves as the closest thing to modern management gospel—is only one way of defining corporate success, and a fairly new one at that.

    “This controversy is the tip of an iceberg,” said James Post, coauthor of the 2002 book “Redefining the Corporation” and a professor emeritus at Boston University School of Management. “And what’s below the iceberg is a much larger debate about the relationship between shareholders and all of the other parties that help account for the success of a company.”

    A company like IBM or General Motors could be the heart of an entire ecosystem of suppliers, investors, and even civic institutions.

    Quote Icon

    Post and others argue that a well-run company can—and should—be managed in a way that benefits not just the investors who own its stock, but a wide range of constituents. As opposed to “shareholders,” they call these people “stakeholders”: a group that includes employees, customers, suppliers, and creditors, as well as the broader community in which the company operates, and even the country that it calls home. According to that view, Market Basket’s employees and customers are essential to the firm’s success and, thus, rightful beneficiaries of its prosperity.

    Importantly, it’s not just antimarket leftists who are making this point: It’s pro-business thinkers who want to see a more competitive future for American corporations. Critics like Post argue that the singleminded emphasis on profits and shareholder value—which took hold in the corporate world during the 1980s—has actually hurt corporations in a number of ways, giving their leaders the wrong kinds of incentives, gutting their future in pursuit of short-term profits, and often draining them of their real value and putting them at odds with their communities.

    To take seriously the idea of a “stakeholder”-oriented corporation is to realize that firms like Market Basket, which we rely on in our daily lives and which rely on us in return, don’t have a fixed role in a capitalist society, but rather exist as tools that can serve a variety of functions. While “shareholder value” is attractive in its simplicity, a look at its track record suggests it might be an idea that has reached its sell-by date.

    ***

    Today, it’s widely taken for granted that the American corporation functions as a standalone, self-interested entity responsible exclusively to its investors. But it wasn’t always this way. “The early corporations were chartered by the state to meet a social purpose,” Post said. “Sometimes it was to build highways, sometimes it was to run banks, but there was always public purpose that went with the grant of a charter.” The message was straightforward: People who owned incorporated companies ran them at the pleasure of the state, and, in exchange for various legal protections, had a responsibility to do more than enrich themselves.

    Though such demanding legislative charters had long fallen out of use by the mid-20th century, when American corporations entered what is widely considered their golden age, historians say that many executives nevertheless held onto the notion that they were overseeing entities with a role in society, and were responsible for creating more than the value that existed on paper. “They viewed their job as a sort of stewardship of an economic and social institution,” said Lynn Stout, a professor at Cornell University Law School and the author of “The Myth of Shareholder Value.”

    During this era of so-called managerial capitalism, which began roughly in the 1920s, corporations were seen by both their managers and much of the American public as institutions that mattered in themselves: They produced useful products, gave workers and their families a stable and often long-term source of income, and played a role in the cities and towns where they did business. A company like IBM or General Motors could be the heart of an entire ecosystem of suppliers, investors, and even civic institutions.

    But a change was coming to American capitalism. Facing unprecedented competition from Europe and Asia, these long-stable firms began to look like sleepy behemoths. And economists had begun to worry that top executives had become so powerful they were running companies with their own personal interests at heart, lining their pockets at the expense of the stockholders who, in theory, should have been benefiting in proportion to the company’s success.

    The solution to all these problems, famously articulated by the University of Chicago free market economist Milton Friedman in a 1970 New York Times article, was an elegant one: By framing the corporation purely in terms of its monetary value to shareholders, and setting aside the notion that it might be a valuable entity in and of itself by virtue of what it did, corporate America suddenly had an easy way to measure performance. The scheme had a kind of moral clarity: The risk of operating a company is borne by stockholders, so they’re the ones who deserve to reap the rewards.

    A well-managed company, then, would have a high stock price that reflected the best possible use of its assets. A poorly managed one was a target for a new class of investor—the corporate raider—who saw big companies as collections of assets that could be bought, broken up, and sold at a profit.

    CEOs got the message: The point of running a company was to keep the share price high. And to keep their eyes on the target, boards started tying executive pay to the share price, by paying CEOs with stock options that were much more valuable than their paper salary. In the wake of the “shareholder value” revolution, everything except the value of a company’s stock—including its impact on the lives of its employees, its contracts with suppliers and retailers, whether it was liked or hated by its customers—came to be seen as almost irrelevant. Everything you needed to know about how a company was doing was believed to be reflected in its share price.

    By the 1990s, the notion that a CEO had an obligation to maximize shareholder value had become an unquestioned mantra taught in business schools; ordinary people assumed it was simply the way of the world. “People think it was brought down from Mount Sinai by Moses, as the 11th Commandment,” said Richard Sylla, a professor who specializes in the history of financial institutions at NYU Stern School of Business, and the coauthor of a recent article in the journal Daedalus critiquing the notion of shareholder supremacy. “If you’re younger than 50 or 60, you’ve lived in a world where everyone taught you that this is what a corporation is supposed to do—maximize profit and shareholder value. But the world used to be different.”

    The philosophy of shareholder supremacy, initially a reform to curb irresponsibility in managers, has ended up causing significant problems of its own, say Sylla and other critics. CEOs became obsessed with stock price at the expense of all other considerations. Some, like the executives at Enron, went so far as to defraud their own stockholders by engineering bogus profits. Countless others made short-sighted decisions intended to goose earnings, keep investors happy, and enrich themselves—all without regard for the long-term health of their companies.

    The broader social effects of the shift toward shareholder value are clear, critics say, with wages stagnating and unemployment remaining stubbornly high even as the stock market has rebounded after the recession. Meanwhile, if the point was to benefit shareholders, it’s not clear that worked either. Roger Martin, the former dean of the Rotman School of Management at the University of Toronto, points out in his 2011 book, “Fixing the Game,” that from 1933 to 1976, returns on investment in the S&P 500—the decades immediately before the “shareholder value” took hold—were actually higher than they have been since. And Stout notes that in the 20 years after 1993, when a change to the tax code encouraged corporations to tie executive compensation to share price, investors in the S&P 500 saw returns that were slightly worse than what they were getting during the 40 years prior. The life expectancy of S&P 500 companies, meanwhile, has been cut dramatically—from around 70 years in the 1920s to 15 years today.

    “We have been dosing our public corporations with the medicine of shareholder value thinking for at least two decades now,” Stout has written. “The patient seems, if anything, to be getting worse.”

    As the effects of shareholder supremacy have begun to make themselves evident—Stout points to Sears and Motorola as examples of companies that have been hollowed out in the name of stoking share prices—an alternative approach to running a corporation, known as the stakeholder model, began gaining purchase among academics and business leaders. This model, as described by its proponents, recommends taking a less simplistic and short-term view of what makes a company successful, and calls for measuring its value not just in terms of profits and stock price, but the total impact it has on the lives of people who come into contact with it. There are clear reasons this might be better for employees, customers, and their communities. In the long run, say thinkers like Stout and Post, it is going to be better for the competitiveness of the American company. Pointing to firms like Market Basket, they argue that stakeholder-focused companies are ultimately more stable and financially healthy—a win, ultimately, for the very shareholders being forced to make room at the trough for other interested parties.

    ***

    Though lots of prominent companies now take pains to cultivate reputations as conscientious corporate citizens, would-be reformers want something more. “All that stuff is just window dressing,” said Stout, referring to philanthropic programs financed by big corporations in the name of good PR. “Corporate social responsibility means running a business that contributes to public welfare—that’s the moral defense of capitalism. Business should be a force for good, not for the enrichment of a few small individuals.”

    Continued in article

    Unbelievable Photos Show Factory Farms Destroying The American Countryside ---
    http://www.businessinsider.com/mishka-henners-photos-of-american-feedlots-2014-8

    Jensen Comment
    It would seem that anything that is bad for business adversely affects shareholder value. However, is the opposite the case. Is everything good for increasing shareholder value good for business. Most of the debate hinges on long-term versus short-term values.

    Milton Friedman argued that the only responsibility of business should be making profits while abiding by all laws ---
    http://www.bostonglobe.com/ideas/2014/08/02/shareholder-value-bad-for-business/3O4MYxjWgmJ2DOPwkeYxyN/story.html
    This is of course difficult when laws are conflicting or unclear --- as is often the case. One example is affirmative action where the laws are sometimes vague or conflicting. Adverse publicity can sometimes cut on both sides of the sword.

    A classic problem is when tax laws and regulations allow companies to avoid taxes in a way that hurts them with adverse publicity such as when Walgreens contemplated moving its headquarters across the Atlantic Ocean --- a decision that the company has since rescinded due to both bad publicity and governmental pressures. The company would have benefitted in the short run by this inversion, but it's not at all clear that the long-term benefits would have been positive.

    It's clear that the private sector differs greatly from the public sector in terms of social responsibilities. For example, the government is ideally subjected to the democratic voting process with respect to controversial decisions such as banning genetic modification certain food products. A company deciding to modify or not modify its products via genetic modification is not directly subjected to the will of the people except via government intervention.

    Highly controversial decisions that are on surface socially responsible have many possible favorable and adverse externalities. For example, if an enormous electric power company elects to substitute coal and nuclear power generation with solar, wind, and hydo power (as is the case with the power generating companies in Vermont) there are many possible externalities for which government would be accountable but not the power companies themselves. For example, enormous increases in the cost of power may cause a spike in unemployment and huge losses of tax revenues from businesses depending on cheap power. In fact power-intensive companies may move to another state where power is cheaper.

    At the moment, there's huge political fight in New Hampshire over what is termed the northern pass ---
    http://en.wikipedia.org/wiki/Northern_Pass_transmission_line
    Power companies want to destroy a significant portion of our forests for enormous (80-foot) transmission towers to bring in hydro power from Quebec. What is profitable for the power companies has adverse externalities on life in the forests as well as life in Quebec if more and more land is flooded for newer and larger hydro dams. But those are Canadians who are hurt. Why should our USA companies care about Canadians if the Northern Pass transmission lines add shareholder value to USA power companies.?


    "When Did the U.S. Forfeit its Moral Leadership in the World?" by Steven Mintz, Ethics Sage, August 6, 2014 --- Click Here
    http://www.ethicssage.com/2014/08/when-did-the-us-forfeit-its-moral-leadership-in-the-world-courage-and-leadership-is-lacking-in-dealing-with-foreign-crise.html


    46 Senators Objecting to Plans to Change Tax Accounting to Accrual-Based Rules
    From the CFO Journal's Morning Ledger on August 8, 2014

    Many Senators Object to Raising Cash from Small Businesses.
    A group of senators object to plans by
    Congress to force small businesses to change accounting methods in order raise revenue to support tax reform, the WSJ’s CFO Journal reports. Some 46 senators sent a letter Wednesday to Senate Finance Committee Chairman Ron Wyden (D., Ore.) and Ranking Member Orrin Hatch (R., Utah), opposing proposals that would force some small businesses to use accrual accounting, rather than cash accounting. The shift would essentially force firms to pay income taxes on money not yet received. The changes could raise more than $23 billion in tax revenue over the next decade, but the senators said the “negative impact” couldn’t justify the change. “The basic tenet of taxation is ‘ability to pay,’” they wrote. The changes, which have been in draft proposals by the House and the Senate in the past year, would affect businesses with more than $10 million in revenue that don’t currently have inventory, such as dentists, architects, engineers and attorneys and CPAs. The senate version could also affect farmers.


    From the CFO Journal's Morning Ledger on July 31, 2014

    Regulatory requirements are making trading in repurchase agreements, or repos, more expensive, and that has banks backing away from this critical part of the plumbing that keeps money flowing through the financial system.

    Repos function as short-term loans, which are backed by collateral, such as a government bond. Borrowers agree to sell the bonds to another party for cash, with the promise to repurchase the bond at a slightly higher price some time in the future.

    Regulators are pleased with the changes. Before the crisis, many Wall Street firms relied heavily on repos, but then lost access to those funds when investors panicked about the value of mortgage bonds and the solvency of firms that relied on repos for cash. But there are signs that the reluctance of banks to facilitate huge amounts of repo transactions is contributing to increased volatility.

    Bob Jensen's threads on repo scandals ---
    http://www.trinity.edu/rjensen/ecommerce/eitf01.htm#Repo


    From the CFO Journal's Morning Ledger on July 31, 2014

    Creating a Cloud Risk Framework with Internal Audit Support ---
    http://deloitte.wsj.com/cfo/

    As organizations migrate to cloud computing, they could be putting their data at significant risk. Positioning the internal audit (IA) function at the forefront of cloud implementation and engaging IA to create a cloud risk framework tool can provide organizations a view on the pervasive, evolving and interconnected nature of risks associated with cloud computing. Such a tool can also improve efficiency in compliance and risk management efforts and be used to develop risk event scenarios.

     


    Property Tax Comparisons ---
    http://www.propertyshark.com/mason/ny/New-York-City/Maps/Property-Tax-Sqft-Map
    You have to play around quite a lot to figure out how to use this site. It's not extremely user friendly and outcomes on the basis of square footage are misleading.

    Jensen Comment
    I think there is possibly a lot of missing data across the USA. I found the property tax information for our former house in San Antonio but not our current house in New Hampshire. However, towns in New Hampshire provide free and detailed property tax information for each street address at the towns' Websites. I think it is probably best to first try to get property tax data from each taxing jurisdiction in the USA.

    In general it's misleading to compare property taxes across different jurisdictions and even within jurisdictions. For example, property may have different homeowner exemptions in different jurisdictions. Property taxes may seem high in a state having no income and/or sales taxes. Consideration should also be given to what home owners are getting for their property taxes. For example, very high property taxes in New York City get you lousy public schools. Lower property taxes in South Dakota get you arguably the best public schools in the USA.

    Unfairness or fairness in property taxation generally begins with the fairness or unfairness of the value appraisals of a jurisdiction. For example, Bexar County in San Antonio frequently changes appraised value. In towns and villages in New Hampshire properties may not be revalued for years and may be totally out of line with recent sales transactions in a given jurisdiction. Comparisons on the basis of square footage or acreage may be totally misleading. For example, in New Hampshire a five acre parcel with an outstanding view may be assessed at ten times the value of a 20 acre parcel buried in the woods because New Hampshire has a view tax that is factored into the property tax valuation. Condos on the 40th floor will be valued much higher per square foot than condos on the third floor in most any city in the USA.


    IASB Chairman:  "Full convergence on accounting standards no longer achievable," by Michelle Quah, Business Times, July 31, 2014 ---
    http://www.businesstimes.com.sg/breaking-news/singapore/full-convergence-accounting-standards-no-longer-achievable-iasb-20140731

    FULL convergence with the United States - leading to the creation of one single set of global accounting standards - is no longer an achievable project, said Hans Hoogervorst, chairman of the International Accounting Standards Board (IASB), at the Singapore Accountancy Convention (SAC) on Thursday.

    His grim pronouncement leaves no doubt as to the fate of collaborative efforts that began over a decade ago; it also comes shortly after the IASB - the global accounting standards setter - published its completed international financial reporting standard (IFRS) on financial instruments, IFRS 9, without the US Financial Accounting Standards Board's (FASB) participation.

    "The FASB decided to stick to current American practices and leave the converged position," Mr Hoogervorst said.

    "It's a pity. Convergence would have allowed the US to make the ultimate jum
    p to IFRS. But nobody can force it to do so; if it wants to stick with US GAAP (Generally Accepted Accounting Principles - the US financial reporting standard), that's its choice. But IFRS moves on - we have a large part of the world to take care of."

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


    "Court Deals Blow to KPMG, Others Marketing Bond-Linked Tax Shelters," Bloomberg News, August 4, 2014 ---
    http://www.bna.com/court-deals-blow-n17179893222/


    Student Loan Fraud:  They sought a total of $240,000 in loans based on false claims of being students either at Joliet Junior College, Harper College or Elgin Community College, authorities said ---
    http://www.insidehighered.com/quicktakes/2014/08/01/4-charged-loan-fraud-scheme

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


    "UPDATE 3-Whistleblower alerted L-3 to accounting misconduct," by Sagarika Jaisinghani, Sweta Singh and Alwyn Scott, Reuters, July 31, 2014 ---
    http://www.reuters.com/article/2014/07/31/l-3-communi-hldg-results-idUSL4N0Q66RI20140731

    July 31 (Reuters) - An employee complaint exposed accounting misconduct at L-3 Communications Holdings Inc, according to people familiar with the matter, prompting the aerospace and defense supplier to fire four people, revise two years of earnings statements and cut its earnings forecast.

    L-3's shares plunged as much as 17 percent - their biggest intraday percentage drop ever - after the company said on Thursday it would take a pretax charge of $84 million for misconduct and accounting errors, including cost overruns and overstated sales figures from 2013 and 2014.

    The surprise announcement prompted some analysts to cut ratings on the company, and raised concern about a broader problem at L-3, which also suffered an ethics scandal in 2010.

    The sources said the latest misconduct stemmed from a single fixed-price contract for maintenance and logistics support with the U.S. military that began in December 2010 and runs through January 2015.

    The Pentagon has not barred L-3 from bidding on other contacts as a result of the misconduct, the sources added.

    The pretax charge includes adjustments for accounting errors L-3 found as it scrubbed its books during the review, said the sources, who spoke on condition that they not be named.

    "The profit L-3 expected in the contract just wasn't there," said one of the sources.

    The sources declined to say which branch of the military had the contract, or precisely which part of L-3 was involved, other than that it was in its aerospace unit. They also would not say how recently the employee lodged the complaint.

    However, they said the New York-based company quickly fired four employees and hired law firm Simpson Thatcher to conduct the investigation and consulting firm AlixPartners to perform forensic accounting.

    "We had some bad actors and they are no longer part of L-3," Chief Executive Michael Strianese said on a conference call with analysts.

    Another employee resigned in connection with the review. The whistleblower is still with the company, and the review is continuing, but not expected to turn up significant additional charges, the sources said.

    L-3, founded in 1997 and built through mergers and acquisitions of smaller companies, supplies a wide range of military and civil electronics equipment and services, including aircraft "black boxes," communications transponders and cockpit display panels.

    The accounting errors surprised investors, but they stopped short of triggering a "restatement" of L-3's accounting. Instead, the financial statements are being "revised" to reflect what are considered non-material adjustments, and the statements can still be relied on by investors, the sources said.

    L-3 also reported on Thursday preliminary sales of $3.02 billion for the second quarter ended June 27, but said the figure could be revised lower after the review is finished.

    The company cut its full-year earnings forecast by 30 cents a share, to $7.90-$8.10 per share from $8.20-$8.40, reflecting expected charges in the second half related to the review.

    Analysts peppered Strianese and CFO Ralph D'Ambrosio with questions on the conference call about whether other misconduct could appear elsewhere.

    "We have no reason to believe that this issue occurred at any other segment of the company," Strianese said.

    Accounting irregularities tend to unnerve investors and bring further scrutiny of company's operations, analyst said. The incident raised memories of a 2010 event in which an L-3 unit was suspended from doing contract work for the U.S. Air Force for allegedly using a government computer to gather business information for its own use.

    Strianese said that case found no evidence that anyone at L-3 "did anything wrong" and "actually proved that we did not have any bad actors."

    Still, "situations involving accounting misconduct with government contractors do not end quickly and generally are expanded in scope," said CRT Capital analyst Brian Ruttenbur, who cut his rating on L-3 stock to "sell" from "fair value."

    D'Ambrosio said the contract involved in the review had average annual sales of about $150 million.

    "It's a low-margin contract and with these adjustments, it is now in a loss position," he said.

    L-3 said about $50 million of the $84 million charge related to periods prior to 2014 and about $30 million related to the second quarter of 2014.

    Continued in article

    "L-3 fires 4 workers over accounting misconduct," The Wall Street Journal, July 31, 2014 ---
    http://online.wsj.com/article/AP8cd259fb873b4499bac589d59ae14e39.html

    Defense contractor L-3 Communications said Thursday that it fired four employees after discovering they overstated the company's profit and sales from a contract with the U.S. government.

    The New York company said a fifth employee resigned. It said the employees, who worked for its aerospace systems business, also inappropriately deferred some cost overruns associated with the contract. L-3 described the contract as a maintenance and logistics support contract with the U.S. Department of Defense, and said the deal began Dec. 1, 2010, and ends January 31. The deal brings in about $115 million in annual revenue for the company.

    "The misconduct included concealment from L-3's Corporate staff and external auditors," L-Communications 3 Chairman and CEO Michael Strianese said during a conference call.

    The company did not disclose the names or positions of the employees or provide other details about the contract. Government spokespeople were not able to confirm the specifics of the contract.

    L-3 Communications said it is conducting an internal review and will take an $84 million charge associated with the misconduct. It said $34 million of that total will come from the first half of 2014. Separately, it will reduce its net sales by $43 million. The company also cut its estimate for second-half operating income for the aerospace systems business by $35 million.

    Shares of L-3 Communications Holdings Inc. tumbled $14.68, or 12 percent, to $104.96 Thursday as the markets slumped.

    Also see Bloomberg Businessweek --- Click Here
    http://investing.businessweek.com/research/stocks/news/article.asp?docKey=600-201407311656BIZWIRE_USPRX____BW6560-1&params=timestamp||07/31/2014%204:56%20PM%20ET||headline||INVESTOR%20ALERT%3A%20Investigation%20of%20L-3%20Communications%20Holdings%2C%20Inc.%20Announced%20by%20Glancy%20Binkow%20%26%20Goldberg%20LLP||docSource||Business%20Wire||provider||ACQUIREMEDIA||bridgesymbol||US;LLL&ticker=LLL

    . . .

    According to the Company, the adjustments primarily relate to “contract cost overruns that were inappropriately deferred and overstatements of net sales, in each case with respect to a fixed-price maintenance and logistics support contract,”ť and are the result of “misconduct and accounting errors”ť at the Aerospace Systems segment, which “included concealment from L-3's Corporate staff and external auditors.”ť

    If you purchased shares of L-3, if you have information or would like to learn more about these claims, or if you have any questions concerning this announcement or your rights or interests with respect to these matters, please contact Casey Sadler, Esquire, of Glancy Binkow & Goldberg LLP, 1925 Century Park East, Suite 2100, Los Angeles, California 90067, by toll-free telephone at (888) 773-9224 or by telephone at (310) 201-9150, by e-mail to shareholders@glancylaw.com, or visit our website at http://www.glancylaw.com. If you inquire by email, please include your mailing address, telephone number and number of shares purchased.

    This press release may be considered Attorney Advertising in some jurisdictions under the applicable law and ethical rules.

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


    "Nearly 80% Of NFL Athletes Blow All Their Money — Here's Who Didn't Mess It Up," by Stacey Bumpus, Business Insider, August 9, 2013 ---
    http://www.businessinsider.com/nfl-players-success-off-the-field-2013-8 

    Jensen Comment
    The title of the above article is a little misleading. Some of the NFL veterans in the article took risks financial risks that paid off. The article does not mention those that were more conservative with investments and probably are better investment managers or hired better investment managers.

    The article does not mention Hall of Famer John Elway who bought five car dealerships and two restaurants that were almost sure-thing money makers. Elway, however, did get burned in a Ponzi scheme, but I don't think his losses here made a big dent in his fortunes. He has taken some other investment risks such as his investments in arena football, but I think he could easily absorb the losses. However, I do not know this for a fact.  His 2004 divorce probably cost him more than any of his business losses. He sure took some rough physical beatings when he was still a quarterback for the Denver Broncos.

    John Elway --- http://en.wikipedia.org/wiki/John_Elway

    The Worst Sack Ever on John Elway (former All-Pro Quarterback in the Mile-High City)
    Elway Got Schemered!
    Stanford Graduates Should Know Better
    "John Elway Invested $15 MILLION With Alleged Ponzi Schemer," Huffington Post, October 14, 2010 ---
    http://www.huffingtonpost.com/2010/10/14/john-elway-invested-15-mi_n_762663.html

    Former Denver Broncos quarterback John Elway and his business partner gave $15 million to a hedge-fund manager now accused of running a Ponzi scheme.

    The Denver Post reported Thursday that Elway and Mitchell Pierce filed a motion saying they wired the money to Sean Michael Mueller in March. They said Mueller agreed to hold the money in trust until they agreed on where it would be invested.

    A state investigator says 65 people invested $71 million with Mueller's company over 10 years and it only had $9.5 million in assets in April and $45 million in liabilities.

    Elway's filing asks that the court put their claims ahead of others so they can collect their money first. His lawyer declined to comment.

    Jensen Comment
    It's hard to feel sorry for rich people who play in games without rules (hedge funds)
    Better to play in games with rules and stand behind 325 lb linemen with missing teeth, BO, and noses that look like corkscrews.

    It's also hard to know how much celebrities really lose in some business ventures. On occasion they are merely investing their names and promotion efforts without sacrificing much in the way of personal investments.

    Often professional athletes and other celebrities are so busy with their non-financial activities and are so naive about finance and accounting and taxes that they are especially vulnerable to con artists who bleed them dry in one way or another. Examples are too numerous to mention and include NBA star Ray Williams who become a homeless bum and Debbie Reynolds of Hollywood fame who had to go back to working for food in Las Vegas.

    A Sad, Sad Case That Might Be Used When Teaching Personal Finance:  Another Joe Lewis Example
    "Desperate times:  Ex-Celtic Williams, once a top scorer, is now looking for an assist," by Bob Hohler, Boston Globe, July 2, 2010 ---
    http://www.boston.com/sports/basketball/celtics/articles/2010/07/02/desperate_times/

    Every night at bedtime, former Celtic Ray Williams locks the doors of his home: a broken-down 1992 Buick, rusting on a back street where he ran out of everything.

    The 10-year NBA veteran formerly known as “Sugar Ray’’ leans back in the driver’s seat, drapes his legs over the center console, and rests his head on a pillow of tattered towels. He tunes his boom box to gospel music, closes his eyes, and wonders.

    Williams, a generation removed from staying in first-class hotels with Larry Bird and Co. in their drive to the 1985 NBA Finals, mostly wonders how much more he can bear. He is not new to poverty, illness, homelessness. Or quiet desperation.

    In recent weeks, he has lived on bread and water.

    “They say God won’t give you more than you can handle,’’ Williams said in his roadside sedan. “But this is wearing me out.’’

    A former top-10 NBA draft pick who once scored 52 points in a game, Williams is a face of big-time basketball’s underclass. As the NBA employs players whose average annual salaries top $5 million, Williams is among scores of retired players for whom the good life vanished not long after the final whistle.

    Dozens of NBA retirees, including Williams and his brother, Gus, a two-time All-Star, have sought bankruptcy protection.

    “Ray is like many players who invested so much of their lives in basketball,’’ said Mike Glenn, who played 10 years in the NBA, including three with Williams and the New York Knicks. “When the dividends stopped coming, the problems started escalating. It’s a cold reality.’’

    Williams, 55 and diabetic, wants the titans of today’s NBA to help take care of him and other retirees who have plenty of time to watch games but no televisions to do so. He needs food, shelter, cash for car repairs, and a job, and he believes the multibillion-dollar league and its players should treat him as if he were a teammate in distress.

    One thing Williams especially wants them to know: Unlike many troubled ex-players, he has never fallen prey to drugs, alcohol, or gambling.

    “When I played the game, they always talked about loyalty to the team,’’ Williams said. “Well, where’s the loyalty and compassion for ex-players who are hurting? We opened the door for these guys whose salaries are through the roof.’’

    Unfortunately for Williams, the NBA-related organizations best suited to help him have closed their checkbooks to him. The NBA Legends Foundation, which awarded him grants totaling more than $10,000 in 1996 and 2004, denied his recent request for help. So did the NBA Retired Players Association, which in the past year gave him two grants totaling $2,000.

    Continued in article

    Bob Jensen's personal finance helpers ---
    http://www.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers


    Go Figure:  Canadians fail to cash more than $730 million in tax refund checks ---
    http://www.montrealgazette.com/business/Ottawa+sitting+million+stockpile+uncashed+taxes+other/10062540/story.html


    "How U.S. Companies can become more competitive - Start with System Thinking and Reengineering," by Jim Martin, MAAW's Blog, July 30, 2014 ---
    http://maaw.blogspot.com/2014/07/how-us-companies-can-become-more.html

    Feedback on the question in my previous post could take many directions. Around the same time that Elliott wrote about the 3rd wave many authors were advocating various approaches to help U.S. companies become competitive. Deming and Goldratt published books about the problem in 1986 and followed that with other books adding more specificity. CAM-I published its conceptual design (edited by Berliner and Brimson) in 1988 and numerous authors (e.g., McNair) have written about activity-based cost management since that time. In 1990 Senge wrote about systems thinking (The Fifth Discipline) and Hammer introduced the concept of Reengineering adding more depth and specificity in Reengineering the Corporation with Champy in 1993. In 1996 Womack and Jones published Lean Thinking with recommendations similar to Imai's approach in his 1986 Kaizen. More recently Johnson and Broms wrote about the living systems model (in Profit Beyond Measure) and Baggaley and Maskell have described value-stream management. I have developed a considerable amount of information about the first three approaches, some information about approaches 5, 6, and 7, but very little about the 4th approach Reengineering. To consider the Reengineering approach see my summary of Hammers' 1990 paper (Hammer, M. 1990. Reengineering work: Don't automate, obliterate. Harvard Business Review (July-August): 104-112. ) at http://maaw.info/ArticleSummaries/ArtSumHammer1990.htm
     
    My current view is that reengineering should be the first step after one embraces systems thinking and then it can be followed by other approaches. This is because approaches such as continuous improvement (TOC, PDCA, etc.), and value-stream management should not be used on obsolete process designs that companies should not be using in the first place.

    1. The systems thinking (Deming 1986, 1993, Senge 1990) approach.
    2. The theory of constraints (Goldratt 1986, 1990) approach.
    3. The activity-based cost management (CAM-I 1988, McNair 1990, etc.) approach.
    4. The reengineering (Hammer and Champy 1990, 1993) approach.
    5. The self-organizing lean enterprise, including just-in-time (Womack and Jones 1996, Imai 1986) approach.
    6. The living systems model (Johnson and Broms 2000) approach.
    7. The value-stream management (Baggaley and Maskell 2003) approach
    .


    "Disruption Ahead: What MOOCs Will Mean for MBA Programs," Knowledge@wharton Blog, July 16, 2014 ---
    http://knowledge.wharton.upenn.edu/article/moocs-mba-programs-opportunities-threats/

    In a new research paper, Christian Terwiesch, professor of operations and information management at Wharton, and Karl Ulrich, vice dean of innovation at the school, examine the impact that massive open online courses (MOOCs) will have on business schools and MBA programs. In their study — titled, “Will Video Kill the Classroom Star? The Threat and Opportunity of MOOCs for Full-time MBA Programs” — they identify three possible scenarios that business schools face not just as a result of MOOCs, but also because of the technology embedded in them. In an interview with Knowledge@Wharton, Terwiesch and Ulrich discuss their findings.

    An edited transcript of the interview appears below.

    Knowledge@Wharton: Christian, perhaps you could start us off by describing the main findings or takeaways from your research?

    Terwiesch: Let me preface what we’re going to discuss about business schools by saying that Karl and I have been in the business school world for many, many years. We love this institution, and we really want to make sure that we find a sustainable path forward for business schools.

    Continued in article

    Bob Jensen's threads on MOOCs ---
    http://www.trinity.edu/rjensen/000aaa/updateee.htm#OKI


    Truth In Accounting Report
    Hawaii Public Radio
    August 6, 2014
    http://www.statedatalab.org/news/detail/truth-in-accounting-report


    How to Mislead With StatisticsThis time its the Bureau of Labor Statistics
    "4 Million Fewer Jobs: How The BLS Massively Overestimated US Job Creation," by Tyler Durden, Zero Hedge, August 5, 2014 ---
    http://www.zerohedge.com/news/2014-08-05/4-million-fewer-jobs-how-bls-massively-overestimated-us-job-creation


    "How One "Sack Of S**t" Mortgage-Backed Security Came To Define The Financial Crisis," by Matthew Zeitlin, Buzzfeed News, August 11, 2014 ---
    http://www.buzzfeed.com/matthewzeitlin/how-one-sack-of-shit-mortgage-backed-security-came-to-define#1ek09p6

    The history of SACO 2006-8, as told through court documents dating back more than six years, provides a view into how the mortgage-backed security industry was built up and spectacularly collapsed. For JPMorgan, it has become the mortgage-backed security from hell.

    Last week, JPMorgan Chase’s costly legal troubles took another step toward completion when trustees for 311 mortgage-backed securities sold by the bank or inherited through acquisitions prior to the financial crisis agreed to a $4.5 billion settlement. Another 14 got an extension to still consider the deal, while five trusts wholly rejected the settlement, leaving open the option for them to continue litigation against the bank. SACO 2006-8, created and marketed by Bear Stearns two years prior to its government-supported acquisition by JPMorgan in 2008, was one of the trusts that rejected the deal.

    The detailed history of this one trust’s creation and sale, as told through court documents dating back to a lawsuit filed by the bond insurer Ambac six years ago, provides a view into how the mortgage-backed security industry was built up and spectacularly collapsed. And it may be one of the very few chances that the investors who bought these securities — and the insurance companies that guaranteed them — can find out what actually happened.

    More importantly, it may be the only chance left for the public to get a granular view of what actually happened in the run-up to the financial crisis.

    The best way to understand the importance of SACO 2006-8 to both the inner workings of the mortgage-backed securities industry and JPMorgan is to start in the present and travel back to the past.

    A large chunk of JPMorgan’s more than $20 billion legal tab last year over the bank and its affiliates’ practices in marketing and selling mortgage-backed securities before the financial crisis is owed to two settlements: one with the Department of Justice for $13 billion and the previously mentioned $4.5 billion deal. (The latter deal still requires approval by a judge, and if granted will finally remove the bulk of financial crisis-era legal liabilities from the bank.) The combined $17.5 billion cost of those two settlements, reached less than a week apart, nearly matched JPMorgan’s net income of $17.9 billion last year.

    The settlement included a statement of facts that JPMorgan agreed to — not a guilty plea — describing generally how its employees (and those of Bear Stearns and Washington Mutual) marketed mortgage-backed securities to investors even though some of the loans didn’t comply with the loan underwriters’ own guidelines for selling and securitizing them. The civil penalty of $2 billion only applied to what JPMorgan did before the crisis, not Bear Stearns or Washington Mutual, and released the bank from civil liability for claims arising from the securities included in the settlement.

    “Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown,” Attorney General Eric Holder said when announcing the deal between the Justice Department, several states, and other regulatory agencies and JPMorgan, which ranks as the country’s largest bank by assets.

    JPMorgan’s chairman and Chief Executive Officer Jamie Dimon described 2013 in a letter to investors as “the best of times [and] the worst of times,” and said that the bank came through “scarred but strengthened — steadfast in our commitment to do the best we can.”

    Many of the same mortgage-backed securities covered by the Justice Department deal were also among those included in the $4.5 billion trustee settlement, SACO 2006-8 being one of them.

    “We believe the acceptance by the Trustees of the overwhelming majority of the 330 trusts is a significant step toward finalizing the settlement,” a JPMorgan spokesman said in a statement earlier this month. The spokesman declined further comment for this story.

    SACO 2006-8 was one of many mortgage-backed securities pumped out by Bear Stearns during the housing and credit boom. Made up of almost 5,300 home equity lines of credit from California, Virginia, Florida, and Illinois acquired by a Bear subsidiary called EMC, the trust had a principal balance of $356 million. Its most senior notes, the “Class A Notes” that would get paid off first by the stream of home equity payments, got the highest possible ratings from Moody’s and Standard & Poor’s, and were buoyed by an insurance policy from the AAA-rated Wisconsin-based bond insurer Ambac that guaranteed payments on the senior debt.

    Almost a third of the home equity lines came from American Home Mortgage Corporation, which would declare bankruptcy less than a year later — not coincidentally, the same year home equity origination would peak. By March 2008, Bear Stearns would be acquired by JPMorgan after its stock plummeted as clients and investors got nervous about its mortgage-backed securities holdings. Two years and a few months later, in November 2010, Ambac would file for bankruptcy.

    But SACO 2006-8 continued to live. It would be quickly downgraded and, by the end of 2010, it had already experienced some $141 million worth of losses and had 41% of its loans go delinquent or charged off entirely.

    A lawsuit filed in 2008 by Ambac, unsealed in 2011, included an email from a Bears Stearns manager to a trader describing the loans that would make up SACO 2006-8 as a “SACK OF SHIT” and, alternately, a “shit breather.”

    “I hope you’re making a lot of money off of this trade,” the manager also wrote to a trader. When asked to explain himself in a deposition, the manager said that “shit breather” was a “term of endearment.”

    SACO 2006-8 was hardly the only Bear Stearns mortgage deal that Ambac and others have said was put together by hiding the low quality of the underlying mortgages from investors and insurers. Ambac’s complaint alleges that Bear “knew and actively concealed that it was building a house of cards.”

    Ambac further said in its complaint that less than 25% of the loans Bear Stearns had acquired from American Home Mortgage were current and 60% had been delinquent for a month. Of those loans, 1,600 ended up in SACO 2006-8. The four transactions covered in the first Ambac suit (it has also filed a second suit against JPMorgan) had $1.2 billion in losses by 2011 and lead to Ambac paying out $641 million on their insurance coverage to bondholders.

    JPMorgan, which inherited the suit from Bear, responded in court documents that Ambac was a financially sophisticated company that actively sought Bear’s business and had access to the underlying loan data used in constructing the securities.

    Selling mortgages based on home equity lines of credit were a relatively new but quickly growing portion of Bear’s mortgage securities business. Ambac’s complaint says that Bear’s EMC subsidiary in 2005 had 9,300 home equity lines worth $509 million, but by the end of 2006 those figures had grown to some 18,000 loans worth $1.2 billion. Moreover, the home equity business was just one portion of Bear’s mortgage machine. From 2003 to 2007, EMC would purchase and then package for investors over 345,000 loans worth some $69 billion.

    As Ambac’s lawsuit was winding its way through the courts, SACO 2006-8 emerged again, this time in a lawsuit brought by New York Attorney General Eric Schneiderman.

    As co-chairman of the Residential Mortgage-Backed Securities Working Group, a group of law enforcement officials convened by the Obama administration to investigate mortgage fraud before the financial crisis, Schneiderman said Bear Stearns sold mortgage-backed securities featuring “material misrepresentations and flagrant omissions.”

    Bear’s representations as to the quality of the loans “were false, misleading, and designed to conceal fundamental flaws and defects in the defendants’ due diligence systems,” Schneiderman said.

    The complaint said “thousands of investors” were harmed by “systemic fraud” and that losses on more than 100 mortgage-backed securities it identified from 2006 and 2007 were $22.5 billion on an original balance of $87 billion. One of those securities was SACO 2006-8.

    For its part, JPMorgan said that Schneiderman’s suit was based on “recycled claims already made by private plaintiffs.” To be sure, one of the lawyers in Schneiderman’s office, Karla Sanchez, was one of Ambac’s lawyers during her time at Patterson Belknap Webb & Tyler. But a source told the Wall Street Journal at the time that Sanchez did not work on the case.

    JPMorgan settled the Schneiderman case as part of its $13 billion deal with the Justice Department, with the state of New York receiving $613 million of that amount.

    “We’ve won a major victory today in the fight to hold those who caused the financial crisis accountable,” Schneiderman said at the time of the settlement.

    Continued in article

    Bob Jensen's threads on Subprime: Borne of Greed, Sleaze, Bribery, and Lies ---
    http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze

    "J.P. Morgan's Mortgage Troubles Ran Deep:  Deals With Subprime Lenders at Heart of $5.1 Billion Settlement," by Al Yoon, The Wall Street Journal, October 27, 2013 ---
    http://online.wsj.com/news/articles/SB10001424052702304470504579161532779973534?mod=djemCFO_h

    A 1,625-square-foot bungalow at 51 Perthshire Lane in Palm Coast, Fla., is among the thousands of homes at the heart of J.P. Morgan Chase JPM +0.55% & Co.'s $5.1 billion settlement with a federal housing regulator on Friday.

    In 2006, J.P. Morgan bought one of two mortgage loans on the home made by subprime lender New Century Financial Corp. J.P. Morgan then bundled the loan with 4,208 others from New Century into a mortgage-backed security it sold to investors including housing-finance giant Freddie Mac. FMCC +11.89%

    By the end of 2007, the borrower had stopped paying back the loan, setting off yearslong delinquency and foreclosure proceedings that halted income to the investors, according to BlackBox Logic LLC, a mortgage-data company. Current Account

    Settlement Puts U.S. in Tight Spot

    The Palm Coast loan wasn't the only troubled one in the New Century deal: Within a year, 15% of the borrowers were delinquent—more than 60 days late on a payment, in some stage of foreclosure or in bankruptcy—according to BlackBox. By 2010, that number exceeded 50%.

    "That's much worse than anyone's expectations when the deal was put together," said Cory Lambert, an analyst at BlackBox and former mortgage-bond trader. "It's all pretty bad."

    J.P. Morgan sidestepped many of the subprime-mortgage problems that bedeviled rivals during the financial crisis, and avoided much of the postcrisis scrutiny that dragged down others on Wall Street. But now its own behavior during the housing boom is coming under close examination as investigators work through a backlog of cases.

    The bank dealt with some of the biggest subprime lenders of the time, including Countrywide Financial Corp., Fremont Investment & Loan and WMC Mortgage Corp., a former unit of General Electric, according to the Federal Housing Finance Agency complaint.

    J.P. Morgan's relationship with New Century, a subprime lender that went bankrupt in 2007 and later faced a Securities and Exchange Commission investigation and shareholder suits, shows that the New York bank was part of the frenzied push to package mortgages for investors at the end of the housing boom.

    The New Century deal, J.P. Morgan Mortgage Acquisition Trust 2006-NC1, was one of 103 cited in the lawsuit against J.P. Morgan brought by the FHFA, which oversees Freddie Mac and home-loan giant Fannie Mae. FNMA +13.40%

    The $5.1 billion settlement is part of a larger tentative deal with the Justice Department and other agencies that would have J.P. Morgan pay a total of $13 billion. That deal is expected to be completed this week.

    "While these settlements seem huge, given the nature of the offenses, they are trivially small," said William Frey, chief executive of Greenwich Financial Services LLC, a broker-dealer that has participated in investor lawsuits against banks that packaged mortgages. J.P. Morgan declined to comment on the settlement or any loans in the bonds it bought.

    The FHFA has gotten aggressive in recouping losses from mortgages and securities sold to Fannie and Freddie. In 2011 it sued 18 lenders, and J.P. Morgan was only the fourth to settle.

    To be sure, the New Century deal was among J.P. Morgan's worst performers, and other mortgage-backed securities it issued at the time have held up better. An improving economy and housing market have lifted many mortgage bonds sold in 2006 and 2007.

    But that is of little consolation to Freddie Mac, which bought more than a third of the $910 million New Century bond deal in 2006 and still is sitting on losses.

    The group of loans backing Freddie's chunk of the deal had more high-risk loans than the rest of the pool. Nearly 44% of Freddie's piece had loan-to-value ratios between 80% and 100%, compared with 31% for the rest, according to the deal prospectus.

    What's more, nearly half the loans backing the New Century deal were from California and Florida, two states hit hard by the housing bust. Of the 4,209 loans in the bond, more than half have some experienced distress, according to BlackBox data.

    Three debt-rating firms gave the top slice of the deal AAA ratings. But as the housing market soured, a series of downgrades starting in 2007 took them all into "junk" territory by July 2011. As of last month, nearly a quarter of the principal of the underlying loans in the deal had been wiped out, with a third of the remaining balance delinquent or in some stage of foreclosure, according to BlackBox.

    Continued in article

    From the CFO Journal's Morning Ledger on October 28, 2013

    J.P. Morgan settlement puts government in tight spot
    Will the U.S. government have to refund J.P. Morgan part of the bank’s expected $13 billion payment over soured mortgage securities? The question is the biggest stumbling block to completing the record settlement between the bank and the Justice Department
    , writes the WSJ’s Francesco Guerrera. The crux of the issue is whether the government can go after J.P. Morgan for (alleged) sins committed by others. And investors, bankers and lawyers are watching the process closely, worried that it could set a bad precedent for the relationship between buyers, regulators and creditors in future deals for troubled banks.

    "JPMorgan's $13 Billion Settlement: Jamie Dimon Is a Colossus No More," by Nick Summers, Bloomberg Businessweek, October 24, 2013 ---
    http://www.businessweek.com/articles/2013-10-24/jpmorgans-13-billion-settlement-jamie-dimon-is-a-colossus-no-more

    Thirteen billion dollars requires some perspective. The record amount that JPMorgan Chase (JPM) has tentatively agreed to pay the U.S. Department of Justice, to settle civil investigations into mortgage-backed securities it sold in the runup to the 2008 financial crisis, is equal to the gross domestic product of Namibia. It’s more than the combined salaries of every athlete in every major U.S. professional sport, with enough left over to buy every American a stadium hotdog. More significantly to JPMorgan’s executives and shareholders, $13 billion is equivalent to 61 percent of the bank’s profits in all of 2012. Anticipating the settlement in early October, the bank recorded its first quarterly loss under the leadership of Chief Executive Officer Jamie Dimon.

    That makes it real money, even for the country’s biggest bank by assets. Despite this walloping, there’s reason for the company to exhale. The most valuable thing Dimon, 57, gets out of the deal with U.S. Attorney General Eric Holder is clarity. The discussed agreement folds in settlements with a variety of federal and state regulators, including the Federal Deposit Insurance Corp. and the attorneys general of California and New York. JPMorgan negotiated a similar tack in September, trading the gut punch of a huge headline number—nearly $1 billion in penalties related to the 2012 London Whale trading fiasco—for the chance to resolve four investigations in two countries in one stroke. In both cases, the bank’s stock barely budged; its shares have returned 25 percent this year, exactly in line with the performance of Standard & Poor’s 500-stock index.

    That JPMorgan is able to withstand penalties and regulatory pressure that would cripple many of its competitors attests both to the bank’s vast resources and the influence of the man who leads it. The sight of Dimon arriving at the Justice Department on Sept. 26 for a meeting with the attorney general underscored Dimon’s extraordinary access to Washington decision-makers—although the Wall Street chieftain did have to humble himself by presenting his New York State driver license to a guard on the street. As news of the settlement with Justice trickled out, the admirers on Dimon’s gilded list rushed to his defense, arguing that he struck the best deal he could. “If you’re a financial institution and you’re threatened with criminal prosecution, you have no ability to negotiate,” Berkshire Hathaway (BRK/A) Chairman Warren Buffett told Bloomberg TV. “Basically, you’ve got to be like a wolf that bares its throat, you know, when it gets to the end. You cannot win.”

    The challenges facing Dimon and his company are far from over. With the $13 billion payout, JPMorgan is still the subject of a criminal probe into its mortgage-bond sales, which could end in charges against the bank or its executives. And other federal investigations—into suspected bribery in China, the bank’s role in the Bernie Madoff Ponzi scheme, and more—are ongoing.

    The ceaseless scrutiny has tarnished Dimon’s public image, perhaps irreparably. Once seen as the white knight of the financial crisis, he’s now the executive stuck paying the bill for Wall Street’s misdeeds. And as the bank’s legal fights drag on, it’s worth asking just how many more blows the famously pugnacious Dimon can take.

    Although the $13 billion settlement would amount to the largest of its kind in the history of regulated capitalism, it looks quite different broken into its component pieces. While the relative amounts could shift, JPMorgan is expected to pay fines of only $2 billion to $3 billion for misrepresenting the quality of mortgage securities it sold during the subprime housing boom. Overburdened homeowners would get $4 billion; another $4 billion would go to the Federal Housing Finance Agency, which regulates Freddie Mac (FMCC) and Fannie Mae (FNMA); and about $3 billion would go to investors who lost money on the securities, Bloomberg News reported.

    JPMorgan will only pay fines (as distinct from compensation to investors or homeowner relief) related to its own actions—and not those of Bear Stearns or Washington Mutual, the two troubled institutions the bank bought at discount-rack prices during the crisis. Aside from shaving some unknown amount off the final settlement, this proviso enhances Dimon’s reputation as the shrewdest banker of that era. In 2008, with the backing of the U.S. Department of the Treasury and the Federal Reserve, who saw JPMorgan as a port in a storm, Dimon got the two properties for just $3.4 billion. Extending JPMorgan’s retail reach overnight into Florida and California, Bear and WaMu helped the bank become the largest in the U.S. by 2011. The portions of the settlement attributable to their liabilities are almost certainly outweighed by the profits they’ve brought and will continue to bring.

    Bob Jensen's threads on Subprime: Borne of Greed, Sleaze, Bribery, and Lies ---
    http://www.trinity.edu/rjensen/2008Bailout.htm#Sleaze


    The Worst States for Finding Full-Time Work --- Click Here
    http://247wallst.com/special-report/2014/08/07/states-where-its-hardest-to-find-full-time-work/?utm_source=247WallStDailyNewsletter&utm_medium=email&utm_content=AUG072014A&utm_campaign=DailyNewsletter

    1. Nevada
    2. California
    3. Arizona
    4. Oregon
    5. Rhode Island
    6. Illinois
    7. Michigan
    8. Kentucky
    9. Florida
    10. New Jersey

      Jensen Comment
      The smoking gun in each state is not obvious. Some states are low in opportunities for skilled workers who typically have an easier time finding full-time work. Nevada. The sunshine states typically have more opportunities for restaurant and travel employment notorious for part-time work. California, Illinois, and Rhode Island have immense fiscal problems that spill over into high taxation that discourages business expansion. Obamacare especially  discourages full-time employment in small and medium-sized companies, but this is a problem in all 50 states.

      Mysteries remain. Why aren't Texas, Alabama, Vermont, and Mississippi in the list above? I don't know!

     

    "The Full-Time Scandal of Part-Time America Fewer than half of U.S. adults are working full time. Why? Slow growth and the perverse incentives of ObamaCare," by Mortimer Zuckerman, The Wall Street Journal,  July 13, 2014 ---
    http://online.wsj.com/articles/mortimer-zuckerman-the-full-time-scandal-of-part-time-america-1405291652?tesla=y&mod=djemMER_h&mg=reno64-wsj

    There has been a distinctive odor of hype lately about the national jobs report for June. Most people will have the impression that the 288,000 jobs created last month were full-time. Not so.

    The Obama administration and much of the media trumpeting the figure overlooked that the government numbers didn't distinguish between new part-time and full-time jobs. Full-time jobs last month plunged by 523,000, according to the Bureau of Labor Statistics. What has increased are part-time jobs. They soared by about 800,000 to more than 28 million. Just think of all those Americans working part time, no doubt glad to have the work but also contending with lower pay, diminished benefits and little job security.

    On July 2 President Obama boasted that the jobs report "showed the sixth straight month of job growth" in the private economy. "Make no mistake," he said. "We are headed in the right direction." What he failed to mention is that only 47.7% of adults in the U.S. are working full time. Yes, the percentage of unemployed has fallen, but that's worth barely a Bronx cheer. It reflects the bleak fact that 2.4 million Americans have become discouraged and dropped out of the workforce. You might as well say that the unemployment rate would be zero if everyone quit looking for work.

    Last month involuntary part-timers swelled to 7.5 million, compared with 4.4 million in 2007. Way too many adults now depend on the low-wage, part-time jobs that teenagers would normally fill. Federal Reserve Chair Janet Yellen had it right in March when she said: "The existence of such a large pool of partly unemployed workers is a sign that labor conditions are worse than indicated by the unemployment rate."

    There are a number of reasons for our predicament, most importantly a historically low growth rate for an economic "recovery." Gross domestic product growth in 2013 was a feeble 1.9%, and it fell at a seasonally adjusted annual rate of 2.9% in the first quarter of 2014.

    But there is one clear political contribution to the dismal jobs trend. Many employers cut workers' hours to avoid the Affordable Care Act's mandate to provide health insurance to anyone working 30 hours a week or more. The unintended consequence of President Obama's "signature legislation"? Fewer full-time workers. In many cases two people are working the same number of hours that one had previously worked.

    Since mid-2007 the U.S. population has grown by 17.2 million, according to the Census Bureau, but we have 374,000 fewer jobs since a November 2007 peak and are 10 million jobs shy of where we should be. It is particularly upsetting that our current high unemployment is concentrated in the oldest and youngest workers. Older workers have been phased out as new technologies improve productivity, and young adults who lack skills are struggling to find entry-level jobs with advancement opportunities. In the process, they are losing critical time to develop workplace habits, contacts and new skills.

    Most Americans wouldn't call this an economic recovery. Yes, we're not technically in a recession as the recovery began in mid-2009, but high-wage industries have lost a million positions since 2007. Low-paying jobs are gaining and now account for 44% of all employment growth since employment hit bottom in February 2010, with by far the most growth—3.8 million jobs—in low-wage industries. The number of long-term unemployed remains at historically high levels, standing at more than three million in June. The proportion of Americans in the labor force is at a 36-year low, 62.8%, down from 66% in 2008.

    Part-time jobs are no longer the domain of the young. Many are taken by adults in their prime working years—25 to 54 years of age—and many are single men and women without high-school diplomas. Why is this happening? It can't all be attributed to the unforeseen consequences of the Affordable Care Act. The longer workers have been out of a job, the more likely they are to take a part-time job to make ends meet.

    The result: Faith in the American dream is eroding fast. The feeling is that the rules aren't fair and the system has been rigged in favor of business and against the average person. The share of financial compensation and outputs going to labor has dropped to less than 60% today from about 65% before 1980.

    Why haven't increases in labor productivity translated into higher household income in private employment? In part because of very low rates of capital spending on new plant and equipment over the past five years. In the 1960s, only one in 20 American men between the ages of 25 and 54 was not working. According to former Treasury Secretary Larry Summers, in 10 years that number will be one in seven.

    The lack of breadwinners working full time is a burgeoning disaster. There are 48 million people in the U.S. in low-wage jobs. Those workers won't be able to spend what is necessary in an economy that is mostly based on consumer spending, and this will put further pressure on growth. What we have is a very high unemployment rate, a slow recovery and across-the-board wage stagnation (except for the top few percent). According to the Bureau of Labor Statistics, almost 91 million people over age 16 aren't working, a record high. When Barack Obama became president, that figure was nearly 10 million lower.

    The great American job machine is spluttering. We are going through the weakest post-recession recovery the U.S. has ever experienced, with growth half of what it was after four previous recessions. And that's despite the most expansive monetary policy in history and the largest fiscal stimulus since World War II.

    Continued in article


    "The History of Ed Tech Shows It's Not About the Device," by David Thornberg, T.H.E. Journal, July 24, 2014 ---
    http://thejournal.com/articles/2014/07/24/the-history-of-ed-tech.aspx

    In June 1997, THE Journal published an article called Computers in Education: A Brief History.” That article is still one of the most popular on our website, but — to put it mildly — a lot has changed in ed tech since then. This is less a sequel to that article than a companion piece that dips back into the past, traces the trends of the present and looks to the future, all with an eye toward helping districts find the right device for their classrooms. 

    When thinking about the role of technology in education, the logical starting point is exploring why the connection between computers and education was ever made in the first place. My starting point is Logo, an educational programming language designed in 1967 at Bolt Beranek and Newman (BBN) by Danny Bobrow, Wally Feurzeig, MIT professor Seymour Papert and Cynthia Solomon. This language was a derivative of the AI programming language LISP, and ran on the PDP-1 computers from Digital Equipment Corp. Seymour Papert had studied with constructivist pioneer Jean Piaget, and felt that computers could help students learn more by constructing their own knowledge and understanding by working firsthand with mathematical concepts, as opposed to being taught these concepts in a more directed way.

    In 1973 the Xerox Palo Alto Research Center introduced the Alto computer, designed as the world’s first personal computer. At Xerox, Papert’s push to turn kids into programmers led to the development of Smalltalk — the first extensible, object-oriented programming language — under the direction of Alan Kay. Because these early computers were captive in the research lab, local students were brought in to explore their own designs.

    Another path to educational technology began that same year, when the Minnesota Educational Computing Consortium (MECC) was started in an old warehouse in Minneapolis. Part of the state's educational software push, the original programs were simulations designed for a timeshare system running on a mainframe, with terminals placed in schools. Using this system, students could take a simulated journey along the Oregon Trail, for example, and learn about the importance of budgeting resources and other challenges that faced the early pioneers. Another simulation let the students run a virtual lemonade stand. Years later, the MECC software was rewritten for early personal computers.

    In the early days, educational computing was focused on the development of higher-order thinking skills. Drill-and-practice software only became commonplace much later, with the release of inexpensive personal computers. By the late 1970s, personal computers came to market and started showing up in schools. These included the Commodore PET (1977) and Radio Shack TRS-80 (1977), among many other systems. But the computer that ended up having the greatest impact on schools at the time was the Apple II, also introduced in 1977. One characteristic of the Apple II was that it used floppy disks instead of cassette tapes for storing programs and also supported a graphical display, albeit at a low level. The first generation of computers in schools was not accompanied by very much software, though. The customer base was not yet big enough to justify the investment.

    The Uses of Ed Tech, Past and Present

    In 1980, Robert Taylor wrote a book, The Computer in the School: Tutor, Tool, Tutee. The underlying idea in this book was that students could use computers in three different ways: 1) As a tutor running simulations or math practice, for example; 2) as a tool for tasks like word processing; or 3) as a tutee, meaning the student teaches the computer to do something by writing a program in Logo or BASIC. This model touches on several pedagogical models, spanning from filling the mind with information to kindling the fire of curiosity. Even though technologies have advanced tremendously in the intervening years, this model still has some validity, and some contemporary technologies are better suited for some pedagogies than others.

    Continued in article

    Bob Jensen's threads on education technology ---
    http://thejournal.com/articles/2014/07/24/the-history-of-ed-tech.aspx

    Bob Jensen's threads on the history of computers and networking ---
    http://www.trinity.edu/rjensen/bookbob2.htm#---ComputerNetworking-IncludingInternet

     


    From the CPA Newsletter on August 4, 2014

    House committee passes measure giving disabled tax-free savings accounts
    The House Ways and Means Committee has passed a measure that would allow people with disabilities to hold savings accounts that are tax free. A similar measure is on track to be passed in the Senate. It is widely supported in both chambers. The Hill (7/31)

    Jensen Comment

    Jensen Comment and Question
    This is currently a sick joke because under long-standing low-interest policies of the Fed savings accounts pay virtually nothing to be taxed.

    Also I wonder what proportion of the disabled people are among the 48% of USA taxpayers who pay zero income taxes?

    The bill to make savings accounts for the disabled appears to me to be a political stunt rather than one of economic caring.

    This bill also complicates taxation on joint returns where the income of the disabled spouse in general is a very small proportion of the taxable income of the bread-winning spouse. What if the a huge proportion a couple's $10 million in savings is transferred to the savings accounts of the disabled spouse? Will these savings then be tax free if the couple files separate returns?

    I don't know if the bill places a limit on the amount of savings income that can be tax exempt.


    "When Pornography Pays for College:  The trouble with Belle Knox," by Rachel Shteir, Chronicle of Higher Education, August 4, 2014 ---
    http://chronicle.com/article/When-Pornography-Pays-for/147987/?cid=cr&utm_source=cr&utm_medium=en

    Jensen Comment
    Rachel Shteir suggests that the sex trade would be less of a problem if prestigious universities were cheaper for poor and middle-class families. Possibly for some young women and men in the sex trades this is true, but for those like Belle Knox, who turn pornography or prostitution into big money. A college diploma becomes an insurance policy against poverty or serves as an ego-satisfying accomplishment for Belle Knox.

    It seems to me that how students finance their higher education should not be a major concern. Most students engaged in the sex trades are not media stars like Belle Knox and/or are not prostitutes bringing their johns to campus.

    One issue is when students commit crimes to finance their educations. Pornography is not necessarily a crime like prostitution, bank robbery, and drug dealing. Students should probably be expelled for crimes that would get college employees fired. For example, a faculty member who is convicted prostitution or bank robbery would probably get fired from virtually any USA college, although this may not be the case for re-hiring after the sentence is served. To my knowledge Belle Knox, however, is not being expelled from Duke University.


    "The SEC as Prosecutor and Judge The agency is dodging the courts by turning to its own administrative law judges to decide its cases," by Russell G. Ryan, The Wall Street Journal, August 4, 2014 ---
    http://online.wsj.com/articles/russell-g-ryan-the-sec-as-prosecutor-and-judge-1407195362?tesla=y&mod=djemBestOfTheWeb_h&mg=reno64-wsj

    A year after vowing to take more of its law-enforcement cases to trial, Securities and Exchange Commission officials now say the agency will increasingly bypass courts and juries by prosecuting wrongdoers in hearings before SEC administrative law judges, also known as ALJs. "I think you'll see that more and more in the future," SEC Enforcement Director Andrew Ceresney told a June gathering of Washington lawyers, adding that insider trading cases were especially likely to go before administrative judges.

    The 2010 Dodd-Frank law vastly expanded SEC discretion to charge wrongdoers administratively, and this summer the agency increased the number of administrative law judges on staff to five from three in anticipation of an increased workload. This follows a recent string of SEC jury-trial losses in federal courts, though agency officials insist the timing is coincidental.

    Coincidence or not, a surge in administrative prosecutions should alarm anyone who values jury trials, due process and the constitutional separation of powers. The SEC often prefers to avoid judicial oversight and exploit the convenience of punishing alleged lawbreakers by administrative means, but doing so is unconstitutional. And if courts allow the SEC to get away with it, other executive-branch agencies are sure to follow.

    To begin with the obvious, executive-branch agencies like the SEC are not courts established under Article III of the Constitution. These agencies exercise legislative power through rule-making and executive power through prosecution, but the Constitution gives them no judicial power to decide cases and controversies—especially not the very cases they are prosecuting. Executive agencies usurp that judicial power when they shunt penal law-enforcement prosecutions into their own captive administrative hearings.

    Nearly 70 years ago, the Administrative Procedures Act established today's system of quasi-judicial tribunals overseen by administrative law judges. But these tribunals are not courts, and the administrative law judges are not life-tenured judicial officers appointed under Article III of the Constitution. They are executive-branch employees who conduct hearings at the direction of agency leaders following procedural rules dictated by the agencies themselves.

    The SEC's rules favor the prosecution. The rules give the accused only a few months to prepare a defense—after SEC prosecutors have typically spent years building the case—and they give administrative law judges only a few months after the hearing to evaluate the mountains of evidence presented and write detailed decisions that typically run several dozens of single-spaced pages. The rules also allow SEC prosecutors to use hearsay and other unreliable evidence, and they severely limit the kinds of pretrial discovery and defense motions that are routinely allowed in courts.

    Administrative hearings also do not have juries, even when severe financial penalties and forfeitures are demanded. And because these hearings are nominally civil rather than criminal, guilt is determined by a mere preponderance of the evidence—the lightest evidentiary burden known to modern law—rather than beyond reasonable doubt. In short, while administrative prosecutions create the illusion of a fair trial, and while administrative law judges generally strive to appear impartial, these proceedings afford defendants woefully inadequate due process.

    More important, the proceedings violate the Constitution's separation of powers. Every phase of the proceeding, and every government official involved, is controlled by the agency in its role as chief prosecutor. The SEC assigns and directs a team of employees to prosecute the case. It assigns another employee, the administrative law judge, to decide guilt or innocence and to impose sanctions. Appeals must be taken to the same SEC commissioners who launched the prosecution, and their decision is typically written by still other SEC employees.

    The entire process ordinarily takes years, during which many SEC targets are bankrupted by legal costs and their inability to find work with reputable companies. Only after SEC commissioners decide all appeals can the accused finally seek relief from a federal court. But appeals rarely succeed because the law requires courts to defer to the agency's judgment, especially on disputed facts.

    The SEC used to employ administrative proceedings for relatively uncontroversial purposes such as preventing suspicious stock offerings, suspending rogue brokers or consummating settlements where no court involvement was necessary. But through a series of laws beginning in the 1980s and continuing through Dodd-Frank, the SEC has been transformed from a conventional regulator into a penal law-enforcement prosecutor with enormous power to punish private citizens and businesses. In 2013 the agency obtained a record $3.4 billion in monetary sanctions, and it now routinely seeks million-dollar sanctions against accused wrongdoers.

    On its website, the SEC accurately describes itself as "first and foremost" a law-enforcement agency. As such, the agency should play no role in deciding guilt and meting out punishment against the people it prosecutes. Those roles should be reserved for juries and life-tenured judges appointed under Article III of the Constitution. Today's model of penal SEC law enforcement is categorically unsuited for rushed and truncated administrative hearings in which the agency and its own employees serve as prosecutor, judge and punisher. Such administrative prosecution has no place in a constitutional system based on checks and balances, separation of powers and due process.

    Mr. Ryan, a former assistant director of enforcement at the SEC, is a partner with King & Spalding LLP, and his clients include companies and individuals involved in SEC law-enforcement proceedings.

     


    "Auditor Mindsets and Audits of Complex Estimates," by Emily E. Griffith, Jacqueline S. Hammersley, Kathryn Kadous, and Donald Young, SSRN, July 30, 2014 ---
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2474365

    Abstract:     
     
    Auditors experience significant problems auditing complex accounting estimates, and this increasingly puts financial reporting quality at risk. Based on analyses of the specific errors that auditors commit, we propose that auditors need to be able to think more broadly and incorporate information from a variety of sources in order to improve audit quality for these important accounts. We experimentally demonstrate that a deliberative mindset intervention improves auditors’ ability to identify unreasonable estimates by improving their ability to identify and incorporate into their analyses contradictory information from other parts of the audit. We perform additional analyses to demonstrate that our intervention improves auditor performance by causing them to think differently rather than simply to work harder. We demonstrate that thinking more broadly can improve the identification of unreasonable estimates and, in doing so, we provide new directions for addressing audit quality issues.

    Balanced Scorecard --- http://en.wikipedia.org/wiki/Balanced_scorecard

    "The Balanced Scorecard in Norway: A Study of the Concept's Evolution Pattern from 1992 to 2011)", by Dag Řivind Madsen, SSRN,  November 15, 2012 and Revised July 11, 2014 ---
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2450699

    English Abstract:
    The Balanced Scorecard is one of the most well-known concepts in the field of management accounting and control. Since its introduction in 1992, the Balanced Scorecard has been the subject of much attention in academic research and in practice. The concept has diffused to many countries and regions, including Norway, where the concept is often referred to as "balansert mĺlstyring". This article presents a case study of the concept's evolution pattern in the Norwegian context. The study shows that the Balanced Scorecard concept was very popular around the turn of the century, but also that the concept's popularity has not fallen as much as would be predicted by management fashion theory. Instead, the data show that the concept has become "good practice" in Norway. It can therefore be argued that the concept has become institutionalized, and that it has become an "enduring fashion". Towards the end of the paper these results are discussed in relation to extant research on Balanced Scorecard and theories of management fashions.

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


    "Shoppers Are Fleeing Physical Stores Shift to Online Sales Is Prompting Retailers to Scale Back More Store Openings," by Shelly Banjo and Paul Ziobro, The Wall Street Journal, August 5, 2014 ---
    http://online.wsj.com/articles/shoppers-are-fleeing-physical-stores-1407281362?tesla=y&mod=djemCFO_h&mg=reno64-wsj

    U.S. retailers are facing a steep and persistent drop in store traffic, which is weighing on sales and prompting chains to slow store openings as shoppers make more of their purchases online.

    Aside from a small uptick in April, shopper visits have fallen by 5% or more from a year earlier in every month for the past two years, according to ShopperTrak, a Chicago-based data firm that records store visits for retailers using tracking devices installed at 40,000 U.S. outlets. Even as warmer temperatures replace the harsh winter weather this year, store visits fell by nearly 7% in June and nearly 5% in July, according to ShopperTrak.

    New data from Moody's Investors Service shows that the shift to online sales has prompted retailers to scale back store openings and will likely lead them to pare back their fleets even more in coming years, as more than $70 billion in lease debt expires by 2018. Growth in store counts at the 100 largest retailers by revenue has slowed to less than 3% from more than 12% three years ago, according to Moody's.

    The pressure comes as consumer tastes are changing. Instead of wandering through stores and making impulse purchases, shoppers use their mobile phones and computers to research prices and cherry-pick promotions, sticking to shopping lists rather than splurging on unneeded items. Even discount retailers are finding it harder to boost sales by lowering prices as many low-income consumers struggle to afford the basics regardless of the price.

    Continued article

    Jensen Comment
    Here in the boondocks we buy many of our grocery items and virtually all of our clothing online. We love Amazon Prime and Amazon's very efficient and free return service.

    I don't buy bigger items online that are more likely to need service. For this I love the Sears local-store for things like lawn mowers, leaf blowers, lawn sweepers, power trimmers, snow throwers, chain saws, refrigerators, freezers, etc. I especially like Sears home service warranties on heavy items like snow throwers, lawn sweepers, dehumidifiers (for the basement), and air conditioners. A Sears home service warranty includes one free annual at-home maintenance and cleaning service for things like filters on air conditioners, freezers, and refrigerators. Years ago I grew tired of over-stuffed refrigerators. Even though there are only two of us in the cottage, in the basement we have two extra large refrigerators plus an upright freezer. Since Erika is troubled by stairs we also have an elevator that I recommend highly for multi-story homes. Retirement is not all that bad.

    Question
    What is the most useful thing that I now use that I never owned before retirement?

    Answer
    The bucket loader on my tractor. Back surgeons must hate bucket loaders. An 80lb bag of top soil is now a piece of cake as long as the store workers load it into the back of my jeep. At home I simply roll heavy things into the bucket loader. How did I ever manage in my previous life without a bucket loader?


    "Lawmaker Accused of Plagiarizing Thesis Drops Out of Senate Race," Andy Thomason, Chronicle of Higher Education, August 7, 2014 ---
    http://chronicle.com/blogs/ticker/jp/lawmaker-accused-of-plagiarizing-thesis-drops-out-of-senate-race?cid=at&utm_source=at&utm_medium=en

    "Senator’s Thesis Turns Out to Be Remix of Others’ Works, Uncited John Walsh, Democrat, Confronts Questions of Plagiarism," by Jonathan Martin, The New York Times, July 23, 2014 ---
    http://www.nytimes.com/2014/07/24/us/politics/montana-senator-john-walsh-plagiarized-thesis.html

    Jensen Comment
    When plagiarism is detected, professors and celebrities seem to me to be the least likely to lose their jobs or pay a heavy price. Punishments vary, but they seldom are expelled. Doctoral students may pay a heavy price by having theses rejected and a scarlet letter in the job market.

    Is Arizona State University soft on plagiarism, or is this the trend for most universities in the USA
    "New Book, New Allegations," by Colleen Flaherty, Inside Higher Ed, May 13, 2014 ---
    http://www.insidehighered.com/news/2014/05/13/arizona-state-professor-accused-plagiarism-second-time#sthash.OmcGllGb.dpbs 

    An investigation into plagiarism allegations against an Arizona State University professor of history in 2011 found him not guilty of deliberate academic misconduct, but the case remained controversial. The chair of his department’s tenure committee resigned in protest and other faculty members spoke out against the findings, saying their colleague – who recently had been promoted to full professor – was cleared even though what he did likely would have gotten an undergraduate in trouble.

    Now, Matthew C. Whitaker has written a new book, and allegations of plagiarism are being levied against him once again. Several blogs – one anonymously, and in great detail – have documented alleged examples of plagiarism in the work. Several of his colleagues have seen them, and say they raise serious questions about Whitaker’s academic integrity.

    Continued in article

    Celebrities often do not care very much when their plagiarism is detected, especially if they've already achieved celebrity status. Vladimir Putin not only did not write a single word in his Ph.D. thesis, it's not clear that he ever read a single word in his Ph.D. thesis --- http://www.trinity.edu/rjensen/Plagiarism.htm#Celebrities 
    I think he could care less that the world knows he cheated for his doctorate (which is not all that uncommon in Russia).

    Martin Luther King did not seem troubled that it was discovered that he plagiarized in his doctoral thesis ---
    http://www.trinity.edu/rjensen/Plagiarism.htm#Celebrities

    Jane Goodall apologizes for lifting passages from Wikipedia for her new book," by Elizabeth Foster, National Post, March 20, 2013 ---
    http://arts.nationalpost.com/2013/03/20/jane-goodall-apologizes-for-failing-to-cite-passages-from-wikipedia-and-elsewhere-in-her-new-book/
    The world does not seem to care about her plagiarism.

    Renewed Accusations of Plagiarism by Arianna Huffington
    "Blast from the Past," by Colleen Flaherty, Inside Higher Ed, October 14, 2013 ---
    http://www.insidehighered.com/news/2013/10/14/petition-calls-uva-block-arianna-huffington-campus-appearance

    Arianna Huffington is set to appear at the University of Virginia this week to meditate on its famed “lawn” with spiritualist Deepak Chopra. But a petition started by a former graduate student there calls for Huffington’s invitation to be rescinded, citing allegations that she once plagiarized a revered professor’s work.

    Continued in article

    "The Case of the Progressive Plagiarist," by Alexander Nazaryan, Newsweek, June 13, 2014 ---
    http://www.newsweek.com/case-progressive-plagiarist-254746

    In a lengthy article that was obviously thoroughly researched and was, just as obviously, a long time in the making, New Republic contributor Christopher Ketcham convincingly argues that the firebrand left-wing journalist Chris Hedges has routinely plagiarized in his work, liberally borrowing from the likes of Ernest Hemingway and Naomi Klein, not to mention Ketcham’s wife.

    Continued in article

    "MIT Tops List of College Copyright Violators," by Erica R. Hendry, Chronicle of Higher Education, June 17, 2009 ---
    http://chronicle.com/wiredcampus/article/3833/mit-tops-list-of-college-copyright-violators

    The Massachusetts Institute of Technology had the most instances of digital piracy and other copyright infringements among American colleges and universities in 2008 for the second year in a row, according to a report released by Bay-TSP, a California company that offers tracking applications for copyrighted works.

    Continued in article

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

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


    "The Battle Against Misdiagnosis American doctors make the wrong call more than 12 million times a year," by Hardeep Singh, The Wall Street Journal, August 7, 2014 ---
    http://online.wsj.com/articles/hardeep-singh-the-battle-against-misdiagnosis-1407453373?tesla=y&mod=djemMER_h&mg=reno64-wsj

    There are times when a single, unexpected death sparks a change in medical practice. In 2012 a 12-year-old boy named Rory Staunton died after being misdiagnosed in a New York City emergency room. Multiple physicians missed the symptoms, signs and lab results pointing to a streptococcal bacterial infection that led to septic shock and overwhelmed Rory's body. The tragedy prompted New York state in January 2013 to introduce "Rory's regulations," a set of stringent protocols aimed at preventing similar incidents in hospitals.

    Comparable initiatives to prevent misdiagnosis have not happened on a national level—but there might be reason to expect change soon.

    New research my colleagues and I published in April in the journal BMJ Quality and Safety shows the extent of the problem. Based on previous studies of patients seeking outpatient care, we extrapolated data on diagnostic error to the entire U.S. adult population. Each year an estimated 5% are misdiagnosed based on currently available evidence.

    This may sound like a decent track record—95% accuracy—given that doctors are grappling with more than 10,000 diseases in patients who present a staggering array of symptoms. But a 5% error rate means that more than 12 million adults are misdiagnosed every year, and our study may understate the magnitude.

    Still, after years of taking a back seat to problems such as medication and treatment errors, misdiagnosis is getting attention. In 2011 my research colleague in projects on misdiagnosis Mark Graber founded the nonprofit Society to Improve Diagnosis in Medicine, which now holds an annual medical conference on diagnostic error. More recently, the Institute of Medicine, an influential branch of the National Academy of Sciences that advises Congress on health care, is preparing a comprehensive action plan and hosting its second major expert meeting on Thursday and Friday. In 2015 the IOM will issue a report on misdiagnosis.

    Meantime, the U.S. health-care community can take steps to reduce the problem.

    The first is to improve communication between physicians and patients. Patients tend to be the best source of information for making a diagnosis, but often essential doctor-patient interactions such as history and examination are rushed, leading to poor decisions. As new forms of diagnostic and information technologies are implemented, managing large amounts of data will become increasingly complex, and physicians could become more vulnerable to misdiagnosis.

    This problem exists in large part because time pressures and paperwork often force physicians to spend more time struggling to get reimbursed than talking with patients. Extra hours spent pursuing a correct diagnosis are not compensated beyond the payment for the visit, an already small sum for primary-care physicians.

    Patients can't solve this problem, but insurers can streamline administrative paperwork and re-examine the logic behind reimbursement policies. Hospital systems can help by providing high-tech decision support tools and encouraging physicians to collaborate on tough cases and learn from missed opportunities.

    Metrics also need work. As the old business adage goes, you can't manage what you don't measure. Yet most health-care organizations aren't tracking misdiagnosis beyond malpractice claims. Doctors need mechanisms to provide and receive timely feedback on the quality and accuracy of our diagnoses, including better patient follow-up and test-result tracking systems.

    Electronic health records will help eventually, but slow innovation in this area has frustrated many physicians. And most doctors still lack access to electronic patient data gathered by other physicians. Doctors can make a more informed diagnosis when they can see the disease progression or learn what other doctors have discovered about the patient.

    Finally, patients must start keeping good records of each meeting with a doctor, bringing the information to subsequent medical appointments and following up with the physician if their condition doesn't improve. No news from the doctor is not necessarily good news.

    There is much we don't understand about the burden, causes and prevention of misdiagnosis. The IOM report will spur progress, but health-care providers, patients, hospitals and payers can all help. The health outcomes of at least 12 million Americans each year depend on it.

    Dr. Singh is chief of Health Policy, Quality and Informatics at the Michael E. DeBakey VA Medical Center, and an associate professor at Baylor College of Medicine.

    Jensen Comment
    For me this raises the question of why so many mistakes are made by professionals. For auditors and physicians the reason may be budgeted time and money.

    Auditors are often led by budgets to conduct cheaper analytical reviews as opposed to detail testing. Physicians are sometimes led by third party insurance payment bounds (e.g., what Medicare) will pay for an office visit) to hurry their time spent with patients. 

    There's an exploding trend to have patients screened by non-physicians in HMO factories and even in physician offices where physician assistants do much of the initial screening.

    In CPA auditing by big firms it's systemic to send out teams of neophyte auditors, many of them newly graduated, to do a lot of the audit work under supervision that is sometimes questionable.

    After PwC's Miserable 2012 PCAOB Inspection Reports
    "PwC to Require More Robust Review and Supervision of Auditors, Although “Minimum Supervision" Still Has Its Place (in Court)," by Caleb Newquist, Going Concern, December 7, 2012 ---
    http://goingconcern.com/post/pwc-require-more-robust-review-and-supervision-auditors-although-minimum-supervision-still-has

    "PCAOB ISSUES RELEASE ON FAILURE TO SUPERVISE," by Andy Lymer, Accounting Education News ---
    http://www.accountingeducation.com/index.cfm?page=newsdetails&id=151186

    The US Public Company Accounting Oversight Board has issued a Release discussing the provision of the Sarbanes-Oxley Act of 2002 that authorizes the PCAOB to impose sanctions on registered public accounting firms and their supervisory personnel for failing to reasonably supervise associated persons.

    “Through its inspections and investigations, the PCAOB has observed that supervision processes within firms are frequently not as robust as they should be, and that supervisory responsibilities are often not as clearly assigned as they should be," said PCAOB Acting Chairman Daniel L. Goelzer. "This Release seeks to highlight the Board’s views on the scope for using the authority provided in the Act to address those problems."

    The PCAOB issued a two-part Release addressing matters related to the application of Section 105(c)(6) of the Sarbanes-Oxley Act, which authorizes the PCAOB to sanction registered firms and their supervisory personnel for failing to reasonably supervise associated persons who violate certain laws, rules, or standards.

    Part I of the Release serves to highlight the scope of the application of Section 105(c)(6) for the information of registered firms, their associated persons, and the public generally. Part I is not a rule or rule proposal, and the PCAOB is not seeking comment on Part I.

    Part II of the Release discusses concepts relating to possible rulemaking or standard setting that, without imposing any new supervision responsibilities, would require firms to make and document clear assignments of the supervision responsibilities that are already required to be part of any audit practice.

    The PCAOB is considering whether such rules would further the public interest and protect investors by increasing clarity about who, within a firm, is accountable for various responsibilities that bear on the quality of a firm’s audits.

    The PCAOB is soliciting public comment on the concepts discussed in Part II. The comment period is open until Nov 3, 2010.

    Related Items

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    EFFECTIVE DATE OF PCAOB RULES REQUIRING REPORTING BY REGISTERED FIRMS REVISED TO DEC 31 2009
    Auditing the auditors: Evidence on the recent reforms to the external monitoring of audit firms
    How should the auditors be audited? Comparing the PCAOB Inspections with the AICPA Peer Reviews
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    Punishing Audit Firms for Negligence:  Take that feather duster swat!
    "Paper Tiger Becomes "Tony the Tiger:" They're Grrrreat!" by Anthony H. Catanach, Jr., Grumpy Old Accountants Blog, November 26, 2013 ---
    http://grumpyoldaccountants.com/blog/2013/11/26/paper-tiger-becomes-tony-the-tiger-theyre-grrrreat

    . . .

    Finally, on Friday November 22nd, the PCAOB again publicly reprimanded Deloitte for its failure to adequately address quality control problems related to its audit practice by releasing the previously nonpublic portions of the PCAOB’s April 16, 2009 inspection report.  And as usual, we see that this audit “emperor has no clothes.”  Is an audit being done in name only?  The PCAOB raised the following serious audit quality concerns in its report (PCAOB Release No. 104-2009-051A):

    • Did Deloitte perform appropriate procedures to audit significant estimates, including evaluating the reasonableness of management's assumptions and testing the data supporting the estimates (page 10).
    • How appropriate was Deloitte's approach in using the work of specialists and data provided by service organizations when auditing significant management estimates (page 11). Specifically, the PCAOB raised questions about Deloitte’s testing of controls and data, audit documentation, etc.
    • Did Deloitte fail to obtain sufficient competent evidential matter, at the time it issued its audit report, to support its audit opinions, specifically as it related to the exercise of due care, professional skepticism, supervision and review (page 12).

    What’s really depressing about the these audit quality problems, is that they were almost exactly the same as those noted in the PCAOB’s May 19, 2008 report (pages 12 through 16).  Also, problematic is the waning interest of the popular press in these PCAOB report releases, suggesting that GAFS’ strategy to downplay and even ignore the PCAOB just may be working.


    "'Trapped Cash' Begs for More Transparency," by Anthony H. Catanach, Jr., Grumpy Old Accountants Blog, August 29, 2014 ---
    http://grumpyoldaccountants.com/blog/2014/8/29/trapped-cash-begs-for-more-transparency 

    We’ve all heard the expression that “cash is king.” This well-worn phrase often is used when assessing the financial health or investment prospects of a firm.  Those of you that have followed the Grumpies for a while, may recall a past rant on how companies increasingly “manage” reported cash balances and cash flows (see What’s Up With Cash Balances?).  In that diatribe, we described the games that global financial managers now play with cash to overstate performance, as well as the competence decline in entry-level accountants in the auditing and reporting of cash. Unfortunately, things have not improved during the past three years from either an academic OR a real world perspective.

    First, the bad news from the classroom front.  A month ago, I surveyed my summer graduate students (Master of Accounting candidates) on their undergraduate accounting/auditing education in the area of cash.  These students, most of whom attended well-regarded bachelor degree programs, almost unanimously reported that their accounting instructors devoted little or no time to cash or related controls (e.g., bank reconciliations, etc.), and none had even heard of a proof of cashWhen it came to cash disclosures, the results were equally troubling.  None had ever been exposed to cash policy disclosures or the notion of restricted cash balances.  Obviously, cash is NOT king to some of my ivory tower accounting colleagues…

    Surely, it can’t be this bad in the real world, right? WRONG!  The recent fascination with corporate inversions, transactions in which U.S. companies make overseas acquisitions to reduce their tax burden on income earned abroad, has drawn this grumpy old accountant’s attention to yet another potentially misleading disclosure…this time one associated with “trapped cash.”  Trapped cash generally refers to corporate cash balances held in wholly-owned foreign subsidiaries.

    The Bigger Sin: “Trapped Cash” or Non-Payment of Taxes?

    So what’s the problem? To avoid U.S. taxation of foreign income earned abroad, companies commonly assert that they have no intention of returning the “trapped cash” associated with foreign earnings to the United States.  Here are a couple of examples from three well-known tax minimizers:

    “The Company intends to reinvest these earnings indefinitely in its foreign subsidiearies.”
    — Cisco 2013 10-K
    “However, our intent is to permanently reinvest these funds outside the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.”
    — Google 2013 10-K
    “As of June 30, 2013, we have not provided deferred U.S. income taxes or foreign witholding taxes on temporary differences of approximately $76.4 billion resulting from earnings for certain non-U.S. subsidiaries which are permanently reinvested outside the U.S.”
    — Microsoft 2013 10-K

    My beef is not with their obvious and well-publicized tax avoidance practices, but rather that they report “trapped cash” balances as unrestricted cash in their consolidated balance sheets.  Clearly, such cash balances are not available for general corporate use as intimated by Google above, therefore the use of these liquid assets is restricted to the jurisdiction where the cash resides.  Consequently, restrictions on “trapped cash” and related assets should be reported in the financial statements, and 10Q and 10K disclosures expanded to enhance reporting transparency. 

    Continued in article


    XBRL News
    "FASB’s proposed 2015 GAAP taxonomy available for comment," by Ken Tysiac, Journal of Accountancy, August 29, 2014 ---
    http://www.journalofaccountancy.com/News/201410855.htm
    To access the proposed taxonomy go to (requires login permission and password)
    http://www.fasb.org/jsp/FASB/Page/LandingPage&cid=1176164131053
    Note the FAQs link

    Bob Jensen's XBRL and OLAP threads ---
    http://www.trinity.edu/rjensen/XBRLandOLAP.htm


    The Mystery is Why Bank of America Does not Appeal It's New $17 Billion Fine All the Way to the Supreme Court
    Why isn't former Treasury Secretary Hank Paulson being punished?
    These Countrywide Financial mortgage lending crimes were committed before Paulson foreced BofA to buy out Countrywide Financial.

    After the subprime collapse then BofA CEO, Ken Lewis, most certainly did not want to use BofA money to stop the free fall of Merrill Lynch and Countrywide Financial. However, U.S. Treasury Secretary Hank Paulson resorted to personal blackmail according to Ken Lewis.
    "Bank Chief Tells of U.S. Pressure to Buy Merrill Lynch," by Louise Story and Jo Becker, The New York Times, June 11. 2009 ---
    http://www.nytimes.com/2009/06/12/business/12bank.html

    "No Good Rescue Goes Unpunished:  Bank of America keeps paying for doing the feds two bailout favors," The Wall Street Journal, August 1, 2014 ---
    http://online.wsj.com/articles/no-good-rescue-goes-unpunished-1407454672?tesla=y&mod=djemMER_h&mg=reno64-wsj

    If you thought the last financial crisis was expensive, wait until taxpayers see how much it costs to rescue banks when they have to do it all on their own. The U.S. Department of Justice aims to extract as much as $17 billion from Bank of America BAC +0.26% for the crime of taking problems off Washington's hands in 2008.

    Regulators were high-fiving when the bank bought Countrywide Financial and then Merrill Lynch during the crisis. But now Washington seems intent on making bank shareholders pay again for the problems that caused these firms to need a rescue in the first place. Come the next crisis, CEOs will know to run in the other direction when the government offers a deal on a failing firm. And when private capital flees, guess whose money will be used to prop up the banking system.

    In some earlier post-crisis settlements, the feds at least pretended that the cases were about making mortgage investors or borrowers whole. But the pending Bank of America settlement appears to consist largely of a penalty for alleged mortgage sins committed by the two failing companies the feds wanted the bank to buy, and in one case pressured it to buy.

    The new game at Justice seems to be to come up with a big dollar figure to be paid by bank shareholders—big enough to persuade progressives that the department is being tough on Wall Street—and then fill in the blanks on the alleged legal violations. So we can't say for sure what the final deal will claim the bank did. But BofA must be taking the fall for Countrywide and Merrill Lynch because the bank itself originated only 4% of the bad mortgage paper for which it is now responsible.

    The bank has already shovelled out roughly $60 billion in mortgage settlements to various public and private parties, far more than any other bank. Now the feds are coming back to further punish Bank of America for its foolish acquisitions. But at the time the bank made these deals, the regulators were celebrating.

    In 2008 Federal Reserve officials were concerned about their exposure to Countrywide. As BofA prepared for an early July closing on its purchase of Countrywide, New York Fed banking supervisor Arthur Angulo told the Federal Open Market Committee that Countrywide's use of one Fed lending facility "should come to a close next week, knock on wood."

    In his recent memoir, former New York Fed President and Treasury Secretary Timothy Geithner, who thought Countrywide was a systemic threat, wrote that Bank of America's investment "eased fears of a collapse."

    When the bank agreed to buy Merrill a few months later, regulators were once again gratified. St. Louis Fed President James Bullard said at a September 16 meeting of the Federal Open Market Committee that the Merrill deal had removed one of the "large uncertainties looming over the economy." Regulators were so pleased that when BofA CEO Ken Lewis later expressed a desire to back out of the deal, then-Treasury Secretary Hank Paulson threatened to fire him and gave the bank another $20 billion in TARP rescue money to absorb Merrill.

    Bank of America finished repaying its $45 billion in TARP loans in 2009. But we wonder if its shareholders will ever stop paying Washington for the deals Washington wanted—and even demanded—during the crisis.

    Bob Jensen's threads on the bailout scandals ---
    http://www.trinity.edu/rjensen/2008Bailout.htm


    Question
    In accounting, what is the difference between "cooking the books" and "misrepresenting the books?

    Teaching Case
    From The Wall Street Journal Weekly Accounting Review on August 8, 2014

    SEC Charges QSGI Executives of Misrepresenting Books
    by: Maria Arnental
    Jul 30, 2014
    Click here to view the full article on WSJ.com
     

    TOPICS: Fraud, Internal Controls, Misrepresentation

    SUMMARY: Top executives of Florida computer-equipment company QSGI Inc. have been charged with misrepresenting the company's books to increase the amount of money they could borrow. The authorities allege that co-founders Messrs. Sherman and Cummings misled the company's external auditors and had poor internal controls. The deficiencies continued until the company filed for bankruptcy in July 2009.

    CLASSROOM APPLICATION: This article is good to use for coverage of both internal controls and also misrepresentation. The case is a good illustration of the implications of having weak internal controls that lead to intentional or unintentional misstatements in the financial statements.

    QUESTIONS: 
    1. (Introductory) What are the facts of the case in the article? What agency was involved? Why was it involved in the case?

    2. (Advanced) What were the inventory control problems detailed in the article? Do those problems seem to be a result of negligence or intentional actions? Why? What responsibilities do CEOs and CFOs have to insure that financial records properly record the situation in the company?

    3. (Advanced) What sanctions did Mr. Cummings agree to accept? Do these seem appropriate sanctions for his actions?

    4. (Advanced) The article states that Mr. Cummings did not admit or deny wrongdoing. Why would the SEC not require an admission of wrongdoing? Why did he agree to sanctions if the SEC did not prove he participated in wrongdoing?
     

    Reviewed By: Linda Christiansen, Indiana University Southeast

    "SEC Charges QSGI Executives of Misrepresenting Books," by Maria Arnental, The Wall Street Journal, July 30, 2014 ---
    http://online.wsj.com/articles/sec-charges-florida-computer-company-executives-1406751620?mod=djem_jiewr_AC_domainid

    Top executives of Florida computer-equipment company QSGI Inc. QSGI -42.50% have been charged with misrepresenting the company's books to increase the amount of money they could borrow, the Securities and Exchange Commission said Wednesday.

    QSGI Inc.'s Co-Founder and former Chief Financial Officer Edward L. Cummings has agreed to pay a $23,000 a penalty to settle the charges, the agency said. Under the terms of the settlement, Mr. Cummings, who didn't admit or deny wrongdoing, agreed to a five-year ban from practicing as an accountant of any entity regulated by the SEC and from serving as an officer or director of a publicly traded company, the agency said.

    The case against Co-Founder and Chief Executive Marc Sherman is pending. Mr. Sherman is to file an answer within 20 days, according to the SEC.

    Attempts to reach Mr. Sherman and the company for comment were unsuccessful.

    The authorities charge Messrs. Sherman and Cummings misled the company's external auditors, withholding, for example, that inventory controls at the company's Minnesota operations were inadequate.

    The authorities charge the West Palm Beach, Fla., company failed to design inventory-control procedures that took into account such things as employees' qualifications and experience levels. Sales and warehouse employees often failed to document the removal of items from inventories and when they did, accounting personnel often failed to process the paperwork and adjust inventory in the company's financial reporting system, the SEC said.

    The inventory control problems emerged at the Minnesota facility beginning in 2007, when key personnel left, according to the SEC. Workers assigned to replace the accounting staff, however, lacked the necessary accounting background, the authorities said, adding, training either didn't take place or was inadequate, the SEC says.

    The deficiencies continued until the company filed for bankruptcy in July 2009, the SEC added.

    Also, the authorities alleged, Mr. Sherman directed Mr. Cummings to accelerate the recognition of certain inventory and accounts receivables by as much as a week at a time, improperly increasing revenue, to maximize how much money the company could borrow from its chief creditor.

     

    Bob Jensen's threads on "Cooking the Books" ---
    http://www.trinity.edu/rjensen/Theory02.htm#Manipulation

     


    Billionaire Richard Kinder --- http://en.wikipedia.org/wiki/Richard_Kinder

    Jensen Comment
    Rich Kinder was the President and Chief Operating Officer of Enron from 1990-1996. He resigned from Enron several years before the Enron scandals broke. To my knowledge he was never implicated in those scandals.

    A going away party given for him by his Enron colleagues in 1996 is quite hilarious. Among other things it features Ken Lay, Jeff Skilling, and then Texas Governor George W. Bush.
    Watch the Video, especially the part where Jeff Skilling proposes Hypothetical Future Value (HPV) accouinting ---
    http://www.trinity.edu/rjensen/FraudEnron.htm#HFV
    Be patient. This uncompressed video is very slow to load. Note that close friends are playing the parts of key players in the video like Jeff Skilling and Rich Kinder (played by a woman named Peggy in this home video). Governor Bush plays his own part.

    Teaching Case
    From The Wall Street Journal Weekly Accounting Review on August 22, 2014

    Tax Savings to Await Kinder Morgan Deals
    by: Alison Sider
    Aug 14, 2014
    Click here to view the full article on WSJ.com
     

    TOPICS: Tax Strategy, Taxation, Consolidation, Master Limited Partnerships, Partnerships, Tax Planning

    SUMMARY: Kinder Morgan may be giving up the tax-advantaged partnerships that it popularized, but the pipeline giant is unlikely to pay more taxes itself soon. In fact, projected tax savings are a big part of what is fueling the $44 billion deal to consolidate Kinder's four entities into one. The Houston-based company says the deal will generate about $20 billion in income-tax savings for it in the next 14 years.

    CLASSROOM APPLICATION: This article presents an additional angle of the Kinder Morgan consolidation. It offers an interesting look at tax planning/strategy in structuring a deal.

    QUESTIONS: 
    1. (Introductory) What are the facts of the consolidation and tax strategy discussed in the article?

    2. (Advanced) Why is Kinder Morgan making this change? What is the business purpose (other that tax implications)?

    3. (Advanced) What tax benefits will Kinder Morgan derive from the business changes it is making? Are these significant benefits, given the size of the business?

    4. (Advanced) How will Kinder Morgan record the consolidation changes in its accounting records? What journal entries will make? How will the financial statements change?
     

    Reviewed By: Linda Christiansen, Indiana University Southeast
     

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

    Kinder Morgan Deal Risks Big Tax Bills for Investors
    by: Laura Saunders, Alison Sider, and Russell Gold
    Aug 11, 2014
    Click here to view the full article on WSJ.com
     

    TOPICS: Consolidation, Deferred Taxes, Limited Partnerships, Master Limited Partnerships, Partnerships, Taxation

    SUMMARY: Kinder Morgan Inc.'s $44 billion plan to consolidate its pipeline companies was greeted with excitement by Wall Street, which expects the new streamlined company to snap up other pipeline partnerships. But some investors in Kinder Morgan's master limited partnerships may not be happy as the consolidation could leave them with big, unexpected tax bills. Houston-based Kinder Morgan it would swallow three affiliated companies, two of which are organized as MLPs. Such partnerships have attracted investors because they offer hefty distributions that qualify for deferred taxes.

    CLASSROOM APPLICATION: This article is useful for use when covering partnership accounting and deferred taxes. It is also interesting to show how a change in the form of business can result in a tax bill.

    QUESTIONS: 
    1. (Introductory) What are the facts of the Kinder Morgan situation discussed in the article? What is Kinder Morgan planning?

    2. (Advanced) What is the tax impact of the changes planned by Kinder Morgan? Who will be affected? Did those parties anticipate these changes might happen? Have they planned for it?

    3. (Advanced) Why is Kinder Morgan making this change? What is the business purpose? Has the company acknowledge the tax impact of these changes? Is the benefit of the changes on business worth the tax impact on investors?

    4. (Advanced) What were the plans of some investors' when they purchased investments in Kinder Morgan? What long-term plans did some investors have? What tax advantages were they planning to use?

    5. (Advanced) How will Kinder Morgan record these changes in its accounting records? What journal entries will make? How will the financial statements change?
     

    Reviewed By: Linda Christiansen, Indiana University Southeast
     

    RELATED ARTICLES: 
    Kinder Morgan to Consolidate Empire
    by Alison Sider and Russell Gold
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    "Kinder Morgan Deal Risks Big Tax Bills for Investors," by Laura Saunders, Alison Sider, and Russell Gold, The Wall Street Journal, August 11, 2014 ---
    http://online.wsj.com/articles/kinder-morgan-deal-risks-big-tax-bills-for-investors-1407784361?mod=djem_jiewr_AC_domainid

    Kinder Morgan Inc. KMI -1.01% 's $44 billion plan to consolidate its pipeline companies was greeted with excitement by Wall Street, which expects the new streamlined company to snap up other pipeline partnerships.

    But some investors in Kinder Morgan's master limited partnerships may not be happy as the consolidation could leave them with big, unexpected tax bills, tax experts said.

    Houston-based Kinder Morgan said Sunday it would swallow three affiliated companies, two of which are organized as MLPs. Such partnerships have attracted investors because they offer hefty distributions that qualify for deferred taxes.

    Richard Kinder, the company's founder and chief executive, said on Monday that energy MLPs are a "fertile field to do a little grazing in." Once a sleepy corner of energy-infrastructure investing, the number of MLPs has grown rapidly, from just 38 a decade ago to 120 today with a combined market value of around $560 billion.

    Mr. Kinder said in a call with investors that the deal for investors in publicly traded MLPs Kinder Morgan Energy Partners KMP -1.19% LP and El Paso Pipeline Partners EPB -1.24% LP was a "tremendously valuable transaction" because dividend growth at the surviving company would be faster than the payouts at those MLPs.

    Investors had been concerned about how Kinder could continue to increase the payouts from its partnerships. With a market value of over $40 billion, Kinder Morgan Energy Partners would have needed large, high-return projects to make meaningful increases to its revenue.

    Pressure to increase their distributions is likely to lead other MLPs into mergers or other deals, said Jason Spann, a Deloitte Tax LLP partner who advises on mergers and acquisitions.

    "It looks like the stock market is treating this well, so I expect to see some copycats," he said. MLPs also might convert to regular corporations as rising interest rates make the partnerships less attractive as investments, as occurred in the 1980s, he said.

    Shares of Kinder Morgan Energy Partners and El Paso Pipeline Partners, rose 17% and 21%, respectively, on Monday, while Kinder Morgan Inc.'s stock advanced 9%. Shares of Kinder Morgan Management KMR -1.49% LLC, which isn't an MLP, rose 24%. Under the proposed deal, owners of the three Kinder-related companies would receive cash and shares in Kinder Morgan Inc.

    Kinder Morgan Energy Partners also was paying about half its cash-flow to its manager, Kinder Morgan Inc. Analysts said that made it hard for the MLP to invest in the pipelines and other projects needed to service the country's new oil and gas fields. "You've got to be structured financially to be a faster-growing company," said UBS analyst Shneur Gershuni.

    Expectations that the deal would require Kinder Morgan investors to move cash to other MLPs helped lift prices overall for such partnerships, said Greg Reid, a managing director at Salient Partners LP, a Houston-based asset manager with $4.3 billion in MLPs under management.

    Energy companies created MLPs as a way to raise money and issue debt backed by pipelines and other assets. But Moody's Investors Service warned in a recent research report that such partnerships provide "less protection to investors than that of a typical public company." MLPs typically don't have annual meetings to elect directors or have independent directors who oversee strategy.

    Several tax advisers said individual investors in Kinder's MLPs could face unwelcome tax bills.

    Because Kinder Morgan Energy Partners is organized as a partnership that benefits from substantial deductions, the taxes on its substantial quarterly payouts were deferred.

    When the units are sold or exchanged—as they will be in the reorganization—the deferred taxes come due.

    "In this deal, one group of stakeholders will owe tax so that the company as a whole can benefit," said Robert Willens, an independent tax expert in New York.

    Most of that income will probably be taxed at ordinary rates, which are higher than long-term capital-gain rates, said Robert Gordon, a tax strategist who heads Twenty-First Securities Corp. in New York.

    The tax could be especially unwelcome for investors who planned to hold the units until death, when they could skip paying the deferred taxes. In effect, Mr. Gordon said, these people will owe tax they wouldn't otherwise have had to pay. The individual impact would vary widely, depending on when the units were bought and other factors, he said.

    Continued in article

    Bob Jensen's threads on Enron and Worldcom ---
    http://www.trinity.edu/rjensen/FraudEnron.htm


    Teaching Case
    From The Wall Street Journal Weekly Accounting Review on August 1, 2014

    Moving to the Cloud? Engage Internal Audit Upfront to Manage Risks
    by: Deloitte Risk Journal Editor
    Jul 24, 2014
    Click here to view the full article on WSJ.com
     

    TOPICS: Auditing, Cloud Computing, Internal Auditing

    SUMMARY: Cloud computing can yield significant benefits, from increasing speed to market and achieving better economies of scale to improving organizational flexibility and trimming spending on technology infrastructure and software licensing. As organizations increasingly migrate to cloud computing, however, they could be putting their data at significant risk. Positioning the internal audit (IA) function at the forefront of cloud implementation and engaging IA in discussions with the business and IT early on can help address potential risks.

    CLASSROOM APPLICATION: This article offers an example how the internal audit function of a business operates, in this case specifically with cloud computing.

    QUESTIONS: 
    1. (Introductory) What is the internal audit (IA) function of a business? Why would a business use IA?

    2. (Advanced) What is cloud computing? What is it value to a business? What new issues might it bring to the business?

    3. (Advanced) What value can the IA function bring to an organization's adoption of cloud computing? What problems could occur if the organization does not engage internal auditors in the process?

    4. (Advanced) What are the various stages of the process in which IA can help? In which stage do you see the greatest value added by IA? Why?
     

    Reviewed By: Linda Christiansen, Indiana University Southeast

    "Moving to the Cloud? Engage Internal Audit Upfront to Manage Risks," by Deloitte Risk Journal Editor, The Wall Sttreet Journal, July 24, 2014 ---
    http://deloitte.wsj.com/riskandcompliance/2014/07/24/moving-to-the-cloud-engage-internal-audit-upfront-to-manage-risks/?mod=djem_jiewr_AC_domainid

    Cloud computing can yield significant benefits, from increasing speed to market and achieving better economies of scale to improving organizational flexibility and trimming spending on technology infrastructure and software licensing. As organizations increasingly migrate to cloud computing, however, they could be putting their data at significant risk. Those risks include reduced levels of control as information technology (IT) departments are bypassed, as some business owners opt to obtain services more quickly and cheaply by creating their own “rogue” technology environments via the cloud.

    Positioning the internal audit (IA) function at the forefront of cloud implementation and engaging IA in discussions with the business and IT early on can help address potential risks. “Internal auditors view the business through a risk lens,” says Michael Juergens, a principal at Deloitte & Touche LLP. “With their deep understanding of risk mitigation, internal auditors can work with the business and the IT function to build a framework for assessing and mitigating the risks associated with cloud computing.”

    Broadly defined, cloud computing is a model for enabling ubiquitous on-demand network access to a shared pool of configurable computing resources and services, which can be rapidly provisioned and released with minimal management effort or service provider interaction. The IA function can provide assurance on the effectiveness of risk mitigation efforts tied to cloud utilization, explains Mr. Juergens. “Before entering into agreements with cloud vendors or potential customers, a thorough assessment of the current vendor procurement process should be conducted by IA to determine how to mitigate cloud risks the company may be taking on,” he says. “And while an organization’s information security group can build cloud monitoring capabilities, IA can assist and assess the effectiveness of the control environment and prevent the IT department being left out of the loop.”

    A Steady Migration to the Cloud

    Companies are migrating to the cloud in such numbers because of significant advantages it can provide. Once the migration to cloud functionality is complete, organizations no longer face the task of creating and maintaining large data centers and developing proprietary complex systems. The expense of software upgrades or application patches is carried by the provider, which can allocate these costs across a wide customer base. Freed from large up-front capital investments, time-consuming installation and hefty maintenance costs, IT departments can focus on value-added activities that promote the business. While not every organization today has fully embraced cloud computing, chances are cloud services will be the norm within the next decade.

    The growing consumer use of social media and mobile technologies has also added to the demand for cloud services, as businesses seek b