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

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


Bob Jensen's Pictures and Stories


All my online pictures ---

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


FASB Accounting Standards Updates ---

Hasselback Accounting Faculty Directory ---

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

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

2012 AAA Meeting Plenary Speakers and Response Panel Videos ---
I think you have to be a an AAA member and log into the AAA Commons to view these videos.
Bob Jensen is an obscure speaker following Rob Bloomfield
in the 1.02 Deirdre McCloskey Follow-up Panel—Video ---

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

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

List of FASB Pronouncements ---

2013 IFRS Blue Book (Not Free) ---

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

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

Find Accounting Software (commercial site) ---

Galt Travel Reviews and Guides ---

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

David Giles Econometrics Beat Blog ---

Common Accountics Science and Econometric Science Statistical Mistakes ---

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

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

Find Real Estate for Sale ---

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

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

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

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

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


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

Keywords:  faculty shortage, recruiting, accounting Ph.D

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

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



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

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

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

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

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

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

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

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


Changes in Faculty Composition

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

. . .



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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

The available free books in accounting and finance are at

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

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

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

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

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

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

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

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

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

Accounting Hall of Fame ---

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

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

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

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

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

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

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

For Whom the Bell Trolls

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

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

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

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

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

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

Three tax scenarios for vacation homes ---

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


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

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

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

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



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

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

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

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

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

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

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


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

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

Continued in article

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

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

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

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

Continued in article

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Continued in article

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

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

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

Accounting Change Will Expose ...


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

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

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


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

  • PHILIP BROWN, Financial Accounting and Equity Markets: The Selected Essays of Philip Brown (New York, NY: Routledge, 2013, ISBN 978-0-415-81461-4, pp. xiii, 424).

  • TREVOR HOPPER, MATHEW TSAMENYI, SHAHZAD UDDIN, and DANTURE WICKRAMASINGHE, Handbook of Accounting and Development (Cheltenham, U.K.: Edward Elgar Publishing, 2012, ISBN 978-1-84844-816-2, pp. x, 321).

  • LISA JACK, JANE DAVISON, and RUSSELL CRAIG, The Routledge Companion to Accounting Communication (Abingdon, Oxon, U.K.: Routledge, 2013, ISBN: 978-0-415-61714-7, pp. xiv, 259).

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

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

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

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

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

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

Meanwhile Spain Lowers Taxes on Individuals and Business Firms

What happened to the Keynesians in Spain?

They're probably not Laffering ---

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


. . .

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

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

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

Continued in article

Read more:


Activity Based (ABC) Costing ---

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

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


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

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

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

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

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


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

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

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

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

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

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

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


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

. . .


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

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

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

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

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

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

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

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

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

Read more:
Inside Higher Ed

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

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

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

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

Joseph Campbell

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

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

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

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

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

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

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

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

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

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

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

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

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

Put away that novel! Here's some really fun June reading:
  • Berger, J., 2003. Could Fisher, Jeffreys and Neyman have agreed on testing?. Statistical Science, 18, 1-32.
  • Canal, L. and R. Micciolo, 2014. The chi-square controversy. What if Pearson had R? Journal of Statistical Computation and Simulation, 84, 1015-1021.
  • Harvey, D. I., S. J. Leybourne, and A. M. R. Taylor, 2014. On infimum Dickey-Fuller unit root tests allowing for a trend break under the null. Computational Statistics and Data Analysis, 78, 235-242.
  • Karavias, Y. and E. Tzavalis, 2014. Testing for unit roots in short panels allowing for a structural breaks. Computational Statistics and Data Analysis, 76, 391-407.
  • King, G. and M. E. Roberts, 2014. How robust standard errors expose methodological problems they do not fix, and what to do about it. Mimeo., Harvard University.
  • Kuroki, M. and J. Pearl, 2014. Measurement bias and effect restoration in causal inference. Biometrika, 101, 423-437.
  • Manski, C., 2014. Communicating uncertainty in official economic statistics. Mimeo., Department of Economics, Northwestern University.
  • Martinez-Camblor, P., 2014. On correlated z-values in hypothesis testing. Computational Statistics and Data Analysis, in press.

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

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

Who would have guessed that insider trading is commonplace?

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

There is often a tip.

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

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

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

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

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

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

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

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

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

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

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

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

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

Continued in article


More accounting standards divergence instead of convergence

From the CPA Newsletter on June 24, 2014

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


From the CPA Newsletter on June 16, 2014

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

From the CPA Newsletter on June 16, 2014

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Sad State of Governmental Accounting and Accountability ---

From EY on June 13, 2014

Dear CFOdirect member:

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

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

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


CFOdirect Network team

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

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

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

Bob Jensen's Fraud Updates ---

Should Hertz auditor PwC have caught this huge error?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Continued in article

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

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

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

Continued in article (subscription required)

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

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

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

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

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

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

Continued in article

Bob Jensen's threads on PwC are at

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

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

Bob Jensen's Fraud Updates ---

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Continued in article

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Continued in article

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Continued in article

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

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

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

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

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

Securitization Accounting: Sorting Out Recent Rule Changes

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

Read More at CFO Journal »

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

From the CPA Newsletter on June 13, 2014

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

From the CPA Newsletter on June 13, 2014

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

From the CPA Newsletter on June 10, 2014

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

Bob Jensen's threads on certification examinations ---

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

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

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

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

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

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

Continued in article

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

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

1. The overwhelming majority of MOOC students are male

2. MOOCs attract students who already have college degrees

3. The median age of MOOC participants is 24

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

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

6. Europeans view the most course content

7. Students with a doctorate viewed more course material

8. Serial students are the most engaged

What we still don't know

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Continued in article

Bob Jensen's Fraud Updates ---

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

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

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

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

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

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

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


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

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

Continued in article

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

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

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

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

The Lawyers

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

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

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

The Accountants

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

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

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

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

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

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

Continued in article

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

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

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

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

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

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

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

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

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

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

From this article:

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

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

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

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

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

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

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

Bob Jensen's threads on EY ---

Message from EY on June 13, 2014

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


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


Financial services


Health care


Life sciences


Media and entertainment


Oil and gas


Real estate






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

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

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

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

Do bonuses often lead to unethical behavior?

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

Continued in article

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

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

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

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

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

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

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

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


1. Introduction

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

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

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

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

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

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

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

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

Continued in article

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

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

See Bob Herz's recommendations below.

Bob Jensen

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

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

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

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

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


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

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

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

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

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

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

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

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

. . .

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

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

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

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

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

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

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

Jensen Comment
Sounds like a really ineffective internal control system.

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

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

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

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

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

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

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

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

And The Machine will not use Windows.

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

Read more:

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

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

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

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

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

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

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

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

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

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

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

Continued in article

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

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

Teen pregnancies are at their lowest rates in years.

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

What's wrong with corporate taxation in the USA?

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

Case Studies in Gaming the Income Tax Laws ---


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

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

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

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

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

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

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

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

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

Nook Still Looking For a Niche

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Continued in article

History of Professional Women ---

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

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

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


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

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

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

Read more:

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

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

Mary Willingham exposed college athletes' lack of academic abilities

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

Continued in article


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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

From PwC on June 16, 2014

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

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

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



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

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

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

. . .

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

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

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

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

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

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

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

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

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

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

Continued in article

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

Thomas Pekkety ---

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

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

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

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

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

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

Martin Feldstein ---

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Reviewed By: Judy Beckman, University of Rhode Island

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

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

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

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

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

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

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

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

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

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

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

Continued in article


From EY Newsletter on June 27, 2014

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


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

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

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

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

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

Naked Shorts ---

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

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

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

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

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

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

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

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

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

Continued in article

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

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

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

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

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

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

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

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

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

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

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

Reviewed By: Judy Beckman, University of Rhode Island

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

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

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

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

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

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

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

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

Continued in article


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

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

TOPICS: Contingent Liabilities, Product Recall

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

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

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

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

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

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

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

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

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

Reviewed By: Judy Beckman, University of Rhode Island

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

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

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

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

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

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

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

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

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

Continued in article

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

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

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


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

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

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

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

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

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

Reviewed By: Judy Beckman, University of Rhode Island

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

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

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

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

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

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

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

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

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

Specific Objections

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

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


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

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

TOPICS: Auditing, Internal Auditing

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

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

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

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

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

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

Reviewed By: Judy Beckman, University of Rhode Island

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

Reviewed By: Judy Beckman, University of Rhode Island

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Microsoft and Oracle declined to comment.

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

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

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

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

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

Continued in article

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

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

TOPICS: Revenue Recognition

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

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

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

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

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

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

Reviewed By: Judy Beckman, University of Rhode Island

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

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

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

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

“We’ve been waiting for it for a long time,” said Ken Goldman, CFO of Burlington, Mass.-based Black Duck Software Inc., a closely held provider of open-source software and consulting services. “This levels the playing field and takes a lot of the ambiguity out of what are overly restrictive rules.”

Mr. Goldman said the rules change won’t affect the company until it goes public, which it expects will be two to three years from now, but he said the company will adopt the change before it goes into effect at the end of 2016 if it is able. Some software firms give away their services for free and instead charging more for the software, which allows them to book revenue sooner and “thereby gaming the system,” he added, and “the new rule makes that problem go away.”

Companies shouldn’t ignore the overhaul, even if they expect changes under the new rules will be minor.

Sean Aggarwal, CFO of Trulia Inc., a website for homes for sale, said the new guidance should be easier to implement, but he’s concerned about the “additional disclosures” that will be required. “I’m curious at what point we stop adding new disclosures and instead focus on simplifying redundant portions of the current disclosures.”

Tony Tripeny, corporate controller for glass products maker Corning Inc.GLW -0.09%, said “the real question companies now have to deal with pretty quickly is, when they do adopt this standard, will they go back retroactively and restate prior years, or do they just do a cumulative adjustment,” he said, a matter Corning is currently evaluating.

As BlackLine Systems Inc. eyes an initial public offering in the coming years, the Los Angeles-based provider of software that helps companies close their books already prepares results that are compliant with U.S. generally accepted accounting principles, CFO Charles Best said. He said the Securities and Exchange Commission and the two accounting boards have not yet issued guidance on how to implement the changes, which could affect whether companies choose to restate results or make one cumulative adjustment.

Karan Rai, CFO of ADS Inc., a closely held logistics provider and specialty distributor to the U.S. Defense Department based in Virginia Beach, Va., is upbeat on the new rules. “There are going to be a few companies with aggressive accounting policies that are not going to like it, but I’m in favor of it,” he said.

“If it is good for investors in terms of transparency,” Mr. Rai said, “it’s probably good for the company.”

Bob Jensen's threads on Revenue Accounting Controversies ---

Is Google God (or at least Skynet?)

"Is Google Replacing God? There are some things that the all-knowing Internet can't provide," by Christine Rosen, The Wall Street Journal, June 12, 2014 ---

January 3, 2005 message from Glen Gray

Maybe my mind is drifting—or maybe 2 plus 2 does equal 4.

Terminator 3 has been playing recently on cable. [Don’t read further if you don’t want to know the ending!]

At the end of Terminator 3, we learn that Skynet (which takes over the world in the future and tries to kill all humans) is not controlled by just one major computer as we thought in Terminators 1 and 2, but instead, Skynet is all the computers on earth connected together—acting as one giant computer brain.

Tonight I was watching 60 Minutes on TV and they dedicated 30 minutes to Google. Google is able to search all computers connected to the Internet. Recently Google released software that will search all the computers on LANS. Now you can Google on your cell phone, search libraries, etc. etc. etc. Now they are working on a universal translator (Start Trek anyone?) that will automatically search and translate any document in any language.

Is Google Skynet? Think about it.

Glen L. Gray, PhD, CPA
Dept. of Accounting & Information Systems
College of Business & Economics
California State University, Northridge
Northridge, CA 91330  

January 3, 2005 reply from Bob Jensen

Hi Glen,

I also watched the excellent 60 Minute module.   Google is amazing in almost every aspect, including how it is managed.  I think that all business policy and organization behavior students should watch this module.  It will be interesting to see how long the company can continue to grow at an exponential pace and maintain its long-standing motto to “Do No Evil.”   These guys really believe in that motto.  Google is probably the most cautious firm in the world about who gets hired and promoted.

There has never been anything quite like Google in terms of management, except SAS probably comes a little bit close.

Yes I think Google could become Skynet if it were not for the serious policy of Google to not be a monopolist (except by default) which is the antithesis of Microsoft Corporation.  Also there is the black cloud of Microsoft hanging over Google to pull down Google’s Skynet even if it takes a trillion dollars.  

There were some very fascinating things that I learned from the 60 Minutes module.  For one thing, Google is getting closer to scanning the documents in alternate languages around the world and then translating each hit into a language of choice (probably English to begin with).  Secondly, I knew that Google bought Keyhole, but I had not played in recent years with the amazing keyhole (not Google Views) ---

Readers interested in the wonderful “Defining Google” 60 Minutes module should go to

I might also add that this module was followed by another module on The World’s Most Beautiful Woman ---
She’s very articulate and a pure delight in this world of sinking morality even though her movie roles to date have been
Bombay frivolous.

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

What's the Real Cost of the EPA's Emissions Cap?
by: Cassandra Sweet and Amy Harder
Jun 03, 2014
Click here to view the full article on

TOPICS: Cost Behavior, Environmental Cleanup Costs, Forecasting

SUMMARY: This article examines whether the new federal limits on greenhouse-gas emissions are going to cost a lot, primarily to the end user. The impact on power companies is the focus of detailed questions in the review.

CLASSROOM APPLICATION: The article may be used in any general accounting class for discussion of this current topic. One assessment question is advanced, it covers the requirement to show items as operating versus non-operating in the income statement.

1. (Introductory) What are greenhouse gases? What entities generate greenhouse-gas emissions?

2. (Introductory) What new requirements to limit these emissions have been established?

3. (Introductory) What are the business concerns about these new limits?

4. (Advanced) What components of power companies' income statements would be affected by the EPA changes to produce "potential financial losses"-revenues, costs, or both? Explain your answer.

5. (Advanced) Who provided forecasts of the cost of implementing the new greenhouse gas emission limits? What factors in these forecasts seem to be sufficiently subjective and variable to produce varying forecasts?

Reviewed By: Judy Beckman, University of Rhode Island

New EPA Carbon Rules Pinch States Unevenly
by Amy Harder and Alicia Mundy
Jun 03, 2014
Online Exclusive

"What's the Real Cost of the EPA's Emissions Cap?" by Cassandra Sweet and Amy Harder, The Wall Street Journal, June 3, 2014 ---

Are the new federal limits on greenhouse-gas emissions going to cost a lot, as critics say, or a little, as the Environmental Protection Agency asserts?

That depends on whether you think Americans are going to use more electricity in coming years or cut way back.

The EPA assumes electricity consumption will drop sharply. That plays a significant role in the agency's calculation of the cost of complying with new rules to slash the carbon emissions from the utility industry. The industry accounts for about a third of all U.S. emissions, most of it from burning coal.

The agency forecasts that the effort to cut those emissions by 30% from their 2005 level will cost utilities and their customers $8.8 billion a year in 2030. That is less than the cost of other recent EPA rules, such as a limit on mercury emissions from coal-fired power plants that is costing utilities $9.6 billion a year.

"Other people using more realistic assumptions would predict a higher cost," said Jeffrey Holmstead, an EPA official during the Bush administration who now works as a lawyer and consultant for Bracewell & Giuliani LLP in Washington.

The U.S. Chamber of Commerce put the carbon-limit cost at up to $28.1 billion a year, in a study based on analysis by energy consulting firm IHS. The report was done before the new rules came out, however, and assumes they would require a bigger cut than the EPA ultimately proposed.

But the main difference between the EPA and the business group is their forecasts about energy usage.

A big factor in the EPA's cost forecast: successful energy-efficiency programs. These can include steps consumers take, such as more energy-efficient refrigerators, and programs utilities pay for, such as giving companies credits for shifting power use to periods of low demand.

"If a utility is investing more in energy efficiency that means they're going to spend less on things like fuel," an EPA official said.

It was unclear whether the agency considered potential financial losses by power companies that could end up selling less electricity if growth in power demand slows, as the EPA predicts. The agency points to energy-efficiency programs mandated in about half the states that require utilities to try to cut electricity use.

But critics say few states have actually achieved significant annual energy savings. The Electric Reliability Coordinating Council, an industry group, recently called out the EPA for "highly unrealistic assumptions regarding energy efficiency programs."

Unlike the EPA, which assumes growth in energy demand will slow sharply, the Chamber of Commerce assumes a big increase—and thus big spending on new plants or retrofitting to keep up with demand.

The chamber forecasts that Americans will use 1.4% more electricity a year.

Critics of the study have noted that is about twice the rate of increase in recent years. In fact, a problem for the electricity business in recent years is that demand for power, which fell during the recession, has remained slack even as the economy has picked up.

The federal Energy Information Administration last month forecast electricity demand will grow 0.9% a year until 2040.

The EPA is proposing different emission-reduction targets for each state, which then must develop a plan to meet its target and submit it to EPA. That ultimately could mean that the compliance cost could be higher or lower than the EPA estimated.

The EPA predicts that program would increase average U.S. electricity prices by up to 7% by 2020 and another 3% by 2030.

"The reason EPA's electric bill impacts look so good is they are assuming that demand-side energy efficiency will allow electric customers to purchase as much as 12% less electricity per year by 2030," said Brian Potts, a partner at Foley & Lardner LLP, based in Wisconsin.





Humor June 1-30, 2014

Flight Attendant Makes The Most Hilariously Sassy Safety Speech Ever ---

Forwarded by Denny Beresford
Answering Machine Message at an Australian School ---

Jon Stewart Perfectly Mocks Liberals Who Deny Science ---

Dick Cavett’s Worst Show: Starring John Cassavetes, Peter Falk & Ben Gazzara (1970) ---

"Dumbest Burglar Ever Logs In to Facebook on Victim’s Home Computer, Forgets to Log Out" ---
This is dumb, but probably not the dumbest ever thief. Candidate 1 is the drunk who tried to rob a bank but mistook it for the police station next door. Candidate 2 is the bank robber who handed the robbery note to a teller with the message written on the back of his personal deposit slip. There are many other example of idiots who received Darwin Awards (nobody should breed with their children) ---

Forwarded by Auntie Bev

WELCOME to 2014:

• Our Phones – Wireless
• Cooking – Fireless
• Cars – Keyless
• Food – Fatless
• Tires –Tubeless
• Dress – Sleeveless
• Youth – Jobless
• Leaders – Shameless
• Relationships – Meaningless
• Attitudes – Careless
• Babies – Fatherless
• Feelings – Heartless
• Education – Valueless
• Children – Mannerless
• Country – Godless

Congress - Clueless

Forwarded by Maureen

          As we Silver Surfers know, sometimes we have trouble with our

          Yesterday, I had a problem, so I called Georgie, the 11 year old
next door, whose bedroom looks like Mission Control, and asked him to come

          Georgie clicked a couple of buttons and solved the problem.

          As he was walking away, I called after him, 'So, what was wrong?

          He replied, 'It was an ID ten T error.'

          I didn't want to appear stupid, but nonetheless inquired, 'An,
ID ten T error? What's that? In case I need to fix it again.'

          Georgie grinned...'Haven't you ever heard of an ID ten T error

          'No,' I replied.

          'Write it down,' he said, 'and I think you'll figure it out.'

          So I wrote down:


          I used to like Georgie, the little shithead.



Humor Between May 1-31, 2014, 2014 ---

Humor Between April 1-30, 2014 ---

Humor Between March 1-31, 2014 ---

Humor Between February 1-28, 2014 ---

Humor Between January 1-31, 2014 ---

Humor Between December 1-31, 2013 ---

Humor Between November 1-30, 2013 ---

Humor Between October 1-31, 2013 ---

Humor Between September 1 and September 30, 2013 ---

Humor Between July 1 and August 31, 2013 ---

Humor Between June 1-30, 2013 ---

Humor Between May 1-31, 2013 ---

Humor Between April 1-30, 2013 ---

And that's the way it was on April 30, 2014 with a little help from my friends.

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AECM (Accounting Educators)
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This site hosts various discussion groups on such topics as accounting software, consulting, financial planning, fixed assets, payroll, human resources, profit on the Internet, and taxation.

Business Valuation Group 
This discussion group is headed by Randy Schostag [RSchostag@BUSVALGROUP.COM



Concerns That Academic Accounting Research is Out of Touch With Reality

I think leading academic researchers avoid applied research for the profession because making seminal and creative discoveries that practitioners have not already discovered is enormously difficult. Accounting academe is threatened by the twin dangers of fossilization and scholasticism (of three types: tedium, high tech, and radical chic)

“Knowledge and competence increasingly developed out of the internal dynamics of esoteric disciplines rather than within the context of shared perceptions of public needs,” writes Bender. “This is not to say that professionalized disciplines or the modern service professions that imitated them became socially irresponsible. But their contributions to society began to flow from their own self-definitions rather than from a reciprocal engagement with general public discourse.”


Now, there is a definite note of sadness in Bender’s narrative – as there always tends to be in accounts of the shift from Gemeinschaft to Gesellschaft. Yet it is also clear that the transformation from civic to disciplinary professionalism was necessary.


“The new disciplines offered relatively precise subject matter and procedures,” Bender concedes, “at a time when both were greatly confused. The new professionalism also promised guarantees of competence — certification — in an era when criteria of intellectual authority were vague and professional performance was unreliable.”

But in the epilogue to Intellect and Public Life, Bender suggests that the process eventually went too far. “The risk now is precisely the opposite,” he writes. “Academe is threatened by the twin dangers of fossilization and scholasticism (of three types: tedium, high tech, and radical chic). The agenda for the next decade, at least as I see it, ought to be the opening up of the disciplines, the ventilating of professional communities that have come to share too much and that have become too self-referential.”


What went wrong in accounting/accountics research? 
How did academic accounting research become a pseudo science?


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