Bob Jensen's New Bookmarks for April 1-30, 2015 

Bob Jensen at Trinity University 

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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
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From the Chronicle of Higher Education
Search for Job Openings in Higher Education ---

Higher Education Recruitment Consortium ---

Faculty and Staff Salaries from 4,700 colleges and universities ---

Jensen Comment
Once again I voice my oft-repeated warnings about salary comparisons.

  1. Salary does not mean much unless benefits are factored in, and some benefits are difficult to factor into "compensation comparisons." Firstly there's the problem of salary versus extremely high cost of housing in some locales. Stanford University provides various subsidized housing benefits ranging from house lot leasing for $1 per year to subsidized apartments for newer faculty and staff. NYU has enormous apartment subsidies for newer and long-time faculty plus low-cost financing for vacation homes. Prestigious business schools generally provide faculty with $10K to $50K research expense and summer stipend budgets that can be used for a whole lot of fun like taking the family on that next research summer in New Zealand or Switzerland.

    Many newly-retired faculty and staff members at Stanford cannot afford to cash in on the value increases of their houses because finding housing elsewhere entails a huge loss with respect to longer-term retirement in semi-luxurious apartments and condos. This becomes less of a worry for much older retired faculty who will probably kick the bucket in a few years.

  2. Some prestigious universities can get away with somewhat lower starting salaries because there are so many income-producing alternatives that arise from being a a prestigious university. The Harvard Business School provides consulting opportunities for some faculty that greatly exceeds their salaries from Harvard, largely because the HBS has so many CEO alumni of enormous corporations.

    Professor X from MIT will probably get a much better book contract from a top book publisher than if she or he had instead located in Northern Wyoming College.

  3. Property taxes and income taxes vary greatly between locales. For example, residents of New York New Jersey and Vermont get hammered relative to residents of Florida, Texas, North Dakota, Wyoming, and New Hampshire. Salary comparisons should be adjusted for these and widely other varying costs of living whether renting or owning homes.

  4. Consideration must be given to salary compression and longer-term prospects for salary growth. For example, some colleges will pay top dollar for newly-minted and very scarce new accounting Ph.D. graduates who will latter face not-so-great pay raises given the traditional salary compressions in those colleges.

Top Accounting Locations for a Career Boost ---

Jensen Comment
A lot depends upon the level of boost that you are seeking. In the first few years out of college in the San Antonio offices of Big Four firms for graduates who were fluent in Spanish I recommended volunteering for Latin America assignments. There can be some real perks in making closer relations with important Latin American clients, although some nations are much safer than others.

When seeking a fast track to a partnership I used to recommend locations like Moscow where one of my former students who probably would not have become a partner in a USA office became a partner in the Moscow office of a Big Four firm in ten years. These days Moscow is probably not such a great place for career advancement in public accounting. Times change.

When you move to a huge Big Four office its easy to get lost in the numbers unless you have a specialty that sets you apart. For my students headed for Dallas or Houston I recommend becoming an expert on the very complicated FAS 133 and its amendments. These days the forthcoming lease accounting standard offers some specialization opportunities, but I would still give a higher recommendation to FAS 133 and related accounting for financial structures.

For graduates with advanced coding skills there are all sorts of new opportunities in cyber security.

How to Mislead With Statistics:  The Consumer Price Index

Moral Hazard ---

Consumer Price Index ---

. . .


It is apparent that much of the muddle in discussing the merits of the different approaches arises from the promiscuous mixing up of arguments about feasibility, about dislike or approval of the way the index would move under a particular approach and about principles of various, often incompatible, sorts. Feasibility is naturally important. The difficulty of dealing with site values is obvious.

Statisticians in a country lacking a good dwelling price index (which is required for all except the rental equivalent method) will go along with a proposal to use such an index only if they can obtain the necessary additional resources that will enable them to compile one. Even obtaining mortgage interest rate data can be a major task in a country with a multitude of mortgage lenders and many types of mortgage. Dislike of the effect upon the behaviour of the Consumer Price Index arising from the adoption of some methods can be a powerful, if sometimes unprincipled, argument.

Dwelling prices are volatile and so, therefore, would be an index incorporating the current value of a dwelling price sub-index which, in some countries, would have a large weight under the third approach. Furthermore, the weight for owner-occupied dwellings could be altered considerably when reweighting was undertaken. (It could even become negative under the alternative cost approach if weights were estimated for a year during which house prices had been rising steeply).

Then, there is the point that a rise in interest rates designed to halt inflation could paradoxically make inflation appear higher if current interest rates showed up in the index. Economists' principles are not acceptable to all; nor is insistence upon consistency between the treatment of owner-occupied dwellings and other durables.


Much would be gained if two sets of problems were distinguished.*

What is the Consumer Price Index to measure? How can that be achieved?

Another way of putting this is to distinguish:

What is the question that should be answered? This is a matter for policy makers and other users of the Consumer Price Index. How can it best be answered? This is a matter for the statisticians.

The three approaches should not be regarded as rivals, they are different answers to different questions. One, or possibly more, should be chosen. The three questions can be formulated as follows:

Opportunity cost. What is the change through time in what would be the opportunity cost of the reference-period consumption of the services of owner-occupied dwellings? Spending. What is the change through time in the cash outlays that would correspond to the reference-period cash outlays in respect of owner-occupied dwellings? Transactions. What is the change through time in what would be the purchase value of the reference-period net acquisition of owner-occupied dwellings by consumers?

Which question is to be answered is, as just stated, a policy matter, depending upon the purposes the index is to serve. It is not an issue for statisticians to decide. Their job is the technical, professional one of compiling one or more indexes that answer the selected question or questions as well as possible, given the resources at their disposal. In a perfect world this is how the owner-occupied dwellings issue would be resolved. But the world is not perfect

Continued in Article


No one really denies that the CPI, as presently calculated, understates the rate of inflation
Why the Consumer Price Index (CPI) is a Flawed Measure of Cost of Living
It's largely due to moral hazard caused by government's incentives to understate inflation and cash flow increases in things like Social Security

"Deconstructing ShadowStats. Why is it so Loved by its Followers but Scorned by Economists?" by Ed Dolan, Econ Monitor, March 31, 2015 ---

It is hard to think of a website so loved by its followers and so scorned by economists as John Williams’ ShadowStats, a widely cited source of alternative economic data on inflation and other economic indicators. Any econ blogger who has ever written a line about inflation is familiar with ShadowStats. Time and again, readers cite it in comments, not infrequently paranoid in their tone and rude in their language. Brief replies that cast doubt on some of more extreme claims made by ShadowStats fans don’t seem to have much effect. After a recent round of comments, I promised the editor of one website to undertake a thorough deconstruction of ShadownStats. Here is the result.

What ShadowStats Gets Right: The CPI is a Flawed Measure of the Cost of Living

ShadowStats is Williams’ attempt to provide an alternative to the official consumer price index (CPI), which he views as a flawed measure of what members of the general public have in mind when they think of the cost of living. Let me start by saying that although I share the skepticism of many economists about the specific numbers published on ShadowStats, I agree that the official data do not tell the whole story. I support Williams’ attempt to provide an alternative to the official consumer price index that more closely reflects pubic perceptions of inflation.  Here, in his own words, is how Williams explains his undertaing:

In the last 30 years, a growing gap has been obvious between government reporting of inflation, as measured by the consumer price index (CPI), and the perceptions of actual inflation held by the general public.  Anecdotal evidence and occasional surveys have indicated that the general public believes inflation is running well above official reporting . . .

Measurement of consumer inflation traditionally reflected assessing the cost of maintaining a constant standard of living, as measured by a fixed-basket of goods. Maintaining a constant standard of living, however, is a concept not popular in current economic literature, and certainly not within the thinking or the lexicon of the Bureau of Labor Statistics (BLS), the government’s statistical agency that estimates and reports on consumer inflation. . . Individuals look to the government’s CPI as a measure of the cost of maintaining a constant standard of living, as well as measuring that cost of living in terms of out-of-pocket expenses.  Without meeting those parameters, an inflation measure has limited, if any, use for an individual.

Williams is right about the gap between public perceptions of inflation and official indicators. As a recent series of posts on inflation expectations on the Atlanta Fed’s Macroblog noted, “Inflation surveys of households reveal a remarkably wide range of opinion on future inflation compared to those of professional forecasters. Really, really wide.” According to Macroblog, household expectations of inflation for the coming year consistently average two percentage points higher than those of professional forecasters, and some 13 percent of household respondents report inflation expectations of 10 percent or higher even at a time when professional forecasts fall short of 2 percent.

In technical terminology, we refer to a cost of living index based on the changing cost of a fixed-proportion basket of goods that themselves remain unchanged over time as a Laspeyres index without quality adjustment. Williams is again correct when he says that the official CPI, following mainstream academic thinking, has gradually evolved away from the Laspeyres concept toward a measure of the cost of a changing basket of goods that gives equivalent satisfaction as the prices, quantities, and qualities of the goods that consumers buy change over time.

The substitution issue. One of Williams’ key objections to the CPI is that instead of holding the cost-of-living basket unchanged for long periods, the BLS allows for frequent changes in its composition. Some changes in the consumer market basket occur when goods like audio cassette players become technically obsolete and new goods like cell phones appear on the market, but those are not the ones that Williams takes issue with.

What he finds more objectionable are changes in composition of the market basket that stem directly from changes in prices, as, for example, when people eat more chicken because beef becomes unaffordably expensive. To many people, fiddling the market basket to give more weight to the goods whose prices increase least and less to those whose prices increase most sounds like cheating. They see it as if a teacher tried to impress a tenure committee with high test student scores by letting the smart kids take the test several times each while sending their slow-learning classmates home on testing day.

Mainstream economists have a standard response: If we did not account for changed consumption patterns in response to changed prices, they say, we would overstate the cost of maintaining a constant level of satisfaction. Consider an example. Last week you went to the supermarket and bought 5 pounds of chicken at $2 a pound and 5 pounds of steak at $5 a pound, $35 total. This week you go to the supermarket and find that chicken still costs $2 but steak has gone up to $10. There is no question that the new prices leave you worse off than you were the week before, but how do you react?

You would need $60 to buy the same basket of goods that you bought last week for $35. In reality, you might not have that $60 in your wallet or purse, but if I gave you a $60 coupon that you could spend only at the meat counter, you would probably not spend it on the same basket of goods you bought last week. Instead, you might buy, say, 10 pounds of chicken and 4 pounds of steak. However, since $60 would be enough to buy your previous selection if you wanted to, we could conclude that you would change the mix only if the new $60 selection gave you more satisfaction than the original one.

Experience shows that if you put a large number of consumers in this situation and average their behavior, they will shift their consumption toward chicken, even though some individuals might stick with the original mix. Those who did shift would be better off with $60 and the new prices than with $35 and the old prices, and the ones who don’t shift are no worse off. In that sense, $60 overstates the increase in income the average consumer would need to reach the same level of satisfaction as before the price change.

Your cost of living has gone up, and that hurts, but just how much has the increase in the price of steak raised your cost of living? By the ratio of 60/35, a 70 percent increase, or by less than that? It depends on what you mean by the cost of living. If you mean the cost of buying a fixed market basket (the popular conception), then the 70% is correct. If you mean the cost of maintaining a fixed level of satisfaction, then 70% is an overstatement.

The quality issue. In addition to adjusting the relative quantities of goods in the consumer market basket over time, the BLS adjusts the CPI for changes in the quality of goods. The rationale for doing so is that failure to account for quality improvements would cause a further overstatement of the increase in spending that needed to maintain a constant level of consumer satisfaction.

Consider tires for your car. In the old days, you were lucky if a set of bias-ply tires lasted 30,000 miles. Today, a decent set of radial tires will go 60,000 miles or more, and give you a better ride along the way. So, if the price of a set of tires has increased from $100 to $400, what has been the impact on your cost of living? If you calculate the cost per tire, without accounting for quality, tires are four times more expensive than they used to be. If you calculate the cost per mile, they are only twice as expensive.

Williams does not necessarily object to adjusting for quality changes when they are objectively measurable, like package size or the number of miles you get from a set of tires. However, he argues that the BLS exaggerates the importance of quality by making adjustments for changes that consumers don’t really care about. In one post, he uses the example of two computers, purchased ten years apart. Yes, the newer computer has many extra features—more memory, a faster processor, a sharper display, and so on, each of which is quantifiable. However, not all consumers care about the new features. If you just use your computer for e-mail and browsing the web, and not for running big financial spreadsheets or high-powered gaming, who cares about processor speed? The old model does the job just as well.

Other issues. Williams has a number of other criticisms of the CPI beyond the substitution and quality issues. In particular, he takes issue with the way the BLS measures housing prices and medical costs. Without going into detail, in both cases Williams favors an out-of-pocket approach to housing and medical costs as being more in tune with the general public’s concept of the cost of living. I think it is fair to say that mainstream economists agree that these two items, which loom large in household budgets, are particularly difficult to measure, although not everyone agrees with the way Williams would like to see them handled. I hope to deal with these issues in a future post, but this one will focus on the basics.

Where ShadowStats goes wrong: How great is the understatement?

No one really denies that the CPI, as presently calculated, understates the rate of inflation compared to a measure based on a fixed basket of unchanged goods. Rather, what many economists, myself included, find hard to accept is Williams’ estimate of the degree of understatement. The following chart, reproduced by permission and updated monthly on, claims that since the early 1980s, the CPI has been understating the true rate of inflation by an ever increasing margin that now amounts to some 7 percentage points.

Continued in article

Jensen Comment
It's amazing that labor unions have not had more power in Washington DC to reduce the understatement of inflation. Understating inflation greatly decreases union negotiating power for raising wages in the public and private sectors.

Note that the moral hazard of understating inflation affected the Obama years in the presidency, but President Obama certainly did not invent the strategy that for many years preceded his term of office.

Bob Jensen's threads on economic statistics ---

April 23, 2015 message from Dennis Huber

The Structure of the Public Accounting Industry – Why Existing Market Models Fail

Journal of Theoretical Accounting Research, 10(2), 43-67


The structure of the public accounting industry has been the subject of debate for decades. Both empirical and theoretical research has reached contradictory results and conflicting conclusions regarding which model of industrial organization describes the structure of the public accounting industry. Some research has concluded the industry is competitive and other research found it is oligopolistic. Obviously it cannot be both. This paper compares the structure of the public accounting industry with the economic models of industrial organization and discusses the reasons why current models fail to describe the structure of the industry. Previous research has failed to consider that the market for audit services was created by the government which was then subsequently subjected to the simultaneous regulation of both the supply and demand for audit services. The simultaneous regulation of both supply and demand distorts the market thereby rendering current models incapable describing the structure of the public accounting industry.


April 22, 2015 reply from Bob Jensen

Hi Dennis,

Some research has concluded the (audit) industry is competitive and other research found it is oligopolistic. Obviously it cannot be both.
Dennis Huber, Journal of Theoretical Accounting Research, 10(2), 43-67 ---

Jensen Comment
Economists have never found competitive oligopoly to be impossible either in theory or in practice. There are numerous references and illustrations in economics that run counter to this assertion although the definition of competition is not set in concrete in economics. Variations include competitive innovation, competitive pricing, competitive efficiency, and competitive uniqueness of a product or service.

Theory Example ---

Illustration of Competitive Oligopoly in the the Ocean Cruise Market ---;jsessionid=B91229CC69646671BDA6C51AD9FD4BE9

Theory of Rivalry for Maximum Innovation ---

In theory regulated monopolies can be broken up into less-regulated oligopolies such as the long and arduous debates among economists prior to the breakup of AT&T. Regulated monopolies in theory and practice generally are not noted for innovation, although there are some exceptions when the competition is not economic. For example, Russia made tremendous innovations in weapons of war without internal economic competition. However, there was a great rivalry in warfare that is quite different than the lack of rivalry when AT&T had a USA monopoly on the telephone market was initially broken up..

Today the market for telephones is much more competitive than the market for telephones when the AT&T monopoly was initially broken up. But today the market for telephones is hardly competitive to the degree that it is competitive for a corn farmer on a 200 acre Iowa farm. Telephones, especially mobile phones, are not standardized nearly to the same degree as corn traded on the CBOT. There is great competitive oligopoly today in the mobile phone industry.

The issue of multinational auditing is primarily an issue of the degree to which audit services are standardized commodities. I would contend that the industry is much to complex for simplistic analysis of auditing as a commodity. A huge problem is variability in circumstances surrounding where the auditing takes place. Auditing of an oil subsidiary in Russia, for example, is enormously different from auditing an oil subsidiary in Texas. Auditing services are most not the same commodities in these highly different circumstances, particularly the degree of malpractice liability in both places.

For example, if multinational audit Firm A in Russia may have much better political connections in Putin's power structure than Firm B. That comparative advantage, however, does not apply in audits of a Texas subsidiary.

My point is that I think you've greatly oversimplified the problem of oligopoly in a way that market theorists in will shrug aside. The value of your paper lies in carrying on the inquiry of market structures in multinational accounting firms. The value, however, does not lie in its answers.

o cut credit-card fraud, issuers are embedding chips; merchants say they can’t get card readers fast enough.

"Chip-Card Rollout Has Banks, Retailers Scrambling," by Robin Sidel, The Wall Street Journal, April 21, 2015 ---

. . .

Some 575 million of the new cards—representing about three-quarters of U.S. credit cards and about 40% of debit cards—are expected to be in the wallets of American consumers by year-end, making it the biggest rollout of new cards in decades.


Chip cards, which have been used throughout Europe, Asia and Canada for years, are coming to the U.S. after delays from banks that issue cards and the merchants who accept them.


But challenges remain: Even though tens of millions of new cards have already been shipped to customers, only Wal-Mart Stores Inc. and a few other large retailers so far have upgraded their payment terminals to accept the new plastic. Target Corp. , which had a massive breach in late 2013, has upgraded its terminals and plans to start accepting chip cards in the late spring, according to a spokesman.

Continued in article

From the CFO Journal's Morning Ledger on April 21, 2015

Bogus stamps, phony bonds backed failed Oklahoma insurance firm
 Insurance regulators are liquidating an Oklahoma insurer after capital injected by new owners, a New York financial firm, turned out to include bonds linked to an admitted counterfeiter and a supposed $40 million stamp collection that couldn’t be authenticated.

Bob Jensen's Fraud Updates ---

From the CFO Journal's Morning Ledger on April 21, 2015

KPMG taps veteran as first female CEO
is poised to promote Lynne Doughtie to the role of chairman and chief executive, the latest move reflecting women’s advancement to leadership roles in the accounting industry. Ms. Doughtie will assume her new role July 1.


Jensen  Comment
It's impossible to determine if and how much the class action suit by current and former female employees against KPMG affected  this female appointment.


"140 current female KPMG US employees join lawsuit against firm," by Kevin Reed, Accountancy Age, January 9, 2015 ---


MORE THAN 140 current KPMG US fee-earning female staff have opted in to a lawsuit against the firm.


Lawyers contacted 9,000 current and former fee-earning female staff from KPMG in the US, in October 2014, to join the class action. A former KPMG manager, Donna Kassman, spent 17 years in the firm's New York office before resigning, claiming that she and other women had suffered gender discrimination.


Nearly 900 women have currently opted into the case. Of the 845 that have been processed by class action representative Kate Kimpel, of law firm Sanford Heisler, 142 are from existing staff. The opt-in period runs until 31 January.


Kimpel claimed that the number of current employees that had already opted in was high. In similar instances, they tend to wait until the end of the time period before opting-in, to gauge response from their peers, she added.


"It's easier for previous employees to opt in, they're less worried about retaliation. I'm sure the number of current employees [opted in] will rise dramatically," she told Accountancy Age.


KPMG has previously vigorously denied the allegations in the claim against the firm. "We will not comment on pending litigation, except to say that KPMG thoroughly and repeatedly reviewed the allegations in this case and found them totally unsupported by the facts," said a statement from a KPMG spokesman.

Continued in article

Bob Jensen's threads on KPMG litigation ---

Bob Jensen's threads on the history of women in accounting ---

From the CFO Journal's Morning Ledger on April 21, 2015

Restatements affect bottom line less often
Financial restatements are having an impact on a company's bottom line less often, and that suggests that the Sarbanes-Oxley corporate-governance law has succeeded in bolstering companies’ internal controls over financial reporting, CFO Journal’s Maxwell Murphy reports. The proportion of corporate financial restatements that had no impact on the bottom line was 59% last year, a 22-percentage-point increase over the last four years.

PricewaterhouseCoopers was accused of failing to properly audit brokerage firm’s internal controls.
'PwC to Pay $65 Million to Settle Lawsuit Over MF Global," By Michael Rapoport, The Wall Street Journal, April 17, 2015 ---


PricewaterhouseCoopers LLP agreed Friday to pay $65 million to settle class-action litigation over failed brokerage MF Global Holdings Ltd., a case in which investors claimed PwC botched its audits of the firm before it collapsed into bankruptcy in 2011.


MF Global shareholders had contended that PwC’s audits gave MF Global a clean bill of health even though the accounting firm knew or should have known that the firm’s financial statements were erroneous and its internal controls weren’t effective.

Continued in article

Bob Jensen's threads on PwC lawsuit controversies ---

Findings of a PwC Audit
"Business School That Chased Rankings Ran Up a Deficit, Audit Finds," by Charles Huckabee, Chronicle of Higher Education, April 19, 2015 ---


The University of Missouri at Kansas City allowed its business school to run up an operating deficit of nearly $11 million as it pursued a national and global reputation, since tarnished by a rankings scandal, The Kansas City Star reports.

Continued in article

Bielefeld Academic Search Engine (BASE) ---

BASE (Bielefeld Academic Search Engine) is a multi-disciplinary search engine to scholarly internet resources, created by Bielefeld University Library in Bielefeld, Germany. It is based on search technology provided by Fast Search & Transfer (FAST), a Norwegian company. It harvests OAI metadata from scientific digital repositories that implement the Open Archives Initiative Protocol for Metadata Harvesting (OAI-PMH), and are indexed using FAST's software. In addition to OAI metadata, the library indexes selected web sites and local data collections, all of which can be searched via a single search interface.

It allows those who use the search engine to search metadata, when available, as well as conducting full text searches. It contrasts with commercial search engines in multiple ways, including in the types and kinds of resources it searches and the information it offers about the results it finds. Where available, bibliographic data is provided, and the results may be sorted by multiple fields, such as by author or year of publication.

Conduct a BASE Search ---
For example, conduct a search in "Interest Rate Swaps"

Jensen Comment
 This could be useful for searches of international academic literature.

Bob Jensen's search helpers ---

"Accounting Terminology Alphabet Soup ," by Jim Martin, MAAW's Blog, April 17, 2015 ---

A question in a recent IMA group discussion is related to the difference between cost accounting and managerial accounting. The question only touches the tip of an accounting terminology iceberg. We have a much larger problem with our alphabet soup or umbrella mania. For example, how do we explain the difference between all the following terms, many used as umbrella terms in accounting. Cost accounting, cost accounting systems, managerial accounting, management accounting, responsibility accounting, cost management, strategic cost management, activity-based management, activity-based cost management, just-in-time accounting, lean accounting, performance management systems, controllership, management control systems, product life cycle costing, productivity accounting, value stream costing, target costing, social accounting, should costing, and strategic finance to name a few. Try explaining all that to new accounting students.


Jensen Comment
I took the liberty of quoting this entire short module. I don't think Jim will mind.

I did not take the time to check out how many of these terms are now in Wikipedia. However, a substantial portion of these terms are now in Wikipedia such as Lean Accounting ---

Note that the above module seems to me to be a pretty good module for students to follow. Hence I guess I would first sen my students to Wikipedia to initially commence a debate on the difference in the terms Jim mentions in his blog posting.

One problem with Wikipedia is that in some disciplines the modules become so technical that it almost takes a Ph.D. or an M.D. to comprehend the Wikipedia module. For example, see how you do with Rational Expectations and the terms listed at the end of the module ---
See what I mean? These make accounting modules seem more readable relative to mathematics, medicine, and science.

. . he couldn’t sue before he was audited.
"KPMG Can't Shake Ron Burkle's $10M Blown Tax Shelter Suit," by Daniel Siegal, Law 360, April 14, 2015 ---

Law360, Los Angeles (April 14, 2015, 8:55 PM ET) -- A California judge on Tuesday denied KPMG’s bid to dismiss billionaire investor Ronald Burkle’s $10 million suit alleging the accounting firm led him to invest in tax shelters that didn’t withstand scrutiny by state tax officials, saying Burkle’s claims aren’t time-barred under the “simple logic” he couldn’t sue before he was audited.

KPMG had argued in its demurrer to Burkle’s second amended complaint that the Yucaipa Cos. LLC managing partner was on notice that the supposed tax shelters were ineffective in 2007, when he reached a...

Continued in article

What happened to KPMG's 2007 promise to no longer sell questionable tax shelters?
Federal prosecutors indicted 19 individuals on tax-fraud charges in 2005 for their roles in the sale and marketing of bogus shelters . . .
KPMG admitted to criminal wrongdoing but avoided indictment that could have put the tax giant out of business. Instead, the firm reached a deferred-prosecution agreement that included a $456 million penalty. Last week, the federal court in Manhattan received $150,000 from Mr. Makov as part of a bail modification agreement that allows him to travel to Israel.

Paul Davies, "KPMG Defendant to Plead Guilty," The Wall Street Journal, August 21, 2007; Page A11

Bob Jensen's threads on KPMG ---

"The Lehman Brothers Bankruptcy D: The Role of Ernst & Young"

Rosalind Z. Wiggins Yale University - Yale Program on Financial Stability
Rosalind L. Bennett FDIC, Division of Insurance and Research
Andrew Metrick Yale School of Management ; National Bureau of Economic Research (NBER)

SSRN, October 1, 2015


For many years prior to its demise, Lehman Brothers employed Ernst & Young (EY) as the firm’s independent auditors to review its financial statements and express an opinion as to whether they fairly represented the company’s financial position. EY was supposed to try to detect fraud, determine whether a matter should be publicly disclosed, and communicate certain issues to Lehman’s Board audit committee. After Lehman filed for bankruptcy, it was discovered that the firm had employed questionable accounting with regard to an unorthodox financing transaction, Repo 105, which it used to make its results appear better than they were. EY was aware of Lehman’s use of Repo 105, and its failure to disclose its use. EY also knew that Lehman included in its liquidity pool assets that were impaired. When questioned, EY insisted that it had done nothing wrong. However, Anton R. Valukas, the Lehman bankruptcy examiner, concluded that EY had not fulfilled its duties and that probable claims existed against EY for malpractice. In this case, participants will consider the role and effectiveness of independent auditors in ensuring complete and accurate financial statements and related public disclosure.


Number of Pages in PDF File: 22


Keywords: Systemic Risk, Financial Crises, Financial Regulation


From the CFO Journal's Morning Ledger on April 16, 2015


Ernst & Young settles with N.Y. AG.
Ernst & Young LLP
agreed Wednesday to pay $10 million to settle allegations from the New York attorney general’s office that the Big Four accounting firm had turned a blind eye when its client Lehman Brothers Holdings Inc. misled investors before its 2008 collapse.


Jensen Comment
I think this is on top of an earlier $99 million settlement in the Lehman Brothers repo accounting scandal ---

"$99 Million Buys EY Ticket Out Of Private Lehman Litigation, Finally," by Francine McKenna, re:TheAuditors, October 21. 2013 ---

Bob Jensen's threads on Ernst & Young ---

"Bank Holding Companies’ Accounting versus Economic Hedging Activities in the SFAS 133 Framework," by Veliota Drakopoulou, SSRN, April 13, 2015 ---

The goal of this research was to investigate the controversy surrounding the inability of Statement of Financial Accounting Standard No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities to portray the economics of hedging. This research examined whether or not the possibility of increased volatility evolved from economic hedges that do not qualify for hedge accounting under SFAS 133 prompted Bank Holding Companies (BHCs) to adjust their corporate risk management strategy to one that is more accounting responsive. Based on the results of this research, BHCs’ which increased the level of accounting hedges and decreased the level of economic hedges experienced a significant decrease in earnings volatility relative to pre-SFAS 133. The findings suggest that BHCs’ ability to reduce earnings volatility and increase earnings smoothing to meet analysts’ expectations after the 2008 amendment of SFAS 133 has an adverse impact on BHCs’ continual use of economic hedges. Analysts and investors are recommended to evaluate further BHCs’ risk strategies to gain a better representation of their risk paradigm with derivatives. This study extends prior research on corporate risk management activities of BHCs and contributes to social change by presenting new affirmation to investors of the influence of SFAS 133 economic hedges on earnings volatility.

Number of Pages in PDF File: 15

Keywords: Derivatives, Accounting for Derivatives and Hedging Activities, Economic Hedges, Fair Value Hedges, Cash Flow Hedges, SFAS 133, Corporate Risk Management, Earnings Volatility, Earnings Smoothing

Bob Jensen's hedge accounting tutorials ---

EY:  Financial reporting and accounting developments (current through 31 March 2015 ) --- Click Here$FILE/StandardSetterUpdate_BB2964_14April2015.pdf


This First Quarter 201 5 Standard Setter Update highlights significant developments in financial accounting and reporting between 1 January 2015 and 31 March 2015 except as noted. This publication also includes summaries of certain proposals presently under consideration by the Financial Accounting Standards Board (FASB), the Emerging Issues Task Force (EITF), the Private Company Council (PCC), the Securities and Exchange Commission (SEC), the Public Company Accounting Oversight Board (PCAOB), the Auditing Standards Board (ASB) and the Governmental Accounting Standards Board (GASB). For additional details on these developments, we refer you to related EY publications, many of which can be found on our AccountingLink website. We will continue to keep you informed about important developments as they occur.

Bob Jensen's threads on accounting theory ---

EY:  Using the 2015 XBRL US GAAP T axonomy --- Click Here$FILE/TechnicalLine_CC0410_XBRLTaxomony_15April2015.pdf

What you need to know

• The SEC has updated the EDGAR system to allow companies to use the 201 5 XBRL US GAAP Taxonomy. • T he SEC staff is encouraging companies to transition to the 2015 taxonomy for their next reporting period ( i.e., 31 March 2015 for calendar - year registrants ) .


• Registrants may continue to us e the 2014 or 2013 taxonomies, but we expect the SEC staff to remove the 2013 taxonomy from the EDGAR system as early as June 2015. • Companies should review their practices for selecting tags for their XBRL exhibits as they move to the new taxonomy.


• When selecting and reviewing tags, companies should thoroughly search the tags in the 2015 taxonomy.


• New tags were added to reflect new accounting standards and certain industry - specific reporting issues in the insurance and financial services industries . More tags were eliminated than in previous years


Bob Jensen's threads on XBRL and OLAP (including teaching materials and Skip's textbook) ---

UT Law School faculty members fall victim to ID theft, tax scam --- 

. . .

“We are deeply troubled that our colleagues in the law school community have been the victim of identity theft and an unfortunately all-too-common tax scam,” Roberts said in an emailed statement. “When we heard the first reports yesterday from faculty members, we moved immediately to see if there had been any breach of secure information here at the law school and we are working diligently on it still.”


Officials believe the identity thieves filed the tax returns to have refund checks sent to an account or address not associated with the faculty member.


UT Law School officials are assisting affected faculty members with reporting the identity fraud to the proper authorities, including police, the IRS and various credit bureaus.

Jensen Comment
It appears that I'm a victim of a similar ID theft only in my case it was TurboTax that allowed by Social Security Number to be compromised. When I tried to E-file using TurboTax the ID thieves had already files a return in my name and SS number. The far the IRS is also refusing to accept the paper return that I filed on February 16.

I'm about to contact the FTC at

From the CFO Journal's Morning Ledger on April 13, 2015

Valuation in the Fair Value Era: Focus on Quality, Risk

Much has been achieved in the last decade toward improving the quality of fair value measurements, but more is required in the coming years. Learn areas where applying greater focus can help public companies with significant fair value requirements in their financial reporting address audit and regulatory risks, enhance their credibility in the investment community, and, ultimately, increase their enterprises’ value in the marketplace. Continue »

Read more Deloitte Insights »

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

Most Hack Successes at Some Point Require Insiders

Iowa Man Accused of Hacking Lottery to Win $14.3 Million Ticket ---

Bob Jensen's Fraud Updates ---

March 31, 2015

Jensen Comment
There is a great deal of food for thought in these excellent prepared remarks.

I would like to repeat one point I made in an earlier AECM message. There is great concern about the enormous underground economy where both criminals such as drug dealers and very hard workers such as maids cleaning houses are accepting cash wages and not reporting those incomes for tax purposes. They are indeed tens of millions of tax evaders.

One estimate for the year $2010 is that there is $305 billion in tax revenue that could be collected by the IRS is tax evasion was eliminated ---

Suppose that in 2014 the tax evasion was still around $300 billion. This  is less than 1% of the $3.1 trillion collected by the IRS such even if tax evasion was totally eliminated it would would not have such an enormous impact on total net revenues given the billions that would have to be spent to eliminate tax evasion such as collecting taxes from all the drug dealers and cash workers in the underground economy.

In fact the cost of eliminating tax evasion exceed the revenues collected from tax evaders.

I'm not advocating that the IRS does not continue to seek out and punish tax evaders. However, when we are debating all of the really serious issues facing the USA at this moment such as unfunded entitlements (particularly Medicare and Medicaid), climate change, drought, horrid K-12 education in urban centers, increases in crime such as cybercrime, terrorism, etc., spending a $1 trillion to eliminate $300 billion in tax evasion should be put in its proper perspective.

How Business Higher Education and Training is Changing

"Coming to a Business School Near You: Disruption (Part 2)," by Margaret Andrews, Inside Higher Ed, April 13, 2015 ---


. . .

New Entrants With New Offerings

A wide array of players are entering the executive education and corporate training market and here are some recent developments:


University and Business Schools are Innovating, too

That’s not to say that universities and business schools are not innovating, too.  For example:

Low-Cost MBA Alternatives

From Kigali, Rwanda, one woman is piecing together the equivalent of an MBA by taking a series of Massively Open Online Courses (MOOCs) from different providers. For less than $1000 US she’s taken courses from some of the top business schools in the world and her No-Pay MBA website offers information to help others do the same.

Students can now take a variety of courses from various providers in a “cafeteria style” like the example above.  While this buffet of courses doesn’t (yet) add up to a degree, at some point some organization is going to figure out how to assign/award credit for these disparate classes – and accredit the program of study.  Then students will be able to bundle together their own degrees and certificates, choosing the best courses from the best schools and building their own All-Star MBA  (or some other degree or certification) program.

In a recent Financial Times article, Rich Lyons, dean of the Haas School of Business at UC Berkeley, reiterated his belief that 50% of business schools could be out of business within the next ten years, stating:

There are over 10,000 business schools in the world so when you start thinking about that group from 1,000 to 10,000, I think curated MOOC content and better ways of credentialing students is going to be a heck of a threat to a lot of those players.”

Jensen Comment
I think there's increasing accountability required in both the education and training markets. In particular, for-profit-universities of questionable quality are hurting badly or shutting down entirely. Innovative programs more closely tied to respected traditional universities (think Coursera) or top private sector companies like McKinsey and Cisco  are rising up.

We are in a transition period where degrees and diplomas still matter, but badges and certificates of competency are on the rise ---

Scenarios of Higher Education for Year 2020 ---
The above great video, among other things, discusses how "badges" of academic education and training accomplishment may become more important in the job market than tradition transcript credits awarded by colleges. Universities may teach the courses (such as free MOOCs) whereas private sector companies may award the "badges" or "credits" or "certificates." The new term for such awards is a

Competency-Based Learning ---

"If B.A.’s Can’t Lead Graduates to Jobs, Can Badges Do the Trick?" by Goldie Blumenstyk, Chronicle of Higher Education, March 2, 2015 ---

Employers say they are sick of encountering new college graduates who lack job skills. And colleges are sick of hearing that their young alumni aren’t employable.

Could a new experiment to design employer-approved "badges" leave everyone a little less frustrated?

Employers and a diverse set of more than a half-dozen universities in the Washington area are about to find out, through a project that they hope will become a national model for workplace badges.

The effort builds on the burgeoning national movement for badges and other forms of "micro­credentials." It also pricks at much broader questions about the purpose and value of a college degree in an era when nearly nine out of 10 students say their top reason for going to college is to get a good job.

The "21st Century Skills Badging Challenge" kicks off with a meeting on Thursday. For the next nine months, teams from the universities, along with employers and outside experts, will try to pinpoint the elements that underlie skills like leadership, effective storytelling, and the entrepreneurial mind-set. They’ll then try to find ways to assess students’ proficiency in those elements and identify outside organizations to validate those skills with badges that carry weight with employers.

The badges are meant to incorporate the traits most sought by employers, often referred to as "the four C’s": critical thinking, communication, creativity, and collaboration.

"We want this to become currency on the job market," says Kathleen deLaski, founder of the Education Design Lab, a nonprofit consulting organization that is coordinating the project.

No organizations have yet been selected or agreed to provide validations. But design-challenge participants say there’s a clear vision: Perhaps an organization like TED issues a badge in storytelling. Or a company like Pixar, or IDEO, the design and consulting firm, offers a badge in creativity.

If those badges gain national acceptance, Ms. deLaski says, they could bring more employment opportunities to students at non-elite colleges, which rarely attract the same attention from recruiters as the Ivies, other selective private colleges, or public flagships. "I’m most excited about it as an access tool," she says.

‘Celebrating’ and ‘Translating’

The very idea of badges may suggest that the college degree itself isn’t so valuable—at least not to employers.

Badge backers prefer a different perspective. They say there’s room for both badges and degrees. And if anything, the changing job market demands both.

Through their diplomas and transcripts, "students try to signal, and they have the means to signal, their academic accomplishments," says Angel Cabrera, president of George Mason University, which is involved in the project. "They just don’t have the same alternative for the other skills that employers say they want."

Nor is the badging effort a step toward vocationalizing the college degree, participants say. As Ms. deLaski puts it: "It’s celebrating what you learn in the academic setting and translating it for the work force."

Yet as she and others acknowledge, badges by themselves won’t necessarily satisfy employers who now think graduates don’t cut it.

That’s clear from how employer organizations that may work on the project regard badges. "We’re presuming that there is an additional skill set that needs to be taught," says Michael Caplin, president of the Tysons Partnership, a Northern Virginia economic-development organization. "It’s not just a packaging issue."

In other words, while a move toward badges could require colleges to rethink what they teach, it would certainly cause them to re-examine how they teach it. At least some university partners in the badging venture say they’re on board with that.

"Some of what we should be doing is reimagining some disciplinary content," says Randall Bass, vice provost for education at Georgetown University, another participant in the project.

Mr. Bass, who also oversees the "Designing the Future(s) of the University" project at Georgetown, says many smart curricular changes that are worth pursuing, no matter what, could also lend themselves to the goals of the badging effort. (At the master’s-degree level, for example, Georgetown has already begun offering a one-credit courses in grant writing.)

"We should make academic work more like work," with team-based approaches, peer learning, and iterative exercises, he says. "People would be ready for the work force as well as getting an engagement with intellectual ideas."

Employers’ gripes about recent college graduates are often hard to pin down. "It depends on who’s doing the whining," Mr. Bass quips. (The critique he does eventually summarize—that employers feel "they’re not getting students who are used to working"—is a common one.)

Where Graduates Fall Short

So one of the first challenges for the badging exercise is to better understand exactly what employers want and whether colleges are able to provide it—or whether they’re already doing so.

After all, notes Mr. Bass, many believe that colleges should produce job-ready graduates simply by teaching students to be agile thinkers who can adapt if their existing careers disappear. "That’s why I think ‘employers complain, dot dot dot,’ needs to be parsed," he says.

Mr. Caplin says his organization plans to poll its members to better understand where they see college graduates as falling short.

Continued in article

Maine police departments pay hackers to unlock computer ---

The Lincoln County Sheriff's Office and four towns that share a system say they paid $300 after the hackers claimed the 'ransomware' program would wipe the system clean.

Police departments in midcoast and northern Maine said they have paid ransom to hackers to keep their computer files from being destroyed, WCSH-TV reported Friday night.

The Portland station said the Lincoln County Sheriff’s Office and four towns paid $300 to the hackers after a virus, called a “megacode,” was downloaded on a computer system they share. Lincoln County Sheriff Todd Bracket said that the computer system was unusable until the fee was paid, and that the hackers claimed the program, called “ransomware,” would wipe the entire computer system clean if the fee wasn’t paid.

The creator of the virus gave the sheriff’s office a code to unlock the computer system after the money was received. The county paid in bitcoins, an online currency.

“We needed our programs to get back online,” said Damariscotta Police Chief Ron Young. “That was a choice we all discussed and took to get back online to get our information.”

Brackett told WCSH that the FBI tracked the payment to a Swiss bank account, but no further.

The Houlton Police Department told the station that it was hit with a similar virus early this week and its computer system was locked up until ransom was paid.

Last summer, the FBI, foreign governments and private security firms dismantled an operation, based in Russia, that commandeered as many as a million computers and drew money out of bank accounts, The Washington Post reported. The operation also included a ransomware scheme and officials said they had identified the 30-year-old Russian behind the operation but had not apprehended him.

Continued in article

Share Repurchase ---


Share repurchase (or stock buyback) is the re-acquisition by a company of its own stock.[1] It represents a more flexible way (relative to dividends) of returning money to shareholders.[2]


In most countries, a corporation can repurchase its own stock by distributing cash to existing shareholders in exchange for a fraction of the company's outstanding equity; that is, cash is exchanged for a reduction in the number of shares outstanding. The company either retires the repurchased shares or keeps them as treasury stock, available for re-issuance.


Under US corporate law there are five primary methods of stock repurchase: open market, private negotiations, repurchase 'put' rights and two variants of self-tender repurchase: a fixed price tender offer and a Dutch auction. More than 95% of the buyback programs worldwide are through an open-market method,[2] whereby the company announces the buyback program, and then repurchases shares in the open market (stock exchange). In the late 20th and early 21st centuries, there was a sharp rise in the volume of share repurchases in the US: US$5 billion in 1980 rose to US$349 billion in 2005. Large share repurchases started later in Europe than in the US, but are nowadays a common practice around the world.[3]


It is relatively easy for insiders to capture insider-trading like gains through the use of "open market repurchases". Such transactions are legal and generally encouraged by regulators through safe-harbours against insider trading liability


"Companies With the Largest Stock Buybacks of All Time," by Jon C. Ogg, 24/7 Blog, April 13, 2015 --- Click Here

. . .

With General Electric Co. (NYSE: GE), the $50 billion stock buyback announced in April 2015 will be among the biggest ever in a single announcement. GE’s annual report showed that it used $1.9 billion for buybacks in 2014, and the buyback plan in 2013 was for up to $5.1 billion. It has spent much more than this in total over the years, what looked to be over $20 billion in theprior 10 years or so.

24/7 Wall St. has evaluated big buybacks from the following: Apple Inc. (NASDAQ: AAPL), Cisco Systems Inc. (NASDAQ: CSCO), Exxon Mobil Corp. (NYSE: XOM), General Electric Co. (NYSE: GE), Intel Corp. (NASDAQ: INTC), International Business Machines Corp. (NYSE: IBM), Microsoft Corp. (NASDAQ: MSFT) and Procter & Gamble Co. (NYSE: PG). A reference has also been provided for each company’s market cap, and color on future plans and dividends has been included for each company as well.

If you want to know why the total buybacks are not exact to the penny at each company, there is a whole host of reasons. Many companies do not show their total number of dollars back to the inception. Shares outstanding through time include dilution from stock options, convertible preferred shares that converted, restricted stock and even from acquisitions. Independent websites that track buybacks often have numbers that simply are all over the place. Many companies also group their dividends and buybacks together for total capital returned to their shareholders.

As a reminder, many buybacks do not reduce the total share count on a 1:1 basis through time. Companies issue stock options and give restricted stock grants, or they use treasury shares to make acquisitions — all of which can offset or minimize the raw number of shares being repurchased against the float. Still, you will see that companies have to now make announcements of $20 billion or so to make the top buybacks of all-time in the year and years ahead.

As a reminder, April is the beginning of corporate earnings season for the first quarter of 2015. This means that the buyback count is certain to grow even further.

Treasury Stock ---

From the CFO Journal's Morning Ledger on April 13, 2015

Valuation in the Fair Value Era: Focus on Quality, Risk

Much has been achieved in the last decade toward improving the quality of fair value measurements, but more is required in the coming years. Learn areas where applying greater focus can help public companies with significant fair value requirements in their financial reporting address audit and regulatory risks, enhance their credibility in the investment community, and, ultimately, increase their enterprises’ value in the marketplace. Continue »

Read more Deloitte Insights »

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

"FASB PROPOSES IMPROVEMENTS TO NOT-FOR-PROFIT FINANCIAL STATEMENTS," by Bob Schneider, Accounting Education News, April 22, 2015 ---

The FASB has issued a proposed Accounting Standards Update (ASU) intended to improve the information provided in not-for-profit financial statements and notes to financial statements. Stakeholders are encouraged to review and comment on the proposed ASU, Presentation of Financial Statements of Not-for-Profit Entities, by August 20, 2015.

“The proposed ASU contains recommended enhancements to the fundamental reporting model for not-for-profit organizations — a model that has existed for more than 20 years,” stated FASB member Lawrence W. Smith. “We believe that these changes will refresh the model in ways that will make not-for-profit financial statements even more useful to donors, lenders, and other users.”

The document sets forth the FASB’s proposed improvements to current net asset classification requirements and information presented in financial statements and notes to financial statements about a not-for-profit organization’s liquidity, financial performance, and cash flows. Specifically, they are intended to:

Continued in article

From the CFO Journal's Morning Ledger on April 22, 2015

Regional banks sweat through low-rate “torture”
Many regional and community lenders are struggling with low interest rates, even as their Wall Street counterparts ride strong deal and trading activity to strong profits. Such banks, although flush with deposits, can’t earn a high enough rate on loans to boost their profit margins.

Jensen Comment
It's hard for seniors earning nearly zero on bank savings to feel sorry for any of the banks.
Thanks for nothing Janet.

These are the current Certificate of Deposit  interest rates at my local bank:

.0030 for a one-year CD
.0125 for a five year CD

From the CPA Newsletter on April 22, 2015

EU may pursue its own accounting rules
Accounting rules written by the London-based International Accounting Standards Board may soon be adjusted to European Union needs, according to Wolf Klinz, the new head of the European Financial Reporting Advisory Group. EFRAG advises the European Commission on adopting accounting rules.
Reuters  ---


Jensen Comment
I suspect that the IASB will dance to the tunes of EU lawmakers to prevent losing the EU. If the EU joins the USA in departing from IFRS it would be a total disaster for the IASB. The question is  the degree of change the non-European nations will tolerate before going their own ways?

Canada, for example, will probably buy into anything the EU dictates. I'm not so certain about some other parts of the world that shudder at being part of renewed EU empires. Some like me view the EU as much too regulated for its own good.

From the CFO Journal's Morning Ledger on April 22, 2015

“Flash crash” charges filed
A trader who operated out of his West London home was arrested by British authorities on U.S. charges that he helped cause the Dow Jones Industrial Average to plummet 1,000 points on May 6, 2010, in what came to be known as the “flash crash.” Prosecutors and regulators charged Navinder Sarao with using a souped-up version of commercially available software to manipulate a stock-market index futures contract.

Jensen Comment
If one obscure trader than bring down the market the system is much to fragile.


Bill Bosco is biased against the forthcoming IASB-FASB lease accounting standard revisions.

Bill  sent me four new papers on lease accounting. However, since they entail opening MS Word attachments (opening any Word attachments is risky)  I will instead forward the link below from his Website ---

Bill Bosco's Articles on Leasing and Lease Accounting ---

Notorious Tax Cheats in the USA

Tax Evasion in the USA ---

MSN:  10 Notorious Tax Cheats ---

  1. Al Capone
  2. Ty Warner
  3. Wesley Snipes
  4. Joe & Teresa Giudice
  5. Paul Daugerdas
  6. Igor Olenicoff
  7. Rashia Wilson
  8. Leona Helmsley
  9. Pete Rose
  10. Joe Francis

Current cheaters Charlie Rangel and  Al Sharpton did not make the above list. Charlie Rangel did make it to the list below.
Ernst & Young also made the list below.
In that case KPMG should be listed for having paid $430 million in IRS penalties for selling illegal tax shelters ---
This illustrates how Wikipedia can often be seriously incomplete.

Wikipedia's Longer List of Tax Criminals ---


Communalism ---

"Accommodating (Economic) Diversity: Applying the Income Tax to Utopian Communities," by Samuel D. Brunson, SSRN, January 7, 2015 --- 

Communalism has a long history in the United States. Throughout the nineteenth century, the country was seemingly dotted with utopian groups. Most were Christian groups, trying to follow the New Testament model of a body of believers that held all property in common. While these groups generally fell apart quickly, in response to inside or outside pressures, several large groups survived the turn of the century.

In the early twentieth century, though, these religious communal groups had to contend with something new: an income tax. Communalism did not fit into the individualistic economic system envisioned by the drafters of the income tax. So Congress designed a special tax regime, now codified in section 501(d) of the Internal Revenue Code, which exempts religious communal holding companies from tax, while imputing the holding companies’ income to the members of the group. Section 501(d) provides communitarian groups with flexibility to reflect their unusual economics.

There exist, however, a number of problems with the design and implementation of section 501(d). This Article will survey the three principal problems. The first is scope: under current law, only religious communitarian groups can elect to use the section 501(d) regime. Second is uncertainty and vagueness in the statute. Third is I.R.S. overreach in the enforcement, applying doctrines (such as the public policy doctrine) that do not apply to section 501(d). In this Article, I discuss why and how to remedy these problems, while not opening section 501(d) to abusive tax avoidance.

Number of Pages in PDF File: 64

Keywords: religious or apostolic organizations, communitarian, utopia, section 501(d), corporate income tax, partnership tax, pass-through taxation, federal income taxation, Establishment Clause, quasi-pass-through, employment taxes, SECA, dividends, anti-abuse, polygamy

Jensen Comment
The real problem of utopian societies is that they cannot be islands of independence within in their host countries. They benefit from externalities such as cleaner  air and abundant water as well as pay a price for polluted air, contaminated water, and scarce water. A military umbrella of some sort  protects them from outside invasion which is why such, as in World War II, their host countries demanded participation in the military even as conscience objector medics. They seldom can be totally isolated from outside crime and disease. They seldom have sufficient resources for advanced medications and medical treatments. Their markets for goods and services typically are not feasible or practical on a small scale.

To avoid inbreeding they must interact with host societies socially and physically and face the reality of attrition of people born to the community. An open immigration policy into their communities is subject to enormous risks of abuse. This is exacerbated when they sit on valuable resources such a oil, timber, rich minerals, mountain passes, rivers, water supplies, etc.

They cannot be totally isolated from host country laws, especially to a point that they become homes to people seeking exemption from the law --- such as homes to criminal gangs. pedophiles, slavers, and seditions. For example, the USA is now faced with a question about the refusal of some Indian tribes to accept new same-sex legislation.

They are typically highly vulnerable to the politics and economics of the host nation. Their existence may depend upon how the host country defines a "religion."

Grand experiments in utopian societies have generally failed in spite of tempting theory and literature ---

"Journal of Accounting and Economics 2014 Update," by Jim Martin, MAAw's Blog, April 11, 2015 ---

Jensen Comment
In particular I call your attention to the following articles:

DeFond, M. and J. Zhang. 2014. A review of archival auditing research. Journal of Accounting and Economics (November-December): 275-326.

Donovan, J., R. Frankel, J. Lee, X. Martin and H. Seo. 2014. Issues raised by studying DeFond and Zhang: What should audit researchers do? Journal of Accounting and Economics (November-December): 327-338.

From the CFO Journal's Morning Ledger on April 6, 2015

Fiat Chrysler faces more hazards
Fiat Chrysler Automobiles NV
could face new legal headaches after years of work by the auto maker to ease concerns about fiery rear-end Jeep crashes ran headlong into a jury awarding big damages. The Jeeps are equipped with fuel tanks that regulators deemed vulnerable to igniting in rear-end collisions – and those vehicles are the subject of other lawsuits yet to be concluded.

Research Idea
One of the big issues in accounting for contingent liabilities is the move from general disclosure of possible legal liability to more precise estimates of losses in particular types of litigation. It might be interesting over time to examine how Chrysler changed and is still changing its accounting for the fiery rear end contingent liabilities from say Year 2008 to Year 2018.

The safety correction that Jeep installed for a few owners is to put a crash-absorbing trailer hitch on the back bumper. I keep waiting for a free trailer hitch on my 1999 Jeep Cherokee. This vehicle really isn't all that hazardous to me because of the way I use it. It sits in my snowed-in barn throughout every long winters up here. I mostly use it for hauling things like nursery plants to my gardens in June and those same plants to the landfill in November.  Sometimes I haul things like big tree limbs to the dump's huge burn pile. If I had a trailer hitch I could make fewer trips to that burn pile.

But I'm not holding my breath for a free trailer hitch. Erika's on my case to just get rid of our old and unsafe Jeep. I tell her I try to be a good guy by keeping a lot old things up here.

Bob Jensen's threads on accounting for contingencies ---

Some Revenue Recognition Links

FASB:  Revenue Recognition

Lucent Revenue Recognition Case Study Essays and Term Papers (not free) ---

PWC:  Revenue recognition: Effectively managing accounting change ---

KPMG:  Accounting for Revenue Recognition: Taking the Necessary Steps for Transition ---

Canada IFRS:  Revenue Recognition: Judgment in the Spotlight

Bob Jensen's threads on revenue recognition issues --- 

New FASB Standard Update on Debt Issuance Costs

From PwC --- Click Here

On April 7, 2015, the FASB issued Accounting Standard Update 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. For public business entities, the standard is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. For all other entities, the standard is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption is permitted for financial statements that have not been previously issued. The new guidance will be applied on a retrospective basis.

Bob Jensen's threads on accounting theory ---

"Pressure in Repo Market Spreads," by Katy Burne, The Wall Street Journal, April 2, 2015 --- 

A shortage of high-quality bonds is disrupting the $2.6 trillion U.S. market for short-term loans known as repurchase agreements, or “repos,” creating bottlenecks for a key source of liquidity in the financial system and sending ripples through short-term debt markets.

Stresses in the repo market are amplifying price swings in government bonds and related debt markets at a time when many investors are reshuffling their portfolios around new interest-rate expectations, following a period of low volatility, traders and analysts said.

Although traders said the impact so far has been manageable, the broad concern is that scarcity in repos will pressure rates and could complicate efforts by the Federal Reserve to lift interest rates when the time comes.

Problems in the repo markets have been the subject of discussions at the U.S. Treasury, people familiar with the matter said. Since there is typically a strong relationship between repos and overall bond markets, the shifts can influence trading in everything from U.S. Treasurys to commercial paper, short-term IOUs taken on by companies.

“The less repo, the less liquidity in bond and other markets,” said Josh Galper, managing principal at consultancy and research firm Finadium LLC.

Continued in article

Jensen Comment
Recall that it was deceptive repo accounting that got Lehman Bros. in trouble and led to a $99 million settlement by the auditing firm, Ernst & Young.

This led to changed accounting rules restricting booking repo sales as revenue especially when it is certain that all the repo sales will be reversed after the balance sheet date. Repo sales gimmicks ---

"Should Repurchase Transactions be Accounted for as Sales or Loans?" by  Justin Chircop , Paraskevi Vicky Kiosse , and Ken Peasnell, Accounting Horizons, December 2012, Vol. 26, No. 4, pp. 657-679.


In this paper, we discuss the accounting for repurchase transactions, drawing on how repurchase agreements are characterized under U.S. bankruptcy law, and in light of the recent developments in the U.S. repo market. We conclude that the current accounting rules, which require the recording of most such transactions as collateralized loans, can give rise to opaqueness in a firm's financial statements because they incorrectly characterize the economic substance of repurchase agreements. Accounting for repurchase transactions as sales and the concurrent recognition of a forward, as “Repo 105” transactions were accounted for by Lehman Brothers, has furthermore overlooked merits. In particular, such a method provides a more comprehensive and transparent picture of the economic substance of such transactions.

. . .


This paper suggests that the current method of accounting for repos is deficient in the sense of ignoring key aspects of the economics of such transactions. Moreover, as shown in the case of Lehman Brothers, under current regulations it may be relatively easy for a firm to design a repo in such a way to accomplish a preferred accounting treatment. For example, a firm wishing to account for a repo as a sale may easily design a bilateral repo with the option not to repurchase the assets should a particular highly unlikely event occur. Such an option would make the repo eligible for sale accounting under SFAS140. In this regard, a standard uniform method of accounting for all repos would reduce the risk of such accounting arbitrage.

Various factors not considered in this paper have probably played a part in the current position adopted by the standard setters regarding repos, including the drive for convergence in accounting standards and the fact that participants in the repo market may be “unaccustomed to treating [repurchase] transactions as sales, and a change to sale treatment would have a substantial impact on their reported financial position” (FASB 2000). It would be a pity if the concerns associated with the circumstances surrounding Lehman's use of Repo 105 prevented proper consideration being given to the possibility of treating all repos in the same manner, one that will reflect the key economic and legal features of repurchase agreements. As lawyers say, hard cases make bad law. But in this case, the Lehman's accounting for its Repo 105 transactions does substantially reflect the economics and legal considerations involved, that is, a sale of an asset with an associated obligation to return a substantially similar asset at the end of the agreement. An alternative approach would be to stick with the current measurement rules but provide additional disclosures. We have offered some tentative suggestions as to what kinds of additional disclosures are needed.


Horrific charts show how fast California is losing its water ---

California’s urban areas are responsible for only 10 percent of the state’s water use. Even as the cities have grown, urban per-capita consumption has declined, from 232 gallons per day in 1990 to 178 gallons per day in 2010. As a result, the cities’ total water use has been relatively stable. Instead, the thirstiest sector of the state is the agricultural industry, which makes up 40 percent of water usage. If you set aside the 50 percent of California’s water that’s reserved for environmental use (maintaining wetlands, rivers, and other parts of the state’s ecosystem), agriculture uses 80 percent of the remaining water dedicated directly or indirectly for human uses.
Leah Libresco, California Chases Easiest Water Savings, Not Biggest ---

While droughts occur intermittently across the globe, other societies have learned better how to cope with water shortages. For instance, Israel (60% desert) has built massive desalination plants powered by cheap natural gas that helped the country weather the driest winter on record in 2014 and a seven-year drought between 2004 and 2010 ---
"California’s Green Drought How bad policies are compounding the state’s water shortage," The Wall Street Journal, April 5, 2015 ---
Jensen Comment
The powerful environmentalists in California would seemingly rather wreck their state's economy than allow cheap natural gas desalinization. In fairness, the cost of getting massive amounts of desalinized water to the agricultural regions are immense. Instead California voters approved $22 billion for water conservation measures that includes paying farmers not to plant crops. That, however, is a costly solution with no long-term future.

My Somewhat Personal Story About the Horrible Drought in California

The purpose of this tidbit is to write about one of California's initiatives to conserve water in agriculture.

Our son Mike is a tax accountant about 35 miles north of Sacramento in Yuba City. His beautiful wife Rene is the mother of their four children and part owner of a family farm along with her two sisters, four brothers, their widowed mother. The sons manage this 5,000+ farm/ranch that mainly produces rice. But there are some other crops like juicing tomatoes and safflower.

Nearby orchards include highly productive trees for such things as walnuts, almonds, apricots, oranges, lemons, etc. Not far away are the thirsty vineyards in the Napa Valley wine country. Incidentally, quite a few of the orchard owners are Sikh immigrants from India. Mike does a lot of tax accounting for these Sikhs.

Farms and orchards in this part of California are irrigated by wells and a network of canals that are usually abundantly replenished with snow melt in the Sierra Nevada mountain range ---
This year and in several preceding years this snow melt is down over 75%.

Rene's family farm does not have orchards. Therefore, to conserve water for orchards the State of California is paying the family not to raise any crops this year. This policy does not work well for orchards because trees that take upwards of 30 years to mature will die if they are not irrigated. Hence, orchard owners are allowed to dig deeper and deeper wells until the wells eventually will probably grow dry. If and when this will happen is unknown by experts at this point in time.

To add to the tragedy of not growing crops on Rene's family farm there are serious externalities. Embedded in this huge farm is a small town (Robbins) made up of mostly Hispanic workers who both maintain and operate all of the equipment used on the farm such as Caterpillar tractors, 18-wheel tractor trailers, and over 20 enormous combines for the rice, tomatoes, and safflower. Most of those Hispanic families are now trying to get by on welfare since there is very little work left on the farm.

Our son David also lives near Yuba City with his wife and four children. He's employed by what I think is the largest multi-state Caterpillar dealer in the world. The dealership is hurting badly by the cutbacks in farming in California. There is not much in the way of farm equipment new sales and service revenues from idle farms. What saves David's job thus far are sales to companies that build and maintain roads and bridges. How long can this go on in a state where tax revenues will eventually dry up as well?

You can imagine that with the decline in employment on these farms that other businesses in the region will feel the adverse economic effects of idle farm workers and idle farms. Before she had children, Rene was the manager of an agricultural chemical dealership in Yuba City. This dealership and others like it are hit hard by idle farms.

Most of the rice in California is exported to Asia. Hence, the price of rice in our supermarkets may not be severe since most of our rice is grown elsewhere in the USA. But the cutback in California rice exports will adversely affect the USA balance of trade.

The enormous problem looming is that south of Sacramento over 60% of the USA's perishable fruits and vegetables are grown. In most instances these farmers are still allowed to dig deeper and deeper wells for irrigation water to make up for lost from reservoirs that are drying up. There's an unknown limit to how long deeper wells will survive. Eventually, some produce in our grocery stores may be much more expensive than our porterhouse steaks.

In anticipation of increasing demand for local organic farm produce up here in the New Hampshire mountains, the son, Alex, of one of our best friends up here quit his high tech computer job and is in Hawaii on an organic farm internship. In anticipation of the rising prices of fruits (think apples) and vegetables up here he hopes to start an organic farm in these White Mountains.  Last summer he worked on a rapidly growing organic farm called the Ski Hearth farm about four miles down the road from our cottage ---

It will be sad when Alex fills his first produce order to ship via FedEx to California.

If there is no drought relief soon for California it will be a game changer for the entire USA.

As far as financial reporting goes drought risks for business firms are mostly covered by accounting rules for contingency liabilities and risks. This is one of the most important and most poorly covered parts of accountancy theory and practice. Bob Jensen's threads on contingencies in accountancy are at

LinkedIn just bought online learning company Lynda for $1.5 billion ---

Lynda Weinman --- ---

We provide training to more than 4 million people, and our members tell us that helps them stay ahead of software updates, pick up brand-new skills, switch careers, land promotions, and explore new hobbies. What can we help you do?

Our teachers are effective, passionate educators, who are also respected authorities in software, creative, and business fields. They're here to share their expertise in dozens of topics with you, with courses organized into these eight subject areas.

For example, view all of Linda's accounting courses at
There especially seems to be quite a lot on QuickBooks training.

PC Magazine Review ---,2817,2385781,00.asp

Bob Jensen's threads on distance education and training ---

Among the subset of students where each student was accepted in 2015 to every Ivy League school, what does every one of these students have in common

The answer is not each student is an all-state athlete  with s SAT score above 2,100.
The answer is not that each student is African American.


Here's the link to the admissions essay of one of these students admitted to every Ivy League school ---
I was not all that impressed that this was such an exceptional essay.

How to Mislead With Statistics
These 9 US colleges are more selective than some Ivy League schools ---

Jensen Comment
There are various ways in which rejection rates  can be misleading. The first question to as is what proportion of the students who were accepted by these nine US colleges would be rejected by Ivy League schools. My opinion is that most would be rejected except for students admitted to exceedingly prestigious universities like MIT and Stanford.

The College of the Ozarks is a unique institution where students work to pay their tuition. Most students in the Ivy League schools can either afford those schools or have significant financial aid.  Rejection rates are high because millions of students would like to get a free college education.

Except for some of those selective 9 colleges like Stanford and MIT, the admission rates themselves are not comparable with Ivy League colleges and universities. Most top graduates do not even bother (and pay) to apply to the most prestigious universities like Harvard, Yale, Stanford, and MIT because they conclude ahead of time that probabilities of being rejected are so high that it's not worth the time, money, and stress to apply in the first place, particularly graduates who do not have very unique resumes in addition to nearly perfect SAT scores. White males and females who have not also done something remarkable other than ace the SAT examination generally know what it takes to be admitted to an Ivy League university.

An example of something unique might be to have gone to Haiti after a huge hurricane and helped to teach children of victims in tent camps. Ot it might help to have given piano lessons or math for three entire summers to children of mothers incarcerated in prison.

What it takes to be admitted to a very prestigious university ---

Also see

What does it really take to get into the Ivy League? Part I: Grades

What does it really take to get into the Ivy League? Part II: PSAT, SAT, and ACT

What does it really take to get into the Ivy League? Part III: AP, IB, and SAT II Exams

What does it really take to get into the Ivy League? Part IV: Extracurriculars

What does it really take to get into the Ivy League? Part V: Essays

What does it really take to get into the Ivy League? Part VI: Recommendations

What does it really take to get into the Ivy League? Part VII: Application Strategy

What does it really take to get into the Ivy League? Part VIII: Interviews

What does it really take to get into the Ivy League? Part IX: Checklist

What does it really take to get into the Ivy League? Part X: Epilogue

How to Share a Hotel’s Single Wi-Fi (WiFi, Wireless) Connection With All Your Devices ---

"Think twice before pulling up personal information online from a hotel room or coffee shop," by Cale Guthrie Weissman, Business Insider, March 27, 2015 ---  

"How to Keep Your Public Web Use Secure and Private with a VPN," by Brain Croxall, Chronicle of Higher Education, November 1, 2010 ---

Mac OS X Isn’t Safe Anymore: The Crapware / Malware Epidemic Has Begun ---

Bob Jensen's threads on Crapware/Malware are at

Truth in Taxes (how to cut down on tax evasion)
Tax evasion costs federal, state and local governments more than $400 billion a year. But Stanford researchers say that applying insights from social psychology to the way tax forms are written could increase compliance. Asking clearer, more direct questions, for example, would take advantage of the fact that it's cognitively harder to lie than to tell the truth.
Stanford University ---

From the CPA Newsletter on April 6, 2015

Individuals can claim a credit for installing energy-efficient property at home
Sec. 25D permits a 30% credit for costs incurred to install certain energy-efficient property, including solar electric property, solar water heating property, fuel cell property, small wind energy property, and geothermal heat pump property in a qualified dwelling unit. This article describes how to qualify for the credit for geothermal heat pump property placed in service on or before Dec. 31, 2016.
The Tax Adviser (4/2015)

Jensen Comment
My cousin on an Iowa farm removed the furnace from his house and replaced his heating pant with a geothermal heat pump. I think most of these pumps require an underground pool/lagoon. However, one of Don's son's digs wells and dug a second well for Don and LaDonna to use just for the geothermal heat pump. This wastes water, however, in regions where well water is more precious (like in the West).

They claim this works great for heating and cooling year around. Don did install back up electric heat in the downstairs rooms of this old farmhouse, and he has dehumidifiers for humid Iowa summer days.

However, from January-March Don and LaDonna have a double wide in Arizona where their daughter lives. I suspect that during those months the geothermal heat pump is not put to a full text as the frigid winds swoop down from Canada.

Bob Jensen's tax helpers ---

What does a Boeing 787-10 cost and why is it such a high price?

In round numbers $300 million for reasons outlined at

March 29, 2015 reply from Tom Sellin


March 30m 2015 reply from Bob Jensen

Hi Tom,

An interesting point to build on with students is that this airliner is made 50% "composites." Read that as meaning "rare earth composites." The US Department of Energy claims demand for rare earth materials increased over 60% since 2003.

Rare Earth Elements That Were Added to the Periodic Table ---

 I really learned a lot from a recent CBS Sixty Minutes module on rare earth elements and their composites. Most of all I learned that rare earth elements in general are not all that rare. They can be found in a lot of places all over the world.

The problem is that they are usually embedded in only small amounts among other earth components such that it becomes both difficult and expensive to extract them with a lot of mining costs and environmental externalities. This has tended to give China a near-monopoly on their mining due to relatively low labor costs and low environmental regulations.

An enormous problem is that the USA military and airline industry are now highly dependent upon China --- a nation willing to exploit its monopolies for economic and political purposes. In times of dire emergencies such as WW III the USA could turn elsewhere for supply, but expanding mining operations elsewhere is both costly and subject to very long delays. There is at least on large mining operation in the USA but it is a drop in the bucket compared to output needs for both the USA and the rest of the world.

The outstanding Sixty Minutes link is at

A blog post by 60 Minutes' Kevin Livelli, one of the producers who reported on rare earth elements this week:

Not long ago, if you had stopped me on the street and told me there was an interesting 60 Minutes story to be told about the lanthanide series of rare earth elements, I would have said you're crazy.

To begin with, who's ever heard of them? And even if you did manage to find them on that obscure bottom rung of the Periodic Table, you'd hit another hurdle - how to pronounce them. They have names only Dr. Seuss might have dreamt up. There's terbium, dysprosium, ytterbium, and lutetium. Neodymium, europium, cerium, and lanthanum. Not exactly the kind of thing that rolls off the tongue.

"...perhaps a little dose of pop culture might spark the imagination. After all, China's hold on rare earth elements is a running theme in 'House of Cards'..."

In this case, I stumbled on rare earths by accident. While doing some other reporting, I found that they were on the mind of the Director of National Intelligence, General James Clapper. He mentioned them in congressional testimony, as part of an annual "Worldwide Threat Assessment" -- a litany of threats to national security.

Clapper told Congress that rare earths are "essential" to the 21st century global economy, including the burgeoning green tech industry, and he emphasized that they are "critical" to advanced defense systems. That was intriguing, I thought. But there was more. One country - China - has been holding a "commanding monopoly" over world supply, at the time about 95 percent of the market, and things weren't going to change soon.

The light bulb went off. Here was something that touched people's lives not just in their everyday use (televisions, smartphones, tablets, computers, stereos, cars), but also had implications for U.S. energy security (hybrids, wind turbines, energy efficient lighting) and national security as well (precision-guided missiles, radar, night-vision goggles, lasers, satellites, fighter jets, submarines).

A little more digging revealed that the U.S. had actually once led the world in the rare earth industry and pioneered many of its common applications before ceding that dominance to China. I wanted to know how that happened and what it all meant. Here were good questions for our 60 Minutes story. My colleague, Graham Messick, and I set out to find the answers.

In doing so, we quickly found reporting on rare earths to be especially challenging. To begin with, we had to learn how rare earths are different from other metals and minerals - like iron or copper. What makes them rare? Turns out, as Lesley Stahl explains in our story, the name is a bit of a misnomer. Rare earths occur naturally in lots of places, but only a few have concentrations high enough to mine. You might think, then, that if the U.S. had more rare earth mines, the problem would be solved. You'd be wrong.

Even if you were to luck out and find a mine like the one owned by Molycorp out in Mountain Pass, California, and get it up and running, your work isn't finished. Unlike other metals, rare earths don't go to market in raw form. They have to be separated from one another and many are turned into metals first, which means they must be processed to exact specifications (sometimes up to several "9's" as in 99.9999 percent purity) that take into consideration their intended end use. And that is very hard to do. So to be successful in the rare earth business, you need to have not just access to the right rocks, but also access to the right know-how that will allow you to turn those rocks into something useful. That complex combination is what makes them "rare."

Another challenge in reporting on rare earths is understanding the supply chain. Rare earths feed the high tech industry around the world, and supply chains from mine to manufacturer can include as many as 12 stops along the way. So, for example, if you were to follow the dozen or so different rare earths metals that experts say are in each iPhone all the way back to the mine, you'd have an extremely hard time doing so. Same goes for the rare earths used in the F-35. The lengthy supply chains get very complicated very quickly.

What's more, lasting success in the rare earth industry, I learned, only comes when the supply chain companies choose to operate close to the source of rare earths and cultivate a symbiotic relationship. Today, China is on top not only because it has the biggest mine and the most know-how, but also as a result of having drawn manufacturers from around the world that use rare earths (i.e. supply chain customers) to Asia.

To help us understand how rare earths impact our lives and to show us where they can actually be found inside our gadgets, we interviewed Ed Richardson, the president of the U.S. Magnetic Materials Association, a trade group that represents American rare earth magnet makers.

In the video player above, you'll see that Richardson came to the interview with what looked at first to be a bunch of electronic junk. It turns out it really was his old stuff - an old cell phone, ear buds, and a toy helicopter -- but then we watched him dissect each object to reveal the rare earth magnets inside.

Along the way, he taught us a few other cool facts about rare earths. For instance, they can hold a thousand times their own weight, and they are a key technology behind the miniaturization of modern gadgets, enabling them to be smaller and lighter.

If, after watching our 60 Minutes story, you still think rare earths bring up too many bad high school chemistry memories, perhaps a little dose of pop culture might spark the imagination.

After all, China's hold on rare earth elements is a running theme in "House of Cards" (think of Raymond Tusk's push for "Samarium 149"). And defending the only U.S. rare earth mine is Jason Bourne's mission in "The Bourne Dominion." There's even a way, if you like to take matters into your own hands, to fight for global control of the rare earth supply in the video game "Call of Duty: Black Ops II." I guess the Periodic Table isn't so boring after all.

Jensen Comment
Rare earth minerals accounting presents wide-ranging research opportunities in at least two dimensions. One is the dimension of financial risks to the buyers and produces of rare earth minerals. The other dimension is environmental accounting in general.

It would appear disclosure guidance to date leaves a lot to be desired.

Making Rare Earth Element Disclosure Transparent and Compliant ---

For some links on this matter go to the SEC homepage ---
Then conduct a search for "rare earth"

April 1, 2015 message from Wayne Bremser (which turned out to be an April Fools Day gotcha of Bob Jensen)

I just read some exciting news in a newsletter, which you might want to add to Bob Jensen's Threads. The Obama administration announced yesterday that the USA will require IFRS effective fiscal years beginning January 1, 2020 for all US firms listed on public stock exchanges. SEC Chairman, Mary Jo White made the announcement yesterday at a press conference in Washington, DC. For more details, click on the PWC link below. 

Best regards,

April 1, 2015 reply from Bob Jensen (before he realized it was an April Fools prank)

Thanks Wayne,

Now auditors must be more principled and blind to bright lines.

And the AICPA and large accounting firms will make gazillions teaching IFRS to the USA and rewriting all that accounting software.

Three cheers to the worldwide IASB monopoly controlled mostly by the EU.


Jensen Comment
All those old CPA exams can soon be trashed as study guides. The Canadian Chartered Accountancy exams will soon be better study guides.

Re-file all your accounting books to the accounting history part of your library, which may be in your basement.

April 3, 2015 revelation that it was an April Fools Hoax

Bob, It looks like you played an April fools too. Yes-- Wayne is an April Fool type of professor (only the last few years). Maybe it is the effect of aging. I hope that you can appreciate the humor. Mary Lou and I remember our nice visit every time that she make pancakes.

I wish you and Erika a Happy Easter!

Best regards,

Wayne G. Bremser, MBA, CPA, Ph.D. Professor of Accountancy Department of Accountancy and Information Systems Villanova School of Business Villanova University, B3024 Bartley Hall, Villanova, Pa. 19085 610-519-4314; Fax 610-519-5204 Home page:


A College math professor brilliantly pranked his students and won the internet ---
His name is not Wayne Bremser

Conceptual Framework Controversies

FASB Conceptual Framework ---

The objective of the conceptual framework project is to develop an improved conceptual framework that provides a sound foundation for developing future accounting standards. Such a framework is essential to fulfilling the Board’s goal of developing standards that are principles based, internally consistent, and that lead to financial reporting that provides the information capital providers need to make decisions in their capacity as capital providers. The new FASB framework will build on the existing framework.

"FASB’s proposed 2015 GAAP taxonomy available for comment," by Ken Tysiac, Journal of Accountancy, August 29, 2014 ---
To access the proposed taxonomy go to (requires login permission and password)
Note the FAQs link

IASB Conceptual Framework ---

The Conceptual Framework sets out the concepts that underlie the preparation and presentation of financial statements. It is a practical tool that assists the IASB when developing and revising IFRSs. The objective of the Conceptual Framework project is to improve financial reporting by providing the IASB with a complete and updated set of concepts to use when it develops or revises standards.

ASBJ Conceptual Framework --- 1503 02C CF Questions.pdf

"The IASB and ASBJ Conceptual Frameworks: Same Objective, Different Financial Performance Concepts," by Carien van Mourik and Yuko Katsuo, Accounting Horizons, Volume 29, Issue 1 (March 2015) ---


This paper illustrates that, despite their general agreement on the decision-usefulness objective of general purpose financial reporting, the Accounting Standard Board of Japan (ASBJ) and the International Accounting Standards Board (IASB)'s conceptual frameworks are based on two different concepts of financial performance. By identifying and contrasting the two financial performance concepts and their impact on the rest of the frameworks and by explaining the thinking that underpins the ASBJ's chosen financial performance concept, it contributes to a debate about the role of financial performance concepts in fulfilling the decision-usefulness objective. Such a debate is pertinent to the revision of the IASB's Conceptual Framework, which is scheduled for completion in 2015.


. . .

The revision of the International Accounting Standards Board (IASB)'s Conceptual Framework is scheduled for completion in 2015. This commentary is motivated by the fact that neither the 2010 IASB Conceptual Framework nor the IASB's 2013 Discussion Paper explains in detail how the particular concept of financial performance underpinning the IASB Conceptual Framework leads to financial reporting standards and financial accounting information that best fulfill the objective of general purpose financial reporting.


This commentary contrasts the 2010 IASB Conceptual Framework with the Accounting Standard Board of Japan (ASBJ)'s 2006 Conceptual Framework Discussion Paper (DP). Both conceptual frameworks are developed from the Financial Accounting Standards Board (FASB) Framework, but despite their agreement on the decision-usefulness objective of general purpose financial reporting, the IASB and the ASBJ arrive at different concepts of financial performance. After identifying and contrasting the IASB's and the ASBJ's financial performance concepts and their impact on the rest of the two frameworks, this commentary explains the ASBJ's arguments for its choice of financial performance concept. The aim is to stimulate and contribute to an international academic debate about how different concepts of financial performance are thought to best fulfill the same decision-usefulness objective.


In this commentary, the term “financial performance concept” refers to the logic and principles underlying the definition, recognition, measurement, presentation, and disclosure of the elements of the statement of financial performance. A system of articulated financial statements (where the flow statements reconcile with items in the stock statement at two points in time) requires that the logic and principles be the same as that underlying the definition, recognition, measurement, presentation, and disclosure of the elements of the statement of financial position, the cash flow statement, and the statement of changes in equity. In contrast, under the non-articulated view, the logic and principles for the stock statement and the flow statements may be different and therefore the financial statements cannot directly be reconciled, either within a period or across time.1 Both the 2010 IASB Framework and the 2006 ASBJ Framework (which, as will be explained later, is still a discussion paper [DP]) adhere to the articulated view.2


The 2010 IASB Framework adopts an “all-inclusive realisable changes in net assets” concept of financial performance. This means that it recognizes changes in assets and liabilities as income or expenses when they are realizable (i.e., measurable and reasonably certain to be realized). On the other hand, the 2006 ASBJ Framework DP adopts a “released-from-risk net income” concept of financial performance. It recognizes changes in assets and liabilities as revenues/gains and expenses/losses in the profit or loss section of the statement of financial performance when they have either been realized through the receipt or payment of cash or assets convertible into cash, or released from risk by virtue of deriving from a financial investment in an asset for which the exit price equals the entry price.


This commentary consists of four further sections. First, we present a brief comparative overview of the contexts in which the 2010 IASB Framework and 2006 ASBJ Framework DP were developed, and discuss their objectives, statuses, and structures. Second, we contrast the objective of general purpose financial reporting, the qualitative characteristics, and the financial performance concepts in both frameworks. Third, we describe how the ASBJ decided on the released-from-risk net income concept of financial performance and discuss the accounting thought underpinning this financial performance concept. The fourth and final section summarizes and concludes.


CONTEXTS, STATUSES, AND STRUCTURES Context and Status of the 2010 IASB Framework

The International Accounting Standards Committee (IASC) was established in 1973 by 14 accountancy bodies in seven countries (Camfferman and Zeff 2007, 48–49). In the early years, the IASC took decisions on a pragmatic rather than a conceptual basis with the result that its early standards included numerous, not necessarily theoretically consistent, options (Camfferman and Zeff 2007, 253). After the FASB completed its conceptual framework, the IASC established its own conceptual framework in 1989. Framework for the Preparation and Presentation of Financial Statements “was strongly reminiscent of the FASB's Statements of Financial Accounting Concepts No. 1, 2, 3, and 5 (1978–1984)” (Camfferman and Zeff 2007, 260).


The 1989 IASC Framework had been established following a due process that was in essence the same as that set out in the 1973 IASC Constitution (Camfferman and Zeff 2007, 352). In 2001 the IASB adopted the 1989 Framework without any critical review of its philosophical and theoretical foundations. In October 2004, the IASB and the FASB decided to start a joint project to work on a common conceptual framework, which resulted in Chapters 1 and 3 of the 2010 IASB Framework. The objective of the project was not to fundamentally review the old 1989 IASC Framework or the existing FASB Framework, but rather to iron out differences between the two frameworks. In 2012 the IASB announced that it would recommence its work on revising Chapter 4 (the remainder of the 1989 IASC Framework) on its own and in July 2013 issued a DP (IASB 2013). An exposure draft is expected in early 2015. Context and Status of the 2006 ASBJ Framework DP


Until 2001, the Business Accounting Deliberation Council (BADC) was the public accounting standard setter in Japan.3 The Japanese “Accounting Big Bang” started with the establishment of the Financial Supervisory Agency in 1998, renamed the Financial Services Agency (FSA) in 2000, with responsibility for ensuring the stability of the Japanese financial system and the regulation and transparency of the Japanese financial and securities markets.4 On July 26, 2001 the Financial Accounting Standards Foundation was established consisting of a board of directors, trustees, the ASBJ, and an advisory council. Since then, the ASBJ has been Japan's private sector accounting standard setter.


In January 2003, a Concepts Working Group, organized by the ASBJ and consisting of nine accounting academics5 and the seven ASBJ members, started the task of drafting a conceptual framework for the ASBJ. The Concepts Working Group issued its first full draft of a DP on June 22, 2004, which was revised in September 2004. By 2005 however, the IASB and FASB had started their joint convergence project that included convergence of their conceptual frameworks. Furthermore, in 2005 the IASB and ASBJ had started meetings on the convergence of financial accounting standards, and in 2006 the FASB and ASBJ did the same. Around the same time, Japan was being considered in the equivalence assessment by the EU (Nishikawa 2011, 4). For these reasons, the ASBJ chose to issue the Conceptual Framework again as a DP rather than as an exposure draft, which it did in December 2006 (Saito 2007, 3). The ASBJ believed that the DP would further evolve through participation in international discussions, particularly with the IASB and the FASB (ASBJ 2006, Preface). In spite of its unofficial status, the 2006 ASBJ Framework DP did have an impact on Japanese accounting standards, for example in the area of accounting for pensions.6 Structures of the Frameworks


The 2006 ASBJ Conceptual Framework follows the structure of the 1989 IASC/2001 IASB Conceptual Framework as the ASBJ thought that this would facilitate communication and mutual understanding (ASBJ 2006, Preface). The 2010 IASB Conceptual Framework has a slightly different structure, but it also consists of an introduction and four chapters. As yet, Chapter 2 on the reporting entity has no content, while Chapter 4 is the remainder of the 1989 IASC/2001 IASB Conceptual Framework. Table 1 shows the comparative structures of the two frameworks.

Continued in article

"Developing a Conceptual Framework to Appraise the Corporate Social Responsibility Performance of Islamic Banking and Finance Institutions," by M. Mansoor Khan, Accounting and the Public Interest, American Accounting Association, Volume 13, Issue 1 (December 2013) ---

This paper fills some of the theoretical and empirical deficiencies regarding Corporate Social Responsibility (CSR) dimensions in Islamic Banking and Financial Institutions (IBFIs). The firms' CSR initiatives are the key to secure success in modern business and society, and there is a scope to develop a broader understanding of CSR in globally integrated business and financial markets. This paper provides the Islamic perspective of CSR, which is etho-religious based and, thus, more meaningful and intensified. It proposes a CSR framework for IBFIs based on principles of Islamic economics and society. The proposed framework urges IBFIs to engage in community-based banking, work toward the betterment of the poor, ensure the most efficient and socially desirable utilization of financial resources, develop their institutional frameworks, infrastructures, and innovative products to facilitate the wider circulation of wealth and sustainable development in the world. This paper observes that IBFIs have failed to deal with underlying CSR challenges due to lack of commitment and expertise in the field. The CSR-based outlook of IBFIs can only ensure their legitimacy, sustainability, and long-term success.


Jensen Comment
All accounting standard setters destroyed the concept of net income by giving priority to balance sheet concepts and fair value accounting where unrealized changes in transitory fair value are combined with realized net income. As a result there is no longer a concept of net income since the days of historical cost accounting standards ala Paton and Littleton ---

Net earnings and EBITDA cannot be defined since the FASB and IASB elected to give the balance sheet priority over the income statement in financial reporting ---
"The Asset-Liability Approach: Primacy does not mean Priority," by Robert Bloomfield, FASRI Financial Accounting Standards Research Initiative, October 6, 2009 ---


April 4, 2015 reply from Denny Beresford


When the FASB began its interest in internationalization of accounting in my second or third year there (around 1990), we began holding meetings of those who were issuing accounting standards in various countries. At one of our first meetings we decided to discuss the conceptual frameworks followed in the various countries. The thinking was that if the group couldn't agree on underlying concepts, there wasn't much sense in debating specific issues such as lease accounting or income taxes because without agreement on an underlying framework any decisions on issues would be ad hoc and unlikely to be consistent.

Back then, only the U.S., the U.K., Canada, and Australia had anything resembling a true conceptual framework. The IASC followed years later. I recall at least one country asserting that while it had no formal framework, one could be implied from the individual standards that had been issued to date! Given the dearth of attention to fundamental concepts in other countries' accounting bodies at that time, the FASB spent most of the rest of my tenure working with the three countries mentioned earlier along with the IASC on specific topic research projects.

As an aside with reference to the article you cite in your message, near the end of my term in 1997 I met with representatives of the group that set accounting standards in Japan at that time. They told me that the objectives of financial reporting in that country were to provide useful information to investors, to determine that companies are in compliance with financial regulations, to provide data for federal taxing authorities, and to help management run the business. Without trying to be too argumentative, I pointed out that one set of GAAP numbers couldn't possibly meet all of those objectives as they were dramatically inconsistent with one another.

In summary, there's both a need to have an effective CF and a need for the standard setters to actually follow it in their subsequent activities.



April 5, 2015 reply from Bob Jensen

Hi Denny,

I agree entirely but with worries that the Devil is in the details.

It's the Devil's details in life that keep the lawmakers and the Supreme Court embroiled in politics even though the USA has a constitution and Bill of Rights. This is why our courts are now unelected legislatures that are made up of political advocates more than legal scholars.

As I've examined the emerging FASB's Conceptual Framework over the years I find it lacking in the most important details in financial contracting in the USA. Our financial brethren and their attorneys and accountants keep inventing financial structures and financial instruments that are increasingly complex and virtually impossible to fit into the Conceptual Framework that has evolved to date. Net income is now partly fiction that varies only on paper and not in the revenue's till. Debt is no longer conceptualized debt. Equity is no longer conceptualized equity as financing contracts are filled with conversion clauses and options that conditionally alter financial risks with changing circumstances.

I would never advocate ceasing efforts to improve conceptual frameworks for accounting standards around the world. But these will do little, if anything, to reduce political game playing in the setting of accounting standards.

The EU recently showed the IASB that it's politicians have the overriding power to change IFRS standards and made the IASB bow toward Brussels.

The USA Congress recently showed the PCAOB that it has the power to change auditing standards such when Congress literally stomped out PCAOB deliberations to mandate rotation of audit firms (as is now required in the EU).

Hence I agree with you Denny and will forever admire the way the FASB under your direction faced off with Silicon Valley on the issue of booking employee stock options as compensation, but I don't think the Conceptual Framework was the main reason the FASB won on this issue. Silicon Valley was just too new and too naive to know how to control the USA Congress.

My point is that a superb conceptual framework and impeccable logic will never take the politics out of standard setting in the world. Indeed we probably will be unable to take the politics out of the setting of accountancy conceptual frameworks if they become more relevant to the setting of accounting standards that impact business firms, government agencies, labor unions, charities, and national economies.

You are my hero in terms of having stood up for principles above politics. I'm not certain that doing so in the 21st Century is possible when the principles bite the powerhouses in politics.




April 5, 2015 reply from Denny Beresford


I absolutely agree with you. Having a good conceptual framework only provides a starting point for debate of many of the most vexing accounting issues. The FASB’s framework helps rule out what would be unreasonable choices but it still leaves room for much disagreement, particularly on recognition and measurement issues. And those are the ones that make the most difference in financial reporting.

I also agree with your observation that political considerations will always be a factor. If nothing else there will be those who will argue that “economic consequences” should be more important than accounting theory in determining what is the most appropriate financial reporting for investors. Of course, those economic consequences are almost always unprovable.

In other words, it’s a dog eat dog world out there and the FASB is always wearing Milk Bone underwear!



Bob Jensen's threads on the differences between IASB versus FASB standards ---

Bob Jensen's threads on accounting theory ---

Teaching Case
"Using the Codification to Research a Complex Accounting Issue: The Case of Goodwill Impairment at Jackson Enterprises," by Casey J. McNellis, Ronald F. Premuroso, and Robert E. Houmes , Issues in Accounting Education, Volume 30, Issue 1 (February 2015) ---

This case is designed to help students develop research skills using the Financial Accounting Standards Board's (FASB) Accounting Standards Codification (Codification or ASC). The case also helps develop students' abilities to analyze and recommend alternatives for a complex accounting issue, goodwill impairment, which is very relevant in today's business world. This case can be used in an undergraduate or graduate accounting class, either in groups of students or as an individual student project.

. . .

Shortly after the case was tested in the graduate course, it was administered to undergraduate students enrolled in an Intermediate I course (n = 50). These students had learned the basics of the two-step impairment test in the week preceding the assignment of the case. As indicated in Table 1, the undergraduate class averaged 57.33 percent on the six-question post-case assessment. These students did not receive the six-question assessment prior to reading the case. This was done partially out of necessity because of the time constraints imposed by the intermediate-level curriculum. The Intermediate I course contains a fixed amount of material that must be learned by students prior to their enrollment in the Intermediate II course.7 Given the demands of the curriculum, the instructor only had a portion (approximately 60 minutes) of one class period in which to devote to the case. This class period was used to discuss the case and to administer the case-related survey items (see paragraph below) after the students read the case and answered the case requirements.8 However, given the pre-test scores that we observed in the graduate class, we also felt this course of action was appropriate, as it was deemed unlikely that the undergraduate students' pre-case knowledge of the in-depth issues would be greater than the graduate students, who had already taken the Intermediate I course. As such, we believe the undergraduate post-case assessment average provides additional evidence of the efficacy of this case.

After the case study was completed and the results and the answers to the case study were discussed and reviewed with the students in each respective class, the instructors had each student complete a five-question survey found in Appendix A. The results of the survey are summarized in Table 2. In general, the mean responses to the five survey questions exceeded 4 on a scale of 1 (disagree) to 5 (totally agree) for the students performing this case study.

Bob Jensen's threads on impairment ---


Jensen Comment
This is stinking bull poop. Sure stimulating the economy is more important than having retirees and future retirees earn safe interest returns on their savings, but Bernankie should not lie outright to seniors. He did indeed throw them under the bus in favor of economic stimulus and Quantitative Easing ---

Ben Bernankie should not lie to us when we're looking up at the bottom of the bus while the capital saved for retirement in confiscated just trying to stay alive before our ticket is punched. I was lucky! In 2006 near my retirement date I negotiated a relatively high lifetime fixed interest rate on my TIAA lifetime annuities.

University employees today are screwed when trying to negotiate safe fixed-rate lifetime annuities under the Bernanke bus with no relief in sight for earning decent retirement returns on their savings balances. The only alternative from under the Bernanke bus is for retirees to take on variable returns based upon fluctuating stock market or real estate values with much higher financial risk and variability than a lifetime of guaranteed monthly lifetime returns.

Bernankie says seniors should just lie there and enjoy QE's miserable low-risk returns on their savings.

Bull Poop
"BERNANKE: We didn't throw seniors under the bus," by Ben Bernanke, The Wall Street Journal, March 30, 2015 ---

Bob Jensen's personal finance helpers ---

Noble Group ---

From the CFO Journal's Morning Ledger on April 10, 2015

Noble Group faces fresh attack on its accounting practices
Commodities trader Noble Group Ltd.’s accounting practices came under attack from short seller Muddy Waters LLC, the third outfit this year to question its financial statements. Muddy Waters said Noble “seems to exist solely to borrow and burn cash,” and alleged its 2011 acquisition of PT Alhasanie was designed to reduce a quarterly loss reported that year.

"Noble Group Faces Fresh Attack From Muddy Waters," by Jake Maxwell Watts And Mia Lamar, The Wall Street Journal, April 9, 2015 ---

SINGAPORE—U.S. short-seller Muddy Waters LLC has joined in the criticism being lobbed at Noble Group Ltd. , becoming the third outfit this year to publicly question the commodities trader’s management and financial statements.

In a 14-page report dated Wednesday and published on its website, Muddy Waters said Noble “seems to exist solely to borrow and burn cash,” and alleged its 2011 acquisition of Indonesian coal-mining service company PT Alhasanie was designed to reduce a quarterly loss reported that year, Noble’s first as a public company.

Noble has repeatedly denied any wrongdoing. In a statement Thursday, it said it “completely rejects the allegations” while noting that Muddy Waters had publicly stated that it has a short position in Noble’s shares. “The company is studying the report in detail,” it said.

Noble is the second Singapore-listed commodities trader that Muddy Waters has criticized. In 2012, it attacked Olam International Ltd. ’s accounting practices and investments, which left Muddy Waters facing off with Singapore state-investment firm Temasek Holding Pte. Ltd. Temasek eventually helped lead a buyout of Olam.

Muddy Waters had more success with a 2011 attack on Chinese forestry company Sino-Forest Corp., which was later delisted in Toronto and filed for bankruptcy. Prominent U.S. hedge-fund manager John Paulson has said his firm, Paulson & Co., suffered millions of dollars in losses from a stake in Sino-Forest.

Noble first came under attack in February when an anonymous outfit calling itself Iceberg Research claimed Noble’s balance sheet overvalued its commodities contracts and associate companies. Hong Kong-based GMT Research has also published critical reports on Noble, including one this week that questioned the company’s valuation of Mongolian mining assets.

“Muddy Waters’ entrance into the fray validates some genuine concerns that exist over Noble’s financial statements,” GMT founder Gillem Tulloch said Thursday. “We believe Noble’s financial statements are some of the most curious we’ve seen in Asia.”

Noble earlier rebutted some of Iceberg Research’s allegations. In March, it filed a lawsuit in Hong Kong against Iceberg and a former Noble employee it said it suspected was behind the reports.

Singapore-listed shares of Noble, which is headquartered in Hong Kong and trades in commodities such as oil and coal, fell as much as 9% in Thursday trading. They closed at 0.86 Singapore dollars (63 U.S. cents), down 5.5% for the day and more than 28% since the Iceberg report was published in mid-February.

In its report, Muddy Waters echoed Iceberg’s criticism of Noble’s acquisitions.

“When we scratched the surface of [the PT Alhasanie] transaction, we found numerous red flags and aggressive actions by Noble,” Muddy Waters founder Carson Block wrote. For instance, the report alleged, the commodities trader paid $300,000 for PT Alhasanie and immediately booked a gain of more than $46 million.

Continued in article

"Noble Group Says Auditor (Ernst & Young) Needs More Time to Review Accounts," by Yuriy Humber, Bloomberg News, February 26, 2015 ---

Full Annual Report for the Noble Group --- Annual Report 2011.pdf

Bob Jensen's threads on fair value (mark-to-market) accounting ---

Bob Jensen's threads on Ernst & Young (EY) ---

From the CFO Journal's Morning Ledger on March 31, 2015

SEC files fraud charges against Lynn Tilton, Patriarch
Flashy financier Lynn Tilton and her Patriarch Partners LLC are facing allegations that they defrauded investors by hiding the true value of loans in some funds managed by the private-equity firm. The SEC said Ms. Tilton and Patriarch “breached their fiduciary duties” by valuing the loans using a different methodology than described in the funds’ offering documents.

Bob Jensen's Fraud Updates ---


Deutsche Bank faces Libor fine of more than $1.5bn ---

Deutsche Bank could face a more than $1.5bn penalty for allegedly manipulating Libor, which would be the biggest fine imposed so far on a bank accused of rigging the benchmark borrowing rate, according to people familiar with the case. The German lender is in talks with US and UK authorities to settle the allegations and an agreement could be reached by the end of April, the people said. But the terms have not been finalised, which means the fine could go higher, the people added. A Deutsche Bank subsidiary could also plead guilty as part of the deal.

Bob Jensen's Fraud Updates ---

Undergraduate and Graduate School "Graduate" Numbers
PwC tops graduate employer table again ---

"One Less Fraud in Washington:  Better accounting for federal loan defaults, but Chuck Schumer objects," The Wall Street Journal, March 29, 2015 ---

Kudos to Rep. Tom Price (R., Ga.) and Sen. Mike Enzi (R., Wyo.) for moving Washington toward more honest accounting. Recently we urged the chairmen of Congress’s budget committees to end one of Washington’s most expensive scams. The good news for taxpayers is that the two lawmakers are teaming up to require more accurate reporting on federal loan programs.

The problem, frequently noted by Democrat Douglas Elmendorf when he was running the Congressional Budget Office, is that federal law requires the government to underestimate the costs of defaults in various credit programs. In an only-in-Washington farce, Mr. Elmendorf would issue official CBO scores showing huge taxpayer profits generated by, for example, student loans—and then he would explain in a separate note why the official numbers were bogus.

Messrs. Price and Enzi can’t change the law until there’s a U.S. President who cares about the taxpayer cost of federal lending. But the two lawmakers can use the congressional budget resolution to change how Congress analyzes credit programs. The two Republicans aim to require CBO to report loan costs using more accurate fair-value accounting that is used in the private economy. In this way voters can get a true sense of their impending burden before Congress holds its next vote to create or expand federal credit programs.

Transparency in government finance is obviously not high on the agenda of Sen. Chuck Schumer (D., N.Y.), whose Democratic Policy and Communications Center sent out a release last week saying that this GOP rule change “rigs the rules against students” and other borrowers.

The truth is that this game has been rigged against taxpayers for far too long. Rep. Price and Sen. Enzi are leading the way on an important reform to make the next Beltway fraud harder to perpetrate.

USA Public Company Accounting Oversight Board (PCAOB)  ---

PCAOB Inspections That Tend to Be Critical of Both Large and Small Auditing Firms in the USA ---
There are many complaints, but a common finding is that audit firms are too eager to replace detail testing with dubious analytical reviews. Other complains include such things as poor supervision of inexperienced auditors.

"PCAOB Inspection Reports at 5: What Can We Learn," by Tammy Whitehouse, Compliance Week, March 30, 2015 ---

After a decade of regulating the audit of public companies in the United States, only one thing is certain about the quality of audits: that even today, nobody is quite sure how good audits actually are.

The Public Company Accounting Oversight Board, formed under the Sarbanes-Oxley Act, continues to adjust its approach to regulating the audit profession, especially the method by which it inspects audits to determine where problems exist that auditors need to fix. That has sent auditors on an odyssey—especially in the last five years—to determine what will satisfy regulators and the public. How can auditors deliver a tough but fair audit at a cost that clients are willing to pay?

“If I’m sitting in Congress or at the Securities and Exchange Commission and I want to see if the auditing profession is getting better or worse, could I figure it out?” asks Joe Carcello, executive director of the corporate governance center at the University of Tennessee and a past member of.

The remainder of the article is for subscribers only (subscriptions are very expensive to Compliance Week)

Other References
Improving Quality of Audits ---

Helen A. Munter Speech ---

The CPA Journal Archive on Auditing ---

Canadian Public Accounting Board (CPAB) ---

CPAB Inspection Reports are Linked in the right-hand column at

Current Trends in the Audit Industry --- and Publications/Speeches and Presentations/Brian Hunt Remarks to PCAOB November 19 2014.pdf

Deloitte's 2014 Transparency Report ---
Search for PCAOB or CPAB

Here Are Your 2014 Elijah Watt Sells Winners ---

Note that the "states" signify where the exam was taken, not where the candidate studied accounting in college.

A few candidates studied accounting outside the USA but managed to be medal winners in the USA.

There is a different legislative framework in the EU and the US regarding internal controls in companies. In the US, regulation on an audit of internal control on financial reporting is contained in the Sarbanes-Oxley Act, and subsequently embodied in the PCAOB standards. In the EU, internal control regulations are contained in Company Law of the member states. As a consequence, legislative differences have a pervasive effect on our analysis ---

Debt ---

Equity ---

"The Historical Origins of the Debt-Equity Distinction," by Paul Caron, TaxProf Blog, April 2, 2015 ---

Jensen Comment
Over the years the distinction became somewhat complicated with the introduction of preferred equity shares that are a little like debt (with liquidation priorities an often fixed returns) and a little like equity (with less liquidation priority than debt holdings).

Over the years the distinction became exceedingly complicated by conversion clauses in contracts that allow conversions of debt or preferred share holdings into common equity holdings and vice versa. Complications also evolved regarding restricted equity shares.

Mezzanine capital ---

In finance, mezzanine capital is any subordinated debt or preferred equity instrument that represents a claim on a company's assets which is senior only to that of the common shares. Mezzanine financings can be structured either as debt (typically an unsecured and subordinated note) or preferred stock.

Mezzanine capital is often a more expensive financing source for a company than secured debt or senior debt. The higher cost of capital associated with mezzanine financings is the result of its being an unsecured, subordinated (or junior) obligation in a company's capital structure (i.e., in the event of default, the mezzanine financing is only repaid after all senior obligations have been satisfied). Additionally, mezzanine financings, which are usually private placements, are often used by smaller companies and may involve greater overall levels of leverage than issues in the high-yield market; they thus involve additional risk. In compensation for the increased risk, mezzanine debt holders require a higher return for their investment than secured or more senior lenders.

Continued in article

Restricted Stock ---

Restricted stock, also known as letter stock or restricted securities, refers to stock of a company that is not fully transferable (from the stock-issuing company to the person receiving the stock award) until certain conditions (restrictions) have been met. Upon satisfaction of those conditions, the stock is no longer restricted, and becomes transferable to the person holding the award. Restricted stock is often used as a form of employee compensation, in which case it typically becomes transferrable ("vests") upon the satisfaction of certain conditions, such as continued employment for a period of time or the achievement of particular product-development milestones, earnings per share goals or other financial targets. Restricted stock is a popular alternative to stock options, particularly for executives, due to favorable accounting rules and income tax treatment.

Restricted stock units (RSUs) have more recently become popular among venture companies as a hybrid of stock options and restricted stock. RSUs involve a promise by the employer to grant restricted stock at a specified point in the future, with the general intention of delaying the recognition of income to the employee while maintaining the advantageous accounting treatment of restricted stock

Continued in article

Jensen Comment
One of the huge problems in academe and in practice is that accounting theory did not evolve at the same rapid pace of financial theory regarding capital structure.

Capital Structure ---

A firm's capital structure is the composition or 'structure' of its liabilities. For example, a firm that has $20 billion in equity and $80 billion in debt is said to be 20% equity-financed and 80% debt-financed. The firm's ratio of debt to total financing, 80% in this example, is referred to as the firm's leverage. In reality, capital structure may be highly complex and include dozens of sources of capital.

Leverage (or gearing) ratios represent the proportion of the firm's capital that is obtained through debt (either bank loans or bonds).

The Modigliani-Miller theorem, proposed by Franco Modigliani and Merton Miller, forms the basis for modern thinking on capital structure, though it is generally viewed as a purely theoretical result since it disregards many important factors in the capital structure process factors like fluctuations and uncertain situations that may occur in the course of financing a firm. The theorem states that, in a perfect market, how a firm is financed is irrelevant to its value. This result provides the base with which to examine real world reasons why capital structure is relevant, that is, a company's value is affected by the capital structure it employs. Some other reasons include bankruptcy costs, agency costs, taxes, and information asymmetry. This analysis can then be extended to look at whether there is in fact an optimal capital structure: the one which maximizes the value of the firm.

Bob Jensen's threads on accounting theory ---

Why Bond Interest Rates Vary Within a Given Financial Risk Rating Category

Hi Cheryl,

It would be nice if you tuned back into the AECM.

Keep in mind that bonds, like stocks, that are traded daily in the open market are never identical --- especially bonds of different companies and governments such as municipalities. When it comes to issuing bonds Stockton is not Palo Alto and GE is not IBM even when bond notionals and underlyings are identical.


Bond prices derived from formulas are not necessarily the same as bond prices set in actual trades by buyers and sellers. Factors such as credit ratings of particular companies and industry outlook.Even within given companies there can be credit rating differences of different bond issues --- due, in part, to different clauses in the bond contracts, valuation of collateral, embedded derivatives, etc.

This is why bond pricing formulas are only starting points in decisions regarding bid and ask prices for bonds. Many factors affecting market prices are subjective and difficult to factor into bond pricing formulas even for bonds with identical risk classifications such as AAA bonds. These factors loom even larger as bond approach junk status.

This is why some professors who teach basic accounting are often naive when it comes to teaching bond pricing formulas. A common mistake is to assert that we can price Bond A by finding the effective interest rate on "similar" bond B having the same cash flow streams. There are no similar bonds for Bond A. Each bond issue is unique in some ways that affect market pricings.

Another common mistake is for accounting teachers and textbooks to value bonds use simplistic PV, RATE, NPV, and IRR formulas in Excel. It's important to use bond pricing formulas that are typically add-on formulas for Excel

Excel's specialized bond functions are as follows:

Bond Prices


Bond Yields


I made my students learn how to look up real-world bond prices and yields for real companies in FINRA --- 

A video that illustrates deriving FINRA's bond price and yield of a McDonald's debenture can be found at --- 

"Did the 2007 PCAOB Disciplinary Order against Deloitte Impose Actual Costs on the Firm or Improve Its Audit Quality?" by  Jeff P. Boone, Inder K. Khurana, and K. K. Raman, The Accounting Review, Volume 90, Issue 2 (March 2015) ---

We examine whether the December 2007 PCAOB disciplinary order against Deloitte affected Deloitte's switching risk, audit fees, and audit quality relative to the other Big 4 firms over a three-year period following the censure. Our findings suggest that the PCAOB censure was associated with a decrease in Deloitte's ability to retain clients and attract new clients, and a decrease in Deloitte's audit fee growth rates. However, methodologies used in extant archival studies yield little or no evidence to suggest that Deloitte's audit quality was different from that of the other Big 4 firms during a three-year window either before or after the censure. Overall, our results suggest that the PCAOB censure imposed actual costs on Deloitte.

In this paper, we investigate the nature of the actual costs imposed on Deloitte by the December 2007 disciplinary order issued against the firm by the Public Company Accounting Oversight Board (PCAOB). That is, we examine whether Deloitte's switching risk in terms of the likelihood of losing existing clients to other Big 4 firms or attracting new clients and audit fees changed following the PCAOB censure.1 We also examine whether the PCAOB censure improved Deloitte's audit quality relative to that of the other Big 4 firms during the three years following the PCAOB censure.

The 2002 Sarbanes-Oxley Act (SOX) replaced self-regulation with government oversight of the auditing profession and created the PCAOB, in part, to inspect audit firms and identify deficiencies in audits of publicly owned companies. The Part I public portion of the PCAOB inspection report details the performance deficiencies found in the sample of audit engagements selected by inspectors. Further, each of the Big 4 firms has been publicly identified by the PCAOB inspection reports as having engagement-level audit deficiencies every year since the beginning of inspections in 2004. Lennox and Pittman (2010) indicate that the public portion of the PCAOB inspection reports reveal little or no cross-sectional differences in audit quality among the Big 4 firms, suggesting that these reports have little or no information value for audit market participants.

By contrast, the Part II non-public portion of the inspection report covers defects and criticisms of the auditor's firm-level quality controls. In this regard, the December 2007 disciplinary order was unprecedented for a Big 4 firm, representing the first-ever public censure of a Big 4 firm by the PCAOB. These disciplinary proceedings (PCAOB 2007) followed up on a prior-year inspection report by publicly censuring Deloitte for violations of auditing standards in connection with the 2003 audit of Ligand Pharmaceuticals.2 Notably, the December 2007 censure came about more than three years after Deloitte's resignation from the Ligand engagement in August 2004, and more than two years after the audit failure became public information in May 2005, when Ligand restated its financial statements for 2003–2004. More importantly, unlike the public portion of the PCAOB's inspection reports, which disclose only engagement-level performance weaknesses, the 2007 PCAOB censure publicly revealed for the first time deficiencies in Deloitte's firm-level quality controls. Without admitting or denying the PCAOB's findings, Deloitte consented to a $1 million civil penalty and agreed to implement changes to its firm-level quality control policies and procedures (PCAOB 2007, 12). Because of its unique nature, we focus on the December 2007 censure to examine the nature of the actual costs imposed on Deloitte and its impact on the firm's audit quality.3

Theoretically, the impact of a PCAOB censure on a Big 4 firm is ambiguous. DeFond and Zhang (2014) note that several SOX-mandated reforms were intended to incentivize audit committees to demand audit quality and shield their companies from perceived threats to audit quality. Relatedly, economic theory (Klein and Leffler 1981; Shapiro 1983) suggests that a PCAOB disciplinary order, by publicly revealing firm-level quality control problems, could damage the Big 4 auditor's brand name reputation for audit quality as perceived by these audit committees, and trigger a decline in the demand for the firm's audit services. The fall in demand would be observable in a change in the firm's switching risk, which is an increased risk of losing an existing client and a decrease in the likelihood of attracting a new client, and/or a decrease in audit fees relative to other Big 4 firms. Potentially, these losses in market share and fees can serve as a deterrent against deficient audits and as an ex ante incentive for Big 4 auditors to maintain their brand name service quality (Klein and Leffler 1981; Shapiro 1983).

On the other hand, there are several reasons to doubt that audit committees experienced increased post-SOX sensitivity to audit quality or that the PCAOB has the ability to improve Big 4 audit quality. Specifically, PCAOB Chairman Doty (2011, 1) suggests that because the auditor continues to be hired and fired by the client, audit committees may persist in viewing “their job as negotiating the lowest audit fee” for their client rather than championing audit quality. Also, Palmrose (2006) suggests that PCAOB inspectors may lack state-of-the-art expertise because they are prohibited from being active auditing professionals. In particular, a Big 4 audit implies brand name quality that exceeds the minimum posited by professional standards. Consequently, audit committees may perceive PCAOB inspectors (1) as lacking cutting-edge expertise when it comes to assessing the quality of a brand name Big 4 auditor, and (2) as focused on documentation and substantiation of audit input and process rather than audit outcomes. Such inspectors may focus narrowly on compliance details rather than on forming a holistic assessment of a Big 4 firm's brand name audit quality (Lennox and Pittman 2010). Further, in an oligopolistic audit market, Big 4 clients are potentially faced with a limited choice of auditors (GAO 2003, 2008). Consequently, a PCAOB censure need not necessarily trigger decreased demand for a Big 4 firm's audit services, thereby inflicting a loss by adversely affecting the firm's market share and/or audit fees. Finally, to the extent that PCAOB inspectors lack cutting-edge expertise and/or are narrowly focused on compliance, documentation, and substantiation rather than on audit outcomes, PCAOB oversight may be unrelated to a Big 4 auditor's brand name service quality.4 For these reasons, the overall effect of a PCAOB censure on the demand for, and quality of, a Big 4 firm's brand name audit services remains an open empirical question.

To examine the consequences of the December 2007 PCAOB disciplinary order, we first examine the changes in Deloitte's switching risk over the 2005–2010 time period relative to that of the other Big 4 firms. Our results using difference-in-differences comparisons indicate that Deloitte's risk of losing (gaining) clients relative to that of other Big 4 auditors increased (decreased) from 2005–2007 to 2008–2010. Further, the increase in the risk of losing existing clients for Deloitte was concentrated during 2008 and 2009, the first two years following the December 2007 PCAOB censure, while the decreased likelihood of gaining new clients spanned all three years. The economic magnitude of these effects was significant as reflected in a 245 (53.1) percent increase (decrease) in loss (gain) risk odds for Deloitte.

Next, we limit our sample to clients with at least two years of tenure with their current auditor to investigate the change in audit fees for Deloitte over the 2005–2010 time period relative to that of other Big 4 firms.5 Test results indicate that Deloitte moved from imposing audit fee increases that were 3.6 percentage points larger than the other Big 4 during 2005–2007 to imposing audit fee increases during 2008–2010 that were not significantly different from those achieved by the other Big 4. The change in the difference in audit fee growth rates of Deloitte relative to that of the other Big 4 was 2.4 percentage points (3.6 percentage points larger in 2005–2007 versus 1.2 percentage points larger in 2008–2010). This change represents our estimate of the PCAOB censure effect on Deloitte's pricing of continuing audit engagements. Further tests indicate that the post-censure decline in the audit fee growth rate was largely confined to years 2009 and 2010, consistent with Deloitte curtailing its above-average fee growth rate in these later years in an attempt to stem client defections to other Big 4 auditors following the PCAOB censure.

We also examine Deloitte's audit quality, as proxied by absolute abnormal accruals and the likelihood of financial misstatements as revealed by subsequent restatements, over the 2005–2010 time period relative to that of the other Big 4 firms. We find that Deloitte's audit quality was no different from that of the other Big 4 firms during either the pre-censure (2005–2007) or the post-censure (2008–2010) time periods. Supplementary analysis using the auditor's propensity to issue a going concern opinion as an additional measure of audit quality provided results consistent with the preceding findings. Collectively, these results are consistent with the notion that PCAOB oversight during the 2005–2010 period of our study was focused more on documentation and substantiation compliance than on a holistic assessment of a Big 4 auditor's brand name service quality. Alternatively, it is possible that Deloitte's audit quality improved after the censure, but we were unable to detect the improvement based on existing methods.

Our study contributes to understanding the actual costs imposed by PCAOB oversight on Big 4 firms. To date, the empirical evidence is mixed. For example, Lennox and Pittman (2010) examine the public portion of PCAOB inspection reports for both large and small auditors and find them to be unrelated to clients' auditor switching decisions.6 By contrast, Abbott, Gunny, and Zhang (2013) examine PCAOB inspection reports for smaller, triennially inspected firms and find that clients of auditors with engagement-level GAAP deficiencies are more likely to switch to other triennially inspected auditors with clean inspection reports. Our study departs from prior research in that we examine the impact of the first-ever PCAOB censure of a Big 4 firm, Deloitte, and find that it imposed actual costs on Deloitte by adversely affecting its switching risk and lowering audit fees. However, Deloitte's audit quality appears to be no different from that of the other Big 4 firms during a three-year period either before or after the censure. Thus, our findings suggest that PCAOB censure can inflict actual harm on a Big 4 auditor by adversely impacting audit committee perceptions of the firm's audit quality, but without an observable improvement in the firm's audit outcomes as reflected in our audit quality metrics.

Our study and Dee, Lulseged, and Zhang (2011) address related, but different research questions and have differing implications. Specifically, while Dee et al. (2011) show that the December 2007 PCAOB action inflicted immediate losses on investors in Deloitte clients, our study provides evidence on the longer-term damage suffered by the auditor (Deloitte) as measured by a change in the firm's switching risk and a decline in the firm's audit fees over a three-year period following the censure. We also examine the longer-term effects of the PCAOB action on Deloitte's audit quality, which is important considering that the overarching goal of PCAOB oversight is to improve audit quality.

We also contribute to the literature on Big 4 auditor incentives to produce high-quality audits in the U.S. Recent studies (Francis 2011; Lennox and Li 2012; Pritchard 2006) suggest that the limited liability partnership (LLP) form adopted by audit firms and the restrictions on private litigation for securities fraud following the 1995 Litigation Reform Act have effectively lowered the threat of litigation, thereby increasing the importance of reputation protection as an incentive for assuring high-quality audits in the U.S. Other research, including Lennox (1999) and Khurana and Raman (2004), suggests that litigation exposure and not reputation loss drives audit quality in the U.K. and the U.S., two of the more litigious countries in the world. As noted by DeFond (2012, 175), empirical research on the incentive effects of auditor reputation loss, particularly in the U.S. context, is scarce, and additional evidence would be fruitful in understanding auditor incentives to provide audit quality. Our findings pertaining to Deloitte's PCAOB censure-related loss of audit market share and fees suggest that reputational loss potentially has a role to play in assuring Big 4 audit quality even in a litigious country such as the U.S.7 However, our finding of no difference between Deloitte's audit quality and that of the other Big 4 firms around the PCAOB disciplinary order is consistent with the notion that PCAOB inspections during the time period of our study were focused on documentation and substantiation compliance rather than on a holistic assessment of Big 4 audit outcomes or quality. However, such an interpretation is subject to the caveat that our inability to detect any difference in audit quality could be due to the limited power of our tests, including imperfections in our audit quality proxies.

In the next section, we provide background information and develop our hypotheses. Section III discusses the research design and sample. Section IV reports our empirical findings, and Section V provides concluding comments.


. . .


DeFond (2010) notes that one channel by which PCAOB inspections can improve audit quality is to provide auditors' ex ante incentives by having tighter standards and imposing harsh sanctions for failure to comply. Our study examines (1) the nature of the actual costs imposed on Deloitte by the PCAOB's first-ever censure of a Big 4 audit firm in December 2007, and (2) the impact of the censure on Deloitte's audit quality.

Our results indicate that the 2007 PCAOB disciplinary order against Deloitte imposed significant actual costs on the firm, as measured by a subsequent change in Deloitte's switching risk in the form of an increase in the firm's existing client loss rate to other Big 4 firms and a drop in the client gain rate. Our results also suggest that Deloitte reduced the rate at which they were escalating fees over a three-year period following the censure to stem the tide of client defections to other Big 4 auditors. Thus, our findings suggest that PCAOB sanctions can inflict actual harm on a Big 4 auditor by affecting audit committee perceptions of the firm's audit quality. Overall, our results suggest a role for non-litigation factors, such as auditor reputation loss, via PCAOB oversight in the market for Big 4 audits in the U.S.

Finally, we are unable to detect a difference between Deloitte's audit quality and that of the other Big 4 auditors during a three-year window either before or after the PCAOB censure. Our finding is consistent with the view expressed in the prior literature (Lennox and Pittman 2010) that PCAOB oversight during the time period of our study was focused on documentation and substantiation compliance rather than on a holistic assessment of Big 4 audit outcomes. Alternatively, the extant research methodologies we use may have been unable to detect the improvement in Deloitte's audit quality. Hence, a fuller assessment of the benefits of PCAOB oversight may have to await the development of newer, more powerful methodologies for assessing audit quality.

PCAOB Inspections ---

Book Reviews, The Accounting Review, Volume 90, Issue 2 (March 2015), Stephen A. Zeff (Editor)  ---

The Routledge Companion to Financial Accounting Theory
Edited by Stuart Jones
Forthcoming in 2015 for $325
Hb: 978-0-415-66028-0

Jensen Comment
Like virtually all accounting theory books this one appears to be long on history and short on accounting theory for complex contracts of the 21st Century. For example, the Table of Contents does not even mention derivative financial instruments accounting, lease accounting, or insurance accounitng. I don't think I will pay $325 for yet another history of accounting book. History to date is inadequate for providing guidance on accounting for modern financial transacting such as financial structures and hedging and operating leases.

If not ideally legitimate, the FASB has been legitimate enough
Title:  "Private Standards, Public Governance: A New Look at the Financial Accounting Standards Board"
Author:  William W. Bratton
              Institute for Law and Economics, University of Pennsylvania Law School; European Corporate Governance Institute (ECGI)
Source:  SSRN
Date: August 11, 2010


The Financial Accounting Standards Board (FASB) presents a puzzle for those interested in the design of private governance institutions: How has this private standard-setter managed simultaneously (1) to remain independent and free of capture, (2) to achieve institutional stability and legitimacy, and (3) to operate in a politicized context in the teeth of opposition from its own constituents? This Article looks to governance design to account for this institutional success. The FASB's founders made a strategic choice between two models of a public regulatory agency, the New Deal model of an independent expert and the post-war pluralist model of a politically responsive regulator. They opted for the New Deal model, structuring the FASB to emphasize independence. Because the New Deal model calls for a normative goal to channel the agency's exercise of discretion, they also undertook to set out a coherent theory of accounting, the "Conceptual Framework," to contain and direct the FASB's decisions and thereby import legitimacy. The Conceptual Framework, however, neither determined nor justified the FASB's subsequent decisions. It nonetheless contributed to the FASB's institutional success by disavowing a neutral posture respecting the conflicting interests of the FASB's leading constituents, explicitly privileging the interests of the users of financial reports (investors and market intermediaries) over the interests of the reports' preparers (large firms and their managers). The FASB's consistent adherence to this repudiation of pluralist responsiveness has had three results. First, it made the FASB's general approach defensible as a matter of economic theory. Second, it triggered political opposition from the preparers that muted allegations of capture even as it resulted in occasional political reversals. Third, it aligned the FASB's institutional mission with that of the SEC, its public overseer, importing institutional stability if not political invulnerability.

The FASB remains vulnerable to a secondary capture allegation. Critics charge that its complex, rules-based standards serve the audit firms' interest in lowering the risk of liability while sacrificing the users' interest in "fairly" stated financials; "principles-based" standards would be better. This Article endorses the rejoinder position. What some see as capture also can be characterized as "responsiveness," and the FASB serves a public interest in taking seriously the accounting firms' need for auditable standards. Even as detailed rules can distort the overall story told by a report's bottom line, they make it easier to see what preparers are doing, easing verification and making audit failures and scandals less likely. In this post-Enron era, scandal prevention arguably takes a legitimate place with transparency as a public-regarding goal for the GAAP setter. The FASB emerges as a generator of suboptimal but institutionally-defensible standards.
If not ideally legitimate, the FASB has been legitimate enough.


Jensen Comment
The largest auditing firms stand in the middle between the cloud of users of financial statements and the companies raising debt and equity capital from the banks and the public in general. I honestly believe that those auditing firms in general have the best interest, along with the SEC, of the decision makers in the cloud from being exploited by the preparers of those financial statements. There are of course numerous exceptions, many of which became court cases that did not act favorably toward the preparers of financial statements and/or there auditors.


But it is naive to think that there will ever be a market or a government-controlled allocation of resources in the economy that even approaches perfection.


One issue of interest is whether having the FASB setting standards in place of the SEC makes it easier to cushion themselves from the slings and arrows of their clients.


To:  The Business Roundtable File
From:  Dennis Beresford
           Chairman of the FASB
Source:  FASB
Date:  June 30, 1988


Tom Jones provided me with the following summary report on the June 28 dinner meeting between Business Roundtable Accounting Principles Task Force representatives and Big 8 Managing Partners. In attendance were seven of the Big 8 MPs (I believe Pete Scanlon of C&L was missing), John Reed, Colby Chandler, Hays Watkins, Tom Jones, Rholan Larson and Ed Coulson.


John Reed opened the meeting with a statement similar to other meetings. focused on the number of new pronouncements/pace of change and theory/practicality issues. hiding behind the FASB rather than taking strong professional stands on accounting issues, and this leads to too many and too detailed standards. He added his belief that the Big 8 firms are hiding behind the FASB rather than taking strong professional stands on accounting issues, and this leads to too many and too detailed standards.


Larry Horner of PMM made a brief opening statement on behalf of the Big 8. His principal message was that the Big 8 firms share many of the business community's concerns about the FASB process. He added that he understood that the FASB was aware of these concerns and also was interested in improving the process. During Horner Is presentation and throughout the comments made by the MPs, the theme of "no one supports moving standard setting to the SEC" was repeated frequently.

Continued in article


Bob Jensen's threads on accounting standard setting controversies ---

"Victims of Financial Wrongdoing Need a More Muscular S.E.C.," The New York Times, April 4, 2015 ---

Given the many billions of dollars financial companies have paid in regulatory and legal settlements related to the mortgage crisis, how much money has actually found its way into the pockets of investors harmed by their actions?

Less than you may think. To start with, little of the cash generated in most of the Justice Department settlements went to investors. Much of this money went into Treasury coffers or to various states while troubled borrowers were promised loan modifications and other relief as part of the deals.

Wronged investors are entitled to receive money, however, from lawsuits filed by the Securities and Exchange Commission. While the S.E.C. cannot, by law, seek compensatory damages for losses incurred by investors, the agency does collect penalties and disgorgement of ill-gotten gains from both institutions and individuals.

Sometimes the S.E.C. puts the dollars it collects into a fund to be distributed to a class of victims the agency has identified; other times it forces defendants to repay those investors directly.

The S.E.C. says it tries, whenever possible, to extract money from wrongdoers on behalf of investors. And an analysis of financial crisis lawsuits cited most recently on the S.E.C.’s website shows that 23 of them generated nearly $2.6 billion for investors.

Among the larger S.E.C. recoveries was $285 million from a 2011 case against Citigroup over a $1 billion collateralized debt obligation and $250 million returned to investors after Goldman Sachs’s settlement of the Abacus C.D.O. case in 2010. Investors also received $275 million from a mortgage securities deal struck last year with Morgan Stanley.

Returning almost $2.6 billion to investors is not nothing. But the S.E.C.’s recoveries pale in comparison to the amounts generated by law firms that brought class actions on behalf of stockholders and debtholders.

In the 17 largest securities law class actions arising out of the financial crisis, investors have recovered almost $8.3 billion, net of legal fees and expenses, court records show. These recoveries included $1.1 billion in two class actions against Citigroup, $850 million received from the American International Group and $523 million from Lehman Brothers.

Among the 17 private lawsuits and the 23 S.E.C. cases, six overlap — meaning the same financial institutions were sued on the same facts by both the agency and private plaintiffs. On a direct comparison, the recoveries generated by class-action lawsuits far exceeded those collected by the S.E.C.

In those six cases, the S.E.C. recovered $400 million for investors while the private plaintiffs received almost $3.8 billion, net of legal fees and expenses.

Consider, for example, the lawsuits against Bank of America. Both the S.E.C. and investors claimed that Merrill Lynch executives had not disclosed losses and bonus payments at the firm before it was purchased by the bank. Private plaintiffs received almost $2.3 billion in their case; from the S.E.C.’s suit, investors received $150 million.Then there is the case against Angelo R. Mozilo and other top executives of Countrywide Financial. The private lawsuit generated $516.4 million for investors; the S.E.C.’s recovery for investors was just over $48 million.

Finally, private litigation against New Century Financial, a defunct mortgage lender, recovered $107.6 million, while the S.E.C.’s lawsuit recovered $1.5 million for investors.

“Private litigation prosecuted by sophisticated plaintiffs and their counsel — who are not restrained by the limited resources and bureaucracy of government agencies — has delivered far larger recoveries for victims than companion government actions,” said Gerald H. Silk, a partner at Bernstein Litowitz Berger & Grossmann, a securities class-action law firm.

To some degree, of course, this is because the S.E.C. cannot recover losses for investors. By law, the agency cannot seek a penalty that exceeds the financial gain a wrongdoer made, even if losses incurred by investors as a result of the improprieties are far greater. For instance, if investors lost $100 million in a Ponzi scheme in which the overseer pocketed $10 million, the S.E.C. can seek to recover only the $10 million in ill-gotten gains and another $10 million in penalties. And the S.E.C. has secured significant sums for investors in some matters where there was no class action. For example, in three big C.D.O. cases, the agency returned a combined $661 million to investors from Citigroup, Goldman Sachs and JPMorgan Chase.

When asked about the size of the recoveries the S.E.C. has generated for investors, Andrew J. Ceresney, the agency’s director of enforcement, said: “We have been vigorous in our efforts to hold individuals and companies accountable for abuses related to the financial crisis. One of our highest priorities in these cases is to return money to harmed investors, in addition to punishing and deterring misconduct.”

The S.E.C. can pursue powerful remedies that private plaintiffs cannot. For instance, the S.E.C. can bar people from serving as directors or officers of companies and suspend lawyers and accountants from practicing before the agency. In the financial crisis cases identified by the S.E.C., the agency said it had barred or suspended 40 people.

The agency can also force the people it sues to pay penalties out of their own pockets; this is much harder for private plaintiffs to do.

Still, the disparity in recoveries is telling. It shows, among other things, how crucial it is for investors to be able to bring private actions under the securities laws.

“The S.E.C. can’t do everything,” said Norman Poser, a professor emeritus at Brooklyn Law School and a former S.E.C. official. “The Supreme Court has said there is an implied private right of action under the securities laws for exactly that reason.”

While both plaintiffs and the agency have different roles to play, Congress should still consider expanding how much the S.E.C. can extract in penalties, perhaps making them commensurate with the losses investors incurred.

The S.E.C. has asked Congress for this authority, Mr. Ceresney said. But it has not been granted. “Allowing us to recover penalties equal to investor losses would assist us in fulfilling our investor protection mission,” he said.

Continued in article

Bob Jensen's threads on Fraud Updates ---  

Teaching Case
From The Wall Street Journal Weekly Accounting Review on April 17, 2015

Europe Slow to Adopt New Accounting Standard
by: Simon Nixon
Apr 13, 2015
Click here to view the full article on

TOPICS: Accrual-Basis Accounting, Governmental Accounting, International Accounting


SUMMARY: Each country has its own national rules for public-sector accounting. Currently only 11 of the 28 EU member states use accruals-based accounting at some level of government. In many countries, different systems operate across the public sector. Most are cash-based, which creates opportunities for governments to arrange the timing of payments to suit political objectives.


CLASSROOM APPLICATION: This is an interesting article to use in a government accounting class or when covering the topic. It can serve as a contrast for the governmental accounting rules in the U.S.


1. (Introductory) What is governmental accounting? What are the governmental accounting issues in the European Union?

2. (Advanced) How does governmental accounting differ in the U.S. vs. the European Union? Why do they differ?

3. (Advanced) How do the governmental accounting rules differ among the EU countries? Why are the systems not uniform? What problems and issues does that cause?

4. (Advanced) What are the differences between cash-basis and accrual-basis accounting? Why are EU countries using different types? What problems can result?

Reviewed By: Linda Christiansen, Indiana University Southeast

"Europe Slow to Adopt New Accounting Standard," by Simon Nixon. The Wall Street Journal, April 13, 2015 ---

Greece’s new government may not have achieved much in its first two months, but it did succeed last week in establishing a parliamentary inquiry into the circumstances surrounding the country’s bankruptcy.

Oddly, this inquiry will only be allowed to investigate decisions taken since October 2009 following the election that brought George Papandreou’s Pasok government to office. Its aim appears to be to point the finger of blame for Greece’s current predicament entirely on those who signed and attempted to implement the bailout programs agreed in 2010 and 2012 with Greece’s eurozone partners and the International Monetary Fund.

Previous governments whose poor decision-making made those bailouts necessary seem to have been officially absolved.

This looks like a missed opportunity. While most of the decisions taken over the past five years were taken in the full glare of international scrutiny, it is still not fully clear how Greece was able to run up a deficit of 15% of gross domestic product apparently without anyone noticing. How did previous governments manage to conceal the ruinous state of Greece’s public finances for so long, not just from their own citizens, who have borne the cost of past profligacy, but also from their eurozone partners, whose own economic and financial stability has been put at risk?

Any answer to these questions would inevitably highlight major weaknesses in Greece’s public-sector accounting systems. Athens didn’t have the management and information systems to ensure that spending decisions were taken transparently and accountably.

Continued in article

Bob Jensen's threads on accounting standard setting controversies ---

Teaching Case
From The Wall Street Journal Weekly Accounting Review on April 10, 2015

GE Bites Tax Bullet in Move to Help Share Buybacks
by: John D. McKinnon and Liz Hoffmann
Apr 11, 2015
Click here to view the full article on

TOPICS: Cash Repatriation, Corporate Taxation


SUMMARY: As General Electric Co. unveiled a reshaping of its balance sheet and operations, the company's decision to repatriate $36 billion in foreign cash brings a large tax bill and raises concerns about whether multinationals' efforts to minimize taxes are taking too heavy a toll back home. The U.S. tax system, with one of the world's highest corporate rates, has led U.S. companies with significant overseas operations to park much of their cash offshore. But that decision comes with its own cost in the form of lost opportunities at home, and GE's decision suggests more companies may be reaching a tipping point.


CLASSROOM APPLICATION: This article features repatriation of cash, and the tax and financial-reporting implications.


1. (Introductory) What is repatriation of cash? Why do companies "park" cash in foreign countries? What are some of the business reasons a company would repatriate cash?

2. (Advanced) What is the cost to a company when it repatriates cash? Why does a company have to pay this?

3. (Advanced) What are the implications to GE for making this move? Why is the company doing it? What does GE plan to do with that additional cash?

4. (Advanced) How are other U.S. companies handling cash parked in other countries? Why is there a variety of approaches or philosophies?

Reviewed By: Linda Christiansen, Indiana University Southeast

"GE Bites Tax Bullet in Move to Help Share Buybacks," by John D. McKinnon and Liz Hoffmann, The Wall Street Journal, April 11, 2015 ---

As General Electric Co. unveiled a reshaping of its balance sheet and operations, the company’s decision to repatriate $36 billion in foreign cash brings a large tax bill and raises concerns about whether multinationals’ efforts to minimize taxes are taking too heavy a toll back home.

The U.S. tax system, with one of the world’s highest corporate rates, has led U.S. companies with significant overseas operations to park much of their cash offshore. But that decision comes with its own cost in the form of lost opportunities at home, and GE’s decision suggests more companies may be reaching a tipping point, some observers said.

“It’s great to keep your profits out of the U.S. tax net,” said Martin Sullivan, chief economist at Tax Analysts, a newsletter. “But as those piles of cash grow [offshore], you are missing more and more opportunities to employ that cash in the U.S. At some point, saving tax is not worth it.”

GE said Friday that it would repatriate $36 billion, more than half its foreign cash, as part of a broader move to jettison its banking operations and focus on industrial units. The money will help fund a $50 billion stock buyback GE’s board has approved, part of a plan to return up to $90 billion to shareholders over the next few years.

The cash transfer will trigger $6 billion in taxes, a significant sum, even for a firm of GE’s size. The expected tax bill amounts to about 40% of its total net income last year of $15.3 billion.

Continued in article

From The Wall Street Journal Weekly Accounting Review on April 10, 2015

Etsy's Costly Path to Profitability
by: Miriam Gottfried
Apr 02, 2015
Click here to view the full article on

TOPICS: Financial Accounting, IPO, Selling Expenses

SUMMARY: Etsy may be the latest brand-name Internet company to file for an initial public offering. But it apparently isn't yet famous enough to turn a profit. Marketing could help Etsy change that the profit picture by giving it greater scale. Yet the rising cost of advertising and promotion could also be a big hurdle. Etsy has thrived on word-of-mouth referrals. That changed last year as it prepared to go public. Marketing expense rose to 20.3% of revenue in 2014 versus 14.3% the year before and 14.6% in 2012.

CLASSROOM APPLICATION: This article and the related articles would be appropriate for coverage of IPOs, as well as for discussions of selling expenses on the income statement.

1. (Introductory) What is an IPO? What are the details surrounding Etsy's IPO?

2. (Advanced) The article states that Etsy is not profitable, yet the company has a positive market value. Why is that? What is the company's estimated value?

3. (Advanced) The article discusses Etsy's marketing expenses. In what section do marketing expenses appear on the income statement? How have the company's marketing expenses changed in recent years? Why has the company decided to make these changes?

4. (Advanced) Using Edgar, please access Etsy's IPO filings and review the information. If you had funds available to invest, would you consider purchasing shares in Etsy? Offer detailed reasons and analysis to support your decision.

Reviewed By: Linda Christiansen, Indiana University Southeast

Etsy IPO to Potentially Raise More Than $300 Million
by Lisa Beilfuss
Mar 31, 2015
Online Exclusive


Online Crafts Marketplace Etsy Files for IPO
by Telis Demos
Mar 04, 2015
Online Exclusive


"Etsy's Costly Path to Profitability," by  Miriam Gottfried, The Wall Street Journal, April 2, 2015 ---

Etsy may be the latest brand-name Internet company to file for an initial public offering. But it apparently isn’t yet famous enough to turn a profit.

The online marketplace for handmade goods kicked off the roadshow for its coming IPO on Wednesday. Etsy plans to sell 16.7 million shares, with an option for the underwriters to purchase an additional 2.5 million, for an expected price of $14 to $16 each.

At the high end, Etsy would have a market value of about $1.8 billion. But despite its 1.4 million active sellers and 19.8 million active buyers, Etsy remains unprofitable. And revenue of about $195 million in 2014 would give it a hefty price-to-trailing-sales multiple of 9.2 times.

Marketing could help Etsy change that the profit picture by giving it greater scale. Yet the rising cost of advertising and promotion could also be a big hurdle.

Etsy has thrived on word-of-mouth referrals. That changed last year as it prepared to go public. Marketing expense rose to 20.3% of revenue in 2014 versus 14.3% the year before and 14.6% in 2012.

Other costs haven’t grown as much suggesting Etsy is seeing some benefits of scale. Just how much though will depend on how effective, and costly, its promotional strategy proves. That is a big unknown.

In a regulatory filing, Etsy points to recent efforts in the U.K. It quintupled year-over-year spending on search-engine marketing and saw a 112.9% increase in active buyers versus 89% the previous year. And buyers spent considerably more.

Etsy says it plans to apply lessons learned in the U.K. more broadly. Still, that is only one market. And it doesn’t prove the benefits of marketing can outweigh costs.

If Etsy can’t show its marketing efforts are paying off, investors swept up in the offering’s excitement may end up wishing it had stuck to its knitting.

Continued in article

Airbnb ---

From The Wall Street Journal Weekly Accounting Review on April 10, 2015

Teaching Case on the Catch to Airbnbb's Tax Exempt Income

Airbnb Income May Be Tax-Free:But There's a Catch
by: Laura Saunders
Apr 03, 2015
Click here to view the full article on

TOPICS: Individual Taxation, Masters Exemption, Residential Rental Property

SUMMARY: It is one of the tax code's best freebies: a provision allowing people to rent out their homes for fewer than 15 days a year and pocket the income-tax-free. Now services such as Airbnb, HomeAway, Onefinestay and FlipKey are making it easier for people to take advantage of the exemption by offering short-term rentals of their homes. The problem: Some firms are required to send 1099 forms to both the taxpayer and the IRS indicating how much income the taxpayer earned from renting through them. Yet there isn't an easy way for a host who rented for fewer than 15 days to tell the IRS such income was tax-free. In fact, IRS Publication 527, Residential Rental Property, says that taxpayers don't need to report such income at all.

CLASSROOM APPLICATION: This is a good article to show the practical side of reporting and excluding short-term residential rental income.

1. (Introductory) What is the Masters exemption? What does it exempt? What is the reason for this exemption?

2. (Advanced) What complications does the exemption present for some taxpayers? What are possible avenues to avoid problems with the IRS? Which of the methods do you prefer? Why?

3. (Advanced) What is a 1099? What is its purpose? Why do some of the companies mentioned in the article issue 1099s? Why aren't other companies issuing 1099s?

4. (Advanced) At what point does tax law draw a line on taxing of residential rental income? What are the ramifications of crossing that line?

Reviewed By: Linda Christiansen, Indiana University Southeast

"Airbnb Income May Be Tax-Free:But There's a Catch," by Laura Saunders, The Wall Street Journal, April 3, 2015 ---

It is one of the tax code’s best freebies: a provision allowing people to rent out their homes for fewer than 15 days a year and pocket the income-tax-free. This break is often called the Masters exemption because of its popularity in Augusta, Ga., during the famous April golf tournament.

Now services such as Airbnb, HomeAway, Onefinestay and FlipKey are making it easier for people to take advantage of the Masters exemption by offering short-term rentals of their homes. Airbnb alone had more than one million listings at the end of 2014, more than triple the number it had at the end of 2012.

But this boon also is putting some so-called hosts on a collision course with the Internal Revenue Service, tax experts say.

The problem: Some firms are required to send 1099 forms to both the taxpayer and the IRS indicating how much income the taxpayer earned from renting through them.

Yet there isn’t an easy way for a host who rented for fewer than 15 days to tell the IRS such income was tax-free. In fact, IRS Publication 527, Residential Rental Property, says that taxpayers don’t need to report such income at all.

As a result of these conflicting rules, some taxpayers who act as hosts may get computer-generated letters from the IRS in a year or so asking about tax on their hosting income—even though no tax is due on it, says Jonathan Horn, a certified public accountant in New York.

The hosts will then need to prove that the income was tax-free. “Nobody likes to hear from the IRS, because it can be difficult to resolve issues easily,” Mr. Horn says.

The IRS hasn’t yet addressed this mismatch issue. Airbnb, which sends out 1099s, says it isn’t able to offer individual tax advice and encourages hosts to consult a tax professional or the IRS website.

A spokesman for HomeAway says that because it acts only as a listing service and doesn’t collect or distribute rental income to hosts, it doesn’t report income to the IRS on behalf of taxpayers. FlipKey and Onefinestay say they do send 1099s as required.

Tax experts agree that there isn’t a ready way for hosts to head off an IRS letter. Specialists at H&R Block ’s Tax Institute, the tax-prep firm’s research arm, suggest that hosts keep good records so that they can respond to an IRS letter by showing a copy of the rental agreement, along with the dates and the amount of rent charged. An IRS spokesman agrees that taxpayers should keep such records.

As an alternative, the H&R Block experts say, filers could attach a statement to their returns with documentation at the time they file, in hopes of forestalling an IRS letter. Some e-filing programs allow for such attachments, and paper filers can attach statements.

Mr. Horn, who has clients facing this issue, says he will advise most of them to do nothing except maintain good records so that they can respond to an IRS query if necessary. In many cases, he adds, the agency can’t yet match taxpayer income with 1099-K forms, the type of report many hosts will receive. These forms typically report payments to businesses from third parties such as credit cards and PayPal.

If Mr. Horn believes an IRS query is likely, he may have the taxpayer claim the hosting revenue on line 21 of the Form 1040 as “other income,” and then add an entry reducing it to zero. In such cases, he also will attach an explanation.

Continued in article

Earned Income Tax Credit (EITC) --- 

. . .

The direct cost of the EITC to the U.S. federal government was about $56 billion in 2012. The IRS has estimated that between 21% and 25% of this cost ($11.6 to $13.6 billion) is due to EITC payments that were issued improperly to recipients who did not qualify for the EITC benefit that they received.[32] For the 2013 tax year the IRS paid an estimated $13.6 billion in bogus claims. In total the IRS has overpaid as much as $132.6 billion in EITC over the last ten years.[33]


The direct fiscal cost of the EITC may be partially offset by two factors: any new taxes (such as payroll taxes paid by employers) generated by new workers drawn by the EITC into the labor force; and taxes generated on additional spending done by families receiving earned income tax credit.


Some economists have noted that the EITC might conceivably cause a reductions in entitlement spending that result from individuals being lifted out of poverty by their EITC benefit check. However, because the pre-tax income determines eligibility for most state and federal benefits, the EITC rarely changes a taxpayer's eligibility for state or federal aid benefits.



Jensen Comment
Note that the poor do not pay federal or state income taxes in the USA. Hence when we talk about EITC tax "break" we are really talking about a negative income tax where the poor get more from "income taxes" than they pay in income taxes.


Teaching Case:  Working Poor Hoping for EITC State Tax Break in Costly California
From The Wall Street Journal Weekly Accounting Review on April 10, 2015


Working Poor Hoping for EITC Tax Refunds in Costly California
by: Erica E. Phillips
Apr 07, 2015
Click here to view the full article on

TOPICS: EITC, Individual Taxation

SUMMARY: California lawmakers, responding to the state's nation-leading poverty level, are considering the creation of a state EITC program. Already, half of the states and the District of Columbia offer such refunds and credits. Montana legislators are also considering a state EITC this year, and a several states are evaluating expansions of their state credits. Some of the state credits currently add as much as 50% to the federal benefit. Earned Income Tax Credit programs aren't popular in all quarters. Critics say the federal program is expensive, amounts to a handout to the poor and is subject to errors. They cite a report published last year by the Internal Revenue Service that found 24% of federal EITC payments made in fiscal 2013 were incorrect, including both overpayments and underpayments.

CLASSROOM APPLICATION: This article is a good supplement to coverage of the Earned Income Tax Credit.

1. (Introductory) What is the EITC? What is its purpose?

2. (Advanced) What has California proposed related to the EITC? Is this kind of program common among states? How many other states offer similar programs?

3. (Advanced) How is the EITC calculated? Who is eligible? How do increases in salaries affect the EITC payments?

4. (Advanced) How is the EITC particularly vulnerable to errors and fraud? What could the government do to reduce these kinds of losses?

Reviewed By: Linda Christiansen, Indiana University Southeast


"Working Poor Bank On Tax Break in Costly California," by Erica E. Phillips, The Wall Street Journal, April 7, 2015 ---

LOS ANGELES—For 30 years, Modesto Alejandro Vasquez has supported his family of four by working as a janitor in a downtown office building here. In 2014, he made about $30,000.

Earning 25% above the federal poverty level in costly Southern California, Mr. Vasquez looks forward to this time of year, when a tax refund puts extra cash in his pocket. He said he used the money—$6,000 this year—to pay off debts and repair a computer for his daughter.

A large portion of the refund came via the federal Earned Income Tax Credit. The EITC is intended to aid the working poor by reducing the amount of taxes owed, or in many cases, like Mr. Vasquez’s, by providing a refund, based on a taxpayer’s income and number of dependents.

California lawmakers, responding to the state’s nation-leading poverty level, are considering the creation of a state EITC program. Already, half of the states and the District of Columbia offer such refunds and credits. Montana legislators are also considering a state EITC this year, and a several states are evaluating expansions of their state credits. Some of the state credits currently add as much as 50% to the federal benefit.

EITC programs aren’t popular in all quarters. Critics, including many fiscal conservatives, say the federal program is expensive, amounts to a handout to the poor and is subject to errors. They cite a report published last year by the Internal Revenue Service that found 24% of federal EITC payments made in fiscal 2013 were incorrect, including both overpayments and underpayments.

While California has a relatively high minimum wage, with the state’s level set to rise to $10 next year from $9 now, many families struggle. The state is among the five most expensive to live in, according to the federal Bureau of Economic Analysis. The U.S. Census Bureau’s Supplemental Poverty Measure, which takes government-assistance programs into account in calculating poverty rates, places California at the top of the list among the 50 states and D.C., with a poverty rate of 23.4%.

In 2013, an estimated 9.8 million Californians—more than a quarter of the population—qualified for the federal EITC. California residents accounted for $7.3 billion of the more than $66 billion federal EITC claims in 2013.

Eight previous EITC proposals have been unsuccessful in California, but some legislative leaders say the state’s economic recovery and budget surplus could make the program more affordable this time around. “Politically, it seems more viable than it has in the last decade,” said Chris Hoene, executive director of the California Budget Project, a think tank focused on the state’s low- and middle-income residents.

The EITC has existed at the federal level since 1975, and has been largely hailed by economists as a success in lifting some families out of poverty and improving the academic performance of their children. It also provides an incentive to work, because the credit rises as income increases to a certain level before phasing out. Eligibility for a family of four ends at just under $50,000 of income.

Last year, the federal government’s average EITC benefit topped $2,400, while many working parents received more than $6,000, the IRS says.

Because the EITC aims to help low-income families, particularly those with children, “it’s well-designed,” said Bruce Meyer, an economist at the University of Chicago’s Harris School of Public Policy. By contrast, he said, the benefits of raising the minimum wage, another increasingly popular antipoverty measure, often go to teenage workers or secondary earners in middle-class and even wealthy families, or to older Americans who receive Social Security and Medicare.

Still, Mr. Meyer said he has mixed feelings about expanding state EITC credits. “The federal credit already is really quite big,” he said. “I’m not sure that it makes sense to increase it much more.”

Boosters cite the EITC’s effect on employment. Research by University of California Berkeley economist Hilary Hoynes found that a $1,000 increase in the federal EITC led to a 7.4 to 8.4 percentage-point increase in employment among single mothers by providing them with more incentive to work. Furthermore, “after-tax incomes increase for families, not simply because they get the credit, but importantly because it has that feature of increasing employment rates,” Ms. Hoynes said.

David Kline, a spokesman for the California Taxpayers Association in Sacramento, which aims to minimize tax burdens, called the credits bad tax policy. He said state lawmakers should focus on what he called friendlier business policies aimed at creating jobs and raising people out of poverty that way.

“The best way to improve things for low-income Californians is to improve our state’s business climate,” Mr. Kline said.

State Sen. Carol Liu, a Los Angeles-area Democrat who has proposed a bill to add 30% to existing federal benefit, said it is hard for working people to get by on the minimum wage, especially in some of California’s coastal cities. “We’re trying everything we can at the state level to keep folks from falling into deeper poverty,” she said.

Under Ms. Liu’s bill, working families who qualify for the federal EITC would receive an additional 30% from the state. According to the California Legislative Analyst’s Office, a 30% program could cost the state roughly $2 billion annually in tax revenue. Last year, California collected roughly $100 billion in revenue from state taxes.

To be sure, a higher minimum wage would mean some workers—particularly full-time workers—might no longer be eligible for as large a percentage in tax credits. The credit begins phasing out at about $18,000 annually for single parents. Still, many part-time workers would see their credits rise with a higher minimum wage.

Jensen Comment
One of the enormous negative impacts of the EITC is the IRS inability to prevent billions of dollars lost do the EITC fraud, particularly stolen identity fraud. State tax collectors are even less likely to prevent further fraud in the system. The IRS seems to be pretty much helpless in fighting such frauds.

Increasingly I think I was a victim of such a fraud this year. When I tried to file my Turbo Tax return electronically the IRS would not accept my eFiled return, presumably because an ID thief had already filed a tax return using my Social Security number. In this case I suspect the theft came from the now-infamous breach of Social Security numbers in the Turbo Tax archives. States like Minnesota stopped accepting Turnbo Tax state income tax returns because of this security breach at Turbo Tax.

I sent my tax return in by mail to the IRS and have a certified mail receipt that it was received by the IRS on February 16, 2015. Meanwhile the IRS refuses to acknowledge that my legitimate refund will ever be paid, probably because some ID theif has already claimed an enormous refund using my Social Security number, most likely an fraudulent EITC refund.

Humor April 1-30, 2015

Many educators have a tough time imagining a world where academic issues are more important than athletic ones at institutions with big-time programs. "Saturday Night Live" this weekend created such a world (slow loading) ---

The Horrific April Fools Pranks of the 19th Century ---

How Trevor Noah will transform the Daily Show, explained in 7 of his funniest clips ---

Hunter S. Thompson’s Ballsy & Hilarious Job Application Letter (1958) ---

There is No Nobel Prize in Economics:  Dilbert Cartoon
Read the comments

MIT researchers have discovered the ultimate tongue twister ---

She's Ready (Hillary Dances) --- Click here: 2008

Humor Between April 1-30 ---

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Humor Between April 1-30, 2014 ---


And that's the way it was on April 30, 2015 with a little help from my friends.


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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?

Avoiding applied research for practitioners and failure to attract practitioner interest in academic research journals ---
"Why business ignores the business schools," by Michael Skapinker
Some ideas for applied research ---


Clinging to Myths in Academe and Failure to Replicate and Authenticate Research Findings


Poorly designed and executed experiments that are rarely, I mean very, very rarely, authenticated

Discouragement of case method research by leading journals (TAR, JAR, JAE, etc.) by turning back most submitted cases ---

Economic Theory Errors
Where analytical mathematics in accountics research made a huge mistake relying on flawed economic theory and interval/ratio scaling


Accentuate the Obvious and Avoid the Tough Problems (like fraud) for Which Data and Models are Lacking


Financial Theory Errors
Where capital market research in accounting made a huge mistake by relying on CAPM


Philosophy of Science is a Dying Discipline
Most scientific papers are probably wrong


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