This case provides an opportunity for you to make accounting allocation
choices, justify those choices, and subsequently consider the ramifications
of those choices. Two different scenarios – one in the academic setting and
one in the business setting – examine the incentives and reporting issues
faced by managers and accountants – the gatekeepers in these reporting
environments. For each scenario, you will read the case materials, related
tables, and then answer the Questions for Analysis. Each scenario presents
you with an allocation task. In the first scenario, you will need to assess
group members’ contributions to a project and allocate points across the
group. These point allocations contribute to the determination of individual
group members’ grades. The second scenario is also an allocation task but in
a business setting, specifically the segment reporting environment. Here the
task is to allocate common costs across reporting segments. For advanced
reading, you will want to consider Accounting Standards Codification (ASC)
topic 820 which addresses segment reporting, as this can help guide you in
the degree of flexibility, if any, allowed in determining how to allocate
This paper examines the background and work of the AICPA’s Accounting
Objectives Study Group, chaired by Robert M. Trueblood, which issued its
important report in October 1973. In particular, the research is informed by
interviews with three members of the Study Group and with four of the
principal members of its research staff. Evidence is presented on the
members of the Study Group who supported, or did not support, various
positions in the report, including their apparent reasons, as well on the
influential role of the staff in shaping the report. The conclusion is that
the full-time staff, abetted by the financial analyst member of the Study
Group, played the key role in driving the thrust of the final report, which
recommended that financial statements should provide users with information
about the cash-generating ability of the enterprise, and eventually the cash
flow to the users themselves. This
recommendation resonated with the FASB and with standard setters around the
From its founding in 1934 until the early 1970s, the SEC and especially its
Chief Accountant disapproved of most upward revaluations in property, plant
and equipment as well as depreciation charges based on such revaluations.
This article is a historical study of the evolution of the SEC's policy on
such upward revaluations. It includes episodes when the private-sector body
that established accounting principles sought to gain a degree of acceptance
for them and was usually rebuffed. In the decade of the 1970s, the SEC
altered its policy. Throughout the article, the author endeavors to explain
the factors that influenced the positions taken by the parties.
I develop an econometric strategy that allows identification of accounting
quality. The strategy relies on a new way of characterizing the dynamics of
accounting accruals. The characterization is intuitive and does not hinge on
strong assumptions about the earnings and accrual processes, or about
managerial preferences. The identifying assumptions derive from two
accounting properties, namely, that both earnings and cash flows reflect the
same underlying performance and that accruals and accounting errors must
reverse over time. My approach discriminates between the accounting error
and the part of accruals that captures the underlying economic performance.
The proposed framework also offers a new way of testing for the presence of
earnings management. Implementation issues and empirical evidence are
discussed in a companion paper (Nikolaev 2014).
Auditing regulators have found deficiencies in 28
of the Ernst & Young LLP audits they evaluated in their latest annual
inspection of the Big Four accounting firm's work.
The 28 deficient audits the Public Company
Accounting Oversight Board found in its 2013 inspection of the firm were out
of 57 audits or partial audits conducted by Ernst & Young that the PCAOB
evaluated—a deficiency rate of 49%. In the previous year, the board's
inspectors found deficiencies in 25 of 52 audits inspected, a rate of 48%.
A deficiency cited by the inspectors doesn't mean
that the subject of the audit needs a restatement, or that the problems
found remained unaddressed after the inspectors found them.
Still, certain of the deficiencies found were
significant enough that it appeared that Ernst & Young hadn't obtained
enough evidence to support its audit opinions giving its clients a clean
bill of health, the PCAOB said in the inspection report it issued Thursday.
In a statement responding to the report, Ernst &
Young said it was "fully committed to audit quality" and that the PCAOB's
inspection process "assists us in identifying areas where we can continue to
Fees = Transactions Costs (when buying or
selling shares) plus Fund Management Fees (paid annually to professionals who
manage your portfolio like the managers at TIAA/CREF, Fidelity, Vanguard, etc.).
manage your retirement funds.
Taxes = Capital Gains Taxes (that apply
even on retirement funds like CREF when you make eventual withdrawals). Note
that capital gains taxes must be paid by your estate on the balances left in
your retirement funds. Most of us won't get hit with estate taxes (due to high
estate tax exemptions), but we all get hit with capital gains taxes on the
retirement funds and farms we leave behind for heirs.
Inflation = Loss in Buying Power of
Saving Dear Money That Turns Into Cheap Money (even under your mattress)
The government is now misleading us about inflation by taking price increases
for food and fuel out of its reported inflation index so you think that
your dollars are still dear when they are cheap in terms of things that you buy
day-by-day. Economists are whores for politicians. Government deficit
spending and obligations for $100 trillion in unfunded entitlements (like
Medicare and Medicaid) make inflation the biggest worry of the three diseases on
retirement savings --- fees, taxes, and inflation.
Real, real returns take into account expenses (the
man), taxes (Uncle Sam), and inflation (the invisible hand).
Thornburg's study notes that "nominal returns are a
misleading driver of an investor's investment and asset-allocation
planning... because they are significantly eroded by taxes, expenses and
inflation." The risk then, as Thornburg sees it, is that a failure to
understand real, real returns could lead to investment decisions that miss
potential diversification opportunities.
This chart from Thornburg shows how the annualized
nominal return of $100 invested in the S&P 500 between 1983 and 2013 is
about 11%, making that investment worth $2,346.
However, on a real, real basis that investment
returns 6%, making it worth just $570.
A pretty stark difference between expectations and
There are ways of partly beating the tax man by investing a portion of your
retirement funds in a tax-exempt mutual fund that holds bonds of school
districts, towns, cities, counties, and states. However, I say "partly beats" in
the sense that value changes in those funds are subject to capital gains taxes
even if the interest on those bonds that builds up your savings are not taxed
while your earn that interest or when you withdraw that interest. A second
drawback is that there is relatively more risk in investing in a given tax-free
municipal bond versus a taxable high-grade corporate bond. But huge diversified
tax-free mutual funds like those of Fidelity and Vanguard. A third drawback
in theory is that tax-free bonds should earn less interest than corporate
bonds. This is not always the case in this era of stupid quantitative easing by
the Federal Reserve that keeps interest rates on CDs and high-grade corporate
bonds close to zero. Tax-free interest rates have held up batter in this idiotic
era of quantitative easing since the crash of 2007.
Remember that higher return investments also carry higher financial risks
beyond the savings killers of fees, taxes, and inflation. For example land
investments have less inflation risks but are subject to many other financial
risks. For example, think of paying a million dollars for an Iowa farm that sold
ten years ago $500,000 and doubled in value because of the corn ethanol
government mandate for gasoline. The added financial risk for your new farm is
that one day soon the government will come to its senses and remove the ethanol
mandate for fuel, thereby leaving the corn for cows and hogs. Your million
dollar farm may plunge in value --- thus the added investment risk beyond the
retirement savings killers of fees, taxes, and inflation.
If you are an active buyer like me on Amazon it probably pays to become a Prime
One advantage of living in the boon
docks is home delivery when you're not at home. I know the rural mail carrier
(Mary), the UPS driver (Joe), and the FedEx drivers all by name. They leave the
deliveries in our unlocked garage in rain, snow, or shine. When I lived in San
Antonio I would've not dared to leave our garage unlocked. City living is just
more scary and a hassle in many other ways.
Don't forget to use your accumulated
payment credits on Amazon. Amazon makes it really easy to use those points when
making a payment.
Taxpayers who received health insurance from Obamacare need to file Form
1095-A with their tax returns in 2014 and every year thereafter.
. . .
Funneling subsidies through the income-tax system
was once seen as a political plus for Obama and the law's supporters. It
allowed the White House to claim that the Affordable Care Act is "the
largest tax cut for health care in American history." But it also promises
to make an already complicated tax system more difficult for many consumers.
Supporters of the law are also concerned about a
related issue: People who got too big a subsidy for health care in 2014 will
have to pay it back next year. And docking refunds will be the first way the
IRS seeks repayment.
That can happen if someone's income for 2014 ends
up being higher than estimated when he or she first applied for health
insurance. Unless such people promptly reported the change to their health
insurance marketplace, they will owe money.
"If someone wound up having more overtime than they
projected, or they received a bonus for good work, these are the kind of
changes that have an impact on subsidies," said Ron Pollack, executive
director of the advocacy group Families USA.
Since the whole system is brand-new, experts are
predicting that millions will end up having to repay money.
Electric Car Owners Contribute Nothing or Almost Nothing to Road Repairs
While Gasoline and Diesel Fuel Vehicles Foot the Road Repair Bills
Tesla Model S owners now have a trillion mile warranty (of eight years) where
all those miles are a free ride to Tesla owners in terms of the road and bridge
depreciation they help cause. This is a wealth transfer that nobody seems to
talk about where poor people in old gas guzzlers are paying for the road and
bridge repairs enjoyed as a free good by rich Model S owners.
In Virginia electric car owners pay $64 per year for road repairs. Big deal.
In Julia Phillips’ 2002
People magazine obituary, Joni Evans, her editor
for the raucous 1991 memoir, “You’ll Never Eat Lunch In This Town Again,”
“Where some of us glow, she burned.”
Phillips, an Oscar winner at age 29 as a producer
of The Sting, and the first women to do so, burned bridges for sure. But she
died, at age 57 of cancer, with no regrets, according to her daughter Kate.
I read Phillips’ book in 1991. The paperback is still on my shelves. I
remember thinking that someday I wanted to write with the same ferociousness
and the same freedom.
“This Town” is billed in the flap copy of the dust
jacket as, “a blistering, stunning —and often hysterically funny—
examination of our ruling class’s incestuous ‘media industrial complex.’”
Others have written tell-all books about Washington DC, lobbyists, and the
revolving door between the legislative and executive branches of government
and the media, regulators and industry—especially “shadow regulator”
I previously reviewed Dean Starkman’s book, “The
Watchdog That Didn’t Bark”. It’s
got plenty of criticism of “access journalism” and what he believes was a
softening of coverage by the business press leading up to the financial
crisis. That couldn’t have made him too popular amongst his journalism
peers, although his position as an editor of the Columbia Journalism Review
means they have to talk to him.
Jeff Connaughton, who is mentioned briefly in
Liebovich’s book, wrote a book about Washington DC and the negative
influence of lobbyists and their client’s money that even he, a former
lobbyist, said was a bridge-burner. Connaughton’s book, “The
Payoff: Why Wall Street Always Wins”,
here, has more mentions of the auditors and their
role in the crisis, although not by name or related to a specific case, than
any other post-crisis book I’ve read.
I’m as guilty as anyone of looking for my name and
the names of the Big Four audit firms in the index of any business book
about the financial crisis. Few mentioned the auditors at all but
my name has started showing up. However, the back
of the Leibovich book jacket has a warning to readers: The book contains no
“Those players wishing to know how they came
out have to read the book.”
I guess Leibovich, like Starkman, is confident
they’ll have to talk to him anyway and maybe even continue to break bread
with him. That’s because
Leibovich is the chief national correspondent of
the New York Times Magazine. He came to the Times in 2006 from the
Washington Post, where he spent nine years.
His book is notable for how current it is—it was
published in 2013— and yet how out of date it is already. Leibovich mentions
many key players who moved from media to industry, government to industry,
and even government to media. In less than two years since the book was
published, however, several more have gone through the revolving door.
Everyone has to make a living, so far be it
from us to complain that David Plouffe, President Obama’s former chief
political strategist, is joining a private business [Uber] to fight
Many of Leibovich’s New York Times colleagues,
mentioned in the acknowledgements, are already gone from the paper. His
opening vignette about “Meet the Press” host Tim Russert’s memorial service
“networking opportunity” in June of 2008 puts his replacement, David
Gregory, front and center in the narrative. Gregory just lost that job,
without even an
“Ann Curry moment” to say goodbye.
It’s like Gregory died, too.
“This Town” utilizes two techniques that were
widely used by journalists writing about the financial crisis:
The well-chosen vignette structure (A
metanarrative “is a global or totalizing cultural narrative schema
which orders and explains knowledge and experience” according to
John Stephens and Robyn McCallum, as cited in
The heavy reuse of your own previously
published work tactic
Leibovich organizes his meta-narrative around some
(Selfish aside: I recently heard the term
“narrative” described, in a “Law and Order: Criminal Intent” episode, as a
postmodern concept. I did not know that so I looked it up. From the
“Encyclopedia of Marxism”:
Narrative knowledge is knowledge in the form of
Keep this in mind when an editor tells you that an
investigative piece or whitepaper has to tell a story.)
Richard Holbrooke, one of Leibovich’s vignette
subjects, died in December 2010, two years into the Obama presidency.
James Mann’s “The
Obamians”, published in 2012 and
excerpted in Slate, said Holbrooke was “of the
wrong generation, serving at the wrong time” in the Obama administration.
Another vignette tells the story of a top press aide for Rep. Darrell Issa,
R-Calif. He lives a Cinderella story, becoming a top advisor to the
congressman, but leaves in a scandal about his own loose lips, only to get
his job back before the book ends. That staffer, Kurt Bardella, is now
CEO of his own “crisis communications” firm,
Endeavor Strategic Communications.
The vignette I like best, though, is about Tammy
Haddad and her “Tam Cam”. Haddad is a former cable TV producer who now acts
as a Washington
“social convener”, in Leibovich’s words, on behalf
of paying clients like Politico, Bloomberg, Condé Nast and HBO.
Haddad’s “Tam Cam” handheld video interview
series, launched for Newsweek and appeared in Politico,
has made headlines and Drudge sirens. Her guests include major public
figures from candidate Senator Barack Obama to Robert DeNiro. She is the
Co-Founder and Editor-in-Chief of WHCInsider.com, the White House
Correspondents Insider website covering political and media culture.
Haddad is such a Washington, DC institution
that Christopher Buckley made her a character in his best selling novel
about Washington, Thank You for Smoking, calling her “a force
A Possible Teaching Case to Either "dial up
financial risk" (speculate) or "dial down
financial risk" (hedge).
Derivative financial instruments are used in two ways --- to speculate with high
(leveraged) financial risk or to hedge financial risk. For example, an investor
with no corn crop might buy put options at relatively low premium prices to sell
corn in at a future (strike) price in a speculation that the contracted strike
price at the maturity of the option will be higher than the spot price on that
date with the difference also being greater than the price paid for the option.
.The option holder who has no corn to sell can net settle the speculation option
for cash and never really has to buy and resell the corn at the strike price.
This is a speculation in what is known as a naked option because the investor
has no corn to back the contracted sale amount (the notional).
On the other hand a farmer with harvested corn in storage can purchase a put
option to sell the corn at a future (strike) price. This is not a naked option
because the farmer has the corn to cover the future sale. The put option simply
locks in the sale's strike price. This is one way to hedge against unknown spot
prices in the future. Actually the farmer can sell the corn inventory at the
spot price and the net-settled put option will either increase or decrease the
combined sales price to the strike price. The hedge in reality locks in the
future sales price of the corn to the strike price in the put contract.
There are of course various other types of financial derivative contracts
including futures contracts (exchange traded), forward contracts (not exchange
traded), and swaps that are portfolios of forward contracts. These other
contracts differ fundamentally in that some require no purchase prices like
options require purchase prices (premiums) but face greater risks in
Hence an investor can use financial instrument derivatives to either "dial
up financial risk" (speculate) or "dial down
financial risk" (hedge). The actual process can become very
complicated with investors changing positions over time with the acquisition of
successive counter positions in risk exposure.
A large California pension manager is using complex
derivatives to supercharge its bets as it looks to cover a funding shortfall
and diversify its holdings.
The new strategy employed by the San Diego County
Employees Retirement Association is complicated and potentially risky, but
officials close to the system say it is designed to balance out the fund's
holdings and protect it against big losses in the event of a stock-market
San Diego's approach is one of the most extreme
examples yet of a public pension using leverage—including instruments such
as derivatives—to boost performance.
The strategy involves buying futures contracts tied
to the performance of stocks, bonds and commodities. That approach allows
the fund to experience higher gains—and potentially bigger losses—than it
would by owning the assets themselves. The strategy would also reduce the
pension's overall exposure to equities and hedge funds.
The pension fund manages about $10 billion on
behalf of more than 39,000 active or former public employees.
San Diego County's embrace of leverage comes as
many pensions across the U.S. wrestle with how much risk to take as they
look to fulfill mounting obligations to retirees. Many remain leery of
leverage, which helped magnify losses for pensions and many other investors
in the financial crisis. But others see it as an effective way to boost
returns and better balance their holdings.
"We think we'll see a lot more people look at risk
the way we do in the not-too-distant future," said Lee Partridge, chief
investment officer of Houston-based Salient Partners LP, the firm hired to
manage the county's money. "Yes, we are an outlier, but that is not a bad
Mr. Partridge said one of the main goals is to
avoid an overreliance on the stock market for returns.
Like many public plans around the country, San
Diego County's fund doesn't currently have enough assets to meet its future
obligations. The plan is about 79% funded, it says. It gained 13.4% last
As a group, state pension funds across the U.S.
have enough assets to cover just 75% of future benefits for their members,
according to Wilshire Associates, an investment consultant in Santa Monica,
San Diego board members haven't yet set a limit on
how much leverage would be used, but one estimate floated at an April board
meeting is the bet could involve an amount equal to as much as 95% of the
fund's assets. Simply put, it could have a market exposure of $20 billion
despite only managing half that amount.
Wilshire Associates Managing Director Andrew Junkin
said more pension funds are now "examining leverage" as they seek to add
balance to their portfolios, meet return targets and reduce their reliance
San Diego's new approach is comparatively complex
at a time when some big pension plans are moving in the opposite direction.
The country's biggest pension, California Public Employees' Retirement
System, is weighing a number of changes to its investment strategy designed
in part to simplify the portfolio, The Wall Street Journal reported this
San Diego's plan was approved by the county in
April but didn't receive much attention until this week, when a local
newspaper columnist wrote criticizing the strategy. In response, the pension
fund posted a letter on its website to answer questions on the issue.
Some local residents said they were wary.
"Larger [pension] systems are moving away from
risk, and try to be a little more conservative. We don't need to see our
systems move in the opposite direction," said Chris Cate, a taxpayer
advocate in San Diego, who is running for city council.
San Diego-area residents are well-acquainted with
pension problems. A decade ago, the city's pension, which is separate from
the county's, endured a scandal after its accounts were found riddled with
errors, though the matter didn't involve sizable investment losses.
Then, in 2006, the collapse of Connecticut hedge
fund Amaranth Partners LLC created tens of millions in losses for the
county's fund. Amaranth made a series of risky bets on natural-gas futures.
"Leverage is a tool, and it can be used improperly.
And if it's used improperly, you could suffer large losses, as shown in
Amaranth," said Brian White, chief executive of the retirement system in San
The CEO said there is a "huge difference" between
Amaranth's approach and the one being employed by Salient. The investments
being made by Salient, Mr. White said, are "highly liquid" and diverse, as
compared with the illiquid, very concentrated bets made by Amaranth.
Salient is being paid $10 million annually for
managing San Diego County's pension fund.
Public funds still have most of their assets in
stocks, but many funds that were burned by the tech-stock bust and the 2008
financial crisis have turned to private equity, real estate and hedge funds
Public pensions for years have had indirect
exposure to borrowed money through property or buyout funds, but most have
steered clear of putting more money at risk than they have in their
The State of Wisconsin Investment Board was one of
the first to embrace the leveraged approach. Trustees in 2010 approved
borrowing an amount equivalent to 20% of assets for purchases of futures
contracts and other derivatives tied to bonds.
Wisconsin staff members initially thought putting
100% of assets at risk might protect the fund against a variety of economic
scenarios, but they concluded that such an amount "could be considered to be
a substantial amount of explicit leverage for a pension fund," according to
a December 2009 report.
Wisconsin's fund has remained among the healthiest
public pensions in the country and currently has enough assets to meet all
future obligations to retirees.
A spokeswoman said the Wisconsin system is moving
slowly on its strategy because of concerns about adding leverage at a time
when economists expect interest rates to rise as the U.S. economy
strengthens. That would cause bond prices to fall, and leverage could
magnify the impact of those declines on the fund's assets. The current
amount at risk on Wisconsin's strategy is roughly 6% of the fund's $90.8
billion in assets.
The accounting rules for accounting for derivatives vary greatly in terms of
whether the unsettled outstanding contracts are deemed speculations or hedges.
For business firms those rules are dictated by FAS 133 and its FASB amendments
in the USA. The international rules were dictated by IAS 39 soon to be replaced
by IFRS 9 of the IASB.
From the CFO Journal's Morning Ledger on August 29, 2014
KPMG faces criticism over Espírito Santo collapse ---
Espírito Santo Group‘s
collapse raises questions about whether its auditor
KPMG LLP should
have detected problems before the bank’s unraveling sent shock waves across
European markets this summer. KPMG was the auditor of Espírito Santo
Financial Group SA, which filed for creditor protection in July, Banco
Espírito Santo SA, which was bailed out in August, and of dozens of related
companies. It was also the auditor of three offshore investment vehicles
that trafficked in Espírito Santo debt. Critics say the scope of the audit
work could have put it in a position to identify the billions of euros that
were secretly flowing amount group companies.
From the CFO Journal's Morning Ledger on August 29, 2014
A former detective working for Austria’s struggling
International Group AG is teasing out the
details of a lending catastrophe
that has already cost taxpayers in Europe billions of
euros, and is likely to cost billions more. Six of the bank’s former bosses
have already received criminal convictions, and the investigation has turned
up seedy details including land purchased from the wrong owner, leased
sports cars that were never delivered, and a missing yacht that was later
found, abandoned, with North Korean currency aboard.
The small bank’s downfall has cost the governments of Austria and Germany
$11.93 billion so far. Now, Austria’s plan to wind down the nationalized
bank has set Vienna up for a new struggle with former investors, including a
Bavarian bank that bought it in 2007 and one of the hedge funds that
recently pushed Argentina to default.
Going Concern Trouble Disclosures are Management's Responsibility
From the CFO Journal's Morning Ledger on August 28, 2015
New accounting rules in the U.S. are going to hold
corporate managers’ feet to the fire over disclosures regarding the ability
of businesses to continue to fund their operations,
CFOJ’s Emily Chasan and Maxwell Murphy report.
The Financial Accounting Standards Board’s updated
rules, effective by the end of 2016, will force executives to disclose
serious risks even if management has a credible plan to alleviate them.
Previously there were no specific rules under
Generally Accepted Accounting Principles and disclosures were mostly up to
the auditors. But supporters of the changes argued that corporate managers
have better information about a company’s ability to operate as a “going
concern” than auditors.
Only about 40% of companies that filed for bankruptcy
in the past two decades have explicitly disclosed the possibility that they
could cease to operate before running into trouble, according to a recent
study from Duke University’s Fuqua School of Business.
Over the past decade, the Big 4 public accounting firms have steadily
increased the proportion of their revenue generated from consulting services
(consulting revenue hereafter), primarily from nonaudit clients. Regulators
and investors have expressed concerns about the potential implications of
accounting firms’ expansion of consulting services on audit quality. We
examine the associations between Big 4 audit firm consulting revenue and
various measures of audit quality, including auditor going concern reporting
errors, client misstatements, and client probability of meeting or just
beating analyst earnings forecasts. Overall, our results suggest that a
higher proportion of firm-level consulting revenue is not associated with
impaired audit quality for the Big 4 firms. However, results of earnings
response coefficient tests suggest that investors perceive a deterioration
of audit quality when a higher proportion of the firms’ revenue is generated
by consulting services.
Given the repeated deficiencies in Big Four audits as reported in PCAOB
inspection reports year after year perhaps cost cutting is more of a problem in
Big 4 audit professionalism than independence. In some cases the Big Four firms
are flagged for poor audit supervision of inexperienced staff auditors. In most
instances, however, the problem is one of failure to do enough detail testing.
Corporate Tax Inversions: The Beautiful and the Ugly
From the CFO Journal's Morning Ledger on August 27, 2015
More corporate finance divisions are looking into the
details of what an inversion would actually do for their tax bill, even if
their companies ultimately aren’t willing to take the plunge and decamp for
a foreign country,
CFOJ’s Emily Chasan reports.
A foreign domicile often will mean a lower overall tax
rate, but a thorough analysis must also factor the cost of moving some
management overseas, reorganizing the company, the sustainability of a move
and its political consequences.
And the political consequences, though at this point
mostly limited to accusations of unpatriotic behavior, could become more
serious if legislators make good on their threats. The Treasury Department
reviewing its options for limiting the tax benefits
of an inversion. And since
Burger King Worldwide Inc. announced its intention
to relocate to Canada through a merger with
Tim Hortons Inc.,
the iconic burger chain has come under direct criticism from lawmakers. Sen.
Dick Durbin (D., Ill.) said, “I’m disappointed in Burger King’s decision to
renounce their American citizenship” and added that “with every new
corporate inversion, the tax burden increases on the rest of us to pay what
these corporations won’t.” The companies say the deal is not about taxes,
but about growth (more on that below).
But the Burger King deal highlights what chief
financial officers are learning in their investigations of inversion deals:
that the tax benefits are not so straightforward, and often lurk in the
details. Writing for Heard on the Street, John Carney notes that
Canada offers a generous tax break
for profits from countries with which it has a tax treaty. These get counted
as “exempt surplus,” which isn’t taxed at all by Canada. And in some of
Burger King’s fastest-growing markets, a Canadian domicile would also give
it the benefit of “tax sparing”—a system that credits companies even for
taxes that aren’t actually paid as part of a complex incentive to invest in
Whopper Deal --- Burger King Headquarters May Move to Canada: There are
tax savings in addition to a purchase of Canada's Tim Horton's Inc.
From the CFO Journal's Morning Ledger on August 25, 2015
The inversion wave that overtook the pharmaceutical
and drug retail industries continues to spread, and now one of America’s
most storied hamburger chains is looking to decamp for a lower-tax domicile
to the north.
And despite the saber-rattling from American lawmakers
who fear that such moves will drain U.S. tax coffers, Burger King is
planning to make the move without the protection of a provision that would
let it walk away from the deal even if the tax benefits are taken away
through new legislation. That may suggest that American big business
perceives the U.S. government as unwilling, or incapable, of making any
serious moves to restrain inversions.
“Some people are calling these companies ‘corporate
That is what President Obama said last month about
the recent wave of tax inversions sweeping across corporate America, and he
did not disagree with the description. But are our nation’s business leaders
really so unpatriotic?
A tax inversion occurs when an American company
merges with a foreign one and, in the process, reincorporates abroad. Such
mergers have many motives, but often one of them is to take advantage of the
more favorable tax treatment offered by some other nations.
Such tax inversions mean less money for the United
States Treasury. As a result, the rest of us end up either paying higher
taxes to support the government or enjoying fewer government services. So
the president has good reason to be concerned. Continue reading the main
story Related Coverage
Walgreen on Wednesday said it would take over the
British pharmacy retailer Alliance Boots but would not, after all, move its
headquarters overseas to save on taxes. Tax Reform: Inverting the Debate
Over Corporate InversionsAUG. 6, 2014
Yet demonizing the companies and their executives
is the wrong response. A corporate chief who arranges a merger that
increases the company’s after-tax profit is doing his or her job. To forgo
that opportunity would be failing to act as a responsible fiduciary for
Of course, we all have a responsibility to pay what
we owe in taxes. But no one has a responsibility to pay more.
The great 20th-century jurist Learned Hand — who,
by the way, has one of the best names in legal history — expressed the
principle this way: “Anyone may arrange his affairs so that his taxes shall
be as low as possible; he is not bound to choose that pattern which best
pays the treasury. There is not even a patriotic duty to increase one’s
If tax inversions are a problem, as arguably they
are, the blame lies not with business leaders who are doing their best to do
their jobs, but rather with the lawmakers who have failed to do the same.
The writers of the tax code have given us a system that is deeply flawed in
many ways, especially as it applies to businesses.
The most obvious problem is that the corporate tax
rate in the United States is about twice the average rate in Europe.
National tax systems differ along many dimensions, making international
comparisons difficult and controversial. Yet simply cutting the rate to be
more in line with norms abroad would do a lot to stop inversions.
A more subtle problem is that the United States has
a form of corporate tax that differs from that of most nations and doesn’t
make much sense in the modern global economy.
A main feature of the modern multinational
corporation is that it is, truly, multinational. It has employees, customers
and shareholders around the world. Its place of legal domicile is almost
irrelevant. A good tax system would focus more on the economic fundamentals
and less on the legal determination of a company’s headquarters.
Most nations recognize this principle by adopting a
territorial corporate tax. They tax economic activity that occurs within
their borders and exclude from taxation income earned abroad. (That
foreign-source income, however, is usually taxed by the nation where it is
earned.) Six of the Group of 7 nations have territorial tax systems.
Continued in article
Hi again Richard,
Perhaps you can clear up my misunderstanding of how large LLP partnerships may
be taxed as corporations in the U.K.
We’ve also got a second, related problem, which I
call the “never-heres.”
They include formerly private companies like Accenture ACN 0.17% , a
consulting firm that was spun off from Arthur Andersen, and disc-drive maker
Seagate STX , which began as a U.S. company, went private in a 2000 buyout
and was moved to the Cayman Islands, went public in 2002, then moved to
Ireland from the Caymans in 2010. Firms like these can duck lots of U.S.
taxes without being accused of having deserted our country because
technically they were never here. So far, by Fortune’s count, some 60 U.S.
companies have chosen the never-here or the inversion route, and others are
lining up to leave.
From the CFO Journal's Morning Ledger on August 26, 2015
More accounting deficiencies linked to inventory Taxes have long been a top accounting bugaboo, but keep an eye on
the inventory, reports
CFOJ’s Maxwell Murphy.
Large companies disclosed deficiencies in their
procedures to account for inventory, vendors and cost of sales 38 times last
year, putting the category just behind tax. In 2012, inventory ranked third
on the list and was sixth as recently as 2011, according to Audit Analytics.
Two Teaching Cases Featuring Proposed Major Differences (FASB versus IASB)
in Lease Accounting
IASB Says the Tentative FASB Lease Accounting Model is Too Complicated
From the CFO Journal's Morning Ledger on August 11, 2014
About $2 trillion in off-balance sheet leases needs to
be brought onto companies’ books, U.S. and international rule makers agree.
But that’s about where the agreement ends. When the final version of their
lease accounting overhaul arrives next year, it’s likely to involve
different models for lease expensing, creating a potential headache for
corporate financial staff in applying the divergent rules.
The U.S. Financial Accounting Standards Board plans to
stick with its proposed dual model for lease accounting, which treats some
leases as straight-line expenses and others as financings. But the
International Accounting Standards Board said last week that it has
tentatively decided to go with just one model for all lease expenses,
because it views the FASB’s plan as too
CFOJ’s Emily Chasan reports.
But it’s also possible that the differences won’t be
too difficult to reconcile. “While it looks like we won’t have one complete
joint solution in the end, the actual impact of the differing models over
time may not be as dramatic as one might first think,” said Nigel
Sleigh-Johnson, head of the Institute of Chartered Accountants of England
and Wales’ financial reporting faculty.
From The Wall Street Journal's Weekly Accounting Review on March 21, 2014
Tuesday and Wednesday, March 18 and 19, 2014, the U.S.
Financial Accounting Standards Board (FASB) and London-based International
Accounting Standards Board (IASB) met to further their "aim to issue a final
standard later this year that would move about $2 trillion dollars of lease
obligations onto corporate balance sheets." According to the article, their
differences have to do with the amortization of the lease cost into the
income statement: straight-line presentation of the rental cost in the
income statement or presentation as a long-term financing of an asset which
involves depreciation expense and interest expense on the lease obligation.
The former treatment is argued to be more appropriate for, say, storefront
rental leases. The latter system can show higher expenses in the early years
of a lease obligation.
CLASSROOM APPLICATION: The article is an excellent one to introduce
impending changes in lease accounting in financial accounting classes.
1. (Advanced) Summarize accounting by lessees under current
2. (Advanced) How do current requirements lead to lack of
comparability among financial reports? How do they result in financial
statements which often lack representational faithfulness? In your answer,
define the qualitative characteristics of comparability and representational
3. (Introductory) Summarize the two proposed methods of accounting
for all leases as described in this article. Identify a timeline over which
these proposals have been made.
4. (Introductory) Summarize company reactions to these proposed
5. (Advanced) Are company arguments and reactions based on
accounting theory? Support your answer.
Reviewed By: Judy Beckman, University of Rhode Island
U.S. and international rule makers remained divided
Tuesday in the first of two days of meetings aimed at resolving differences
on lease accounting.
The U.S. Financial Accounting Standards Board and
London-based International Accounting Standards Board aim to issue a final
standard later this year that would move about $2 trillion dollars of lease
obligations onto corporate balance sheets. But they are still split on the
fundamental model companies should use to measure those liabilities.
“We have been struggling with this standard for
many years,” Hans Hoogervorst, chairman of the IASB said at the meeting in
Norwalk, Conn. “There is no simple answer.”
The major difference is whether to restrict
companies to one method to account for leases, or to let them choose between
two. The debate will continue Wednesday.
Since 2005, the Securities and Exchange Commission
has recommended an overhaul of lease accounting because large off-the-books
lease obligations can obscure a company’s true finances.
Under current rules, lease accounting is based on
rigid categories that let companies keep operating leases for items such as
airplanes, retail stores, computers and photocopiers off the books,
mentioning them only in footnotes. In other cases, where the present value
of lease payments represents a very large portion of the asset’s value, they
are called capital leases and treated more like debt.
In their efforts to revamp the rules, accounting
standard setters have gone back to the drawing board several times. In 2010,
they proposed a method aimed at bringing leases on-the-books by categorizing
them as “right of use” assets, which would treat them like financings.
Companies pushed back, claiming it would be costly
to implement and could unnecessarily front-load lease expenses.
So the rule makers agreed to compromise in 2012 on
a two-method approach: The first would let companies treat some leases like
financings, such as when a company can purchase the asset at the end of a
lease. The second would treat other leases as straight-line expenses, such
as rental payments for retail storefronts.
That move also drew criticism from analysts, who
were concerned they wouldn’t get comparable financial information because
the choice would be left up to companies.
On Tuesday, some board members said they preferred
to return to the “right of use” approach because they think the compromise
is weak. Others were in favor of the two-method approach because it would be
easier to implement.
The dual method approach is the “more operational
one, at least initially,” said FASB Vice Chairman Jim Kroeker.
To speed a resolution, the boards also generally
agreed to eliminate potential changes to lessor accounting from the
The boards had received feedback from investors and
analysts that the current lessor model works well and that changes could
result in more work.
Continued in article
From The Wall Street Journal's Weekly Accounting Review on August 15, 2014
SUMMARY: U.S. and international accounting rule makers are getting
closer to a final version of their long-awaited lease accounting overhaul,
but the two boards are unlikely to use the same lease expensing model in
their final rules. The London-based International Accounting Standards Board
published an update saying it has tentatively decided to propose a single
model for lease expenses, rejecting a 2013 compromise with the U.S.
Financial Accounting Standards Board for a dual model amid concerns that it
is too complex.
CLASSROOM APPLICATION: This article is a good update regarding
accounting for leases.
1. (Introductory) What is FASB? What is IASB? What do they have in
common? How do they differ?
2. (Advanced) What are the current rules regarding accounting for
leasing? Will this be changing? If so, how?
3. (Advanced) Why do some parties take issue with the current model
of accounting for leases? Do you agree that this is a problem? Why or why
4. (Advanced) What is the reasoning behind the idea that there is
no real difference between the FASB and IASB methods? Do you agree?
Reviewed By: Linda Christiansen, Indiana University Southeast
U.S. and international accounting rule makers are
getting closer to a final version of their long-awaited lease accounting
overhaul by next year, but the two boards are unlikely to use the same lease
expensing model in their final rules.
The London-based International Accounting Standards
Board this week published an update saying it has tentatively decided to
propose a single model for lease expenses, rejecting a 2013 compromise with
the U.S. Financial Accounting Standards Board for a dual model amid concerns
that it is too complex.
FASB has tentatively decided to retain the dual
model, because it believes it better reflects the economics of different
types of leases, such as real estate and equipment leases. The models may
not result in significant financial differences, but it could have big
operational differences for corporate financial staff applying the
standards, industry analysts say.
The primary goal of the joint lease accounting
overhaul has long been to push companies to bring about $2 trillion in
off-balance sheet leases onto the books. Investors complain that today’s
off-balance sheet leases obscure a company’s true liabilities, and that they
often have to adjust calculations to include these expenses. Off-balance
sheet leases may be understating the long-term liabilities of companies by
20% in Europe, by 23% in North America, and by 46% in Asia, according to
But the overhaul has been delayed by disagreements
over how companies should measure leased assets and liabilities.
The IASB’s single model would treat all leases like
financings, requiring companies to recognize a so-called “right of use”
asset and amortize it over time. FASB’s dual model would treat some leases
like financings, such as when a company has the option to purchase equipment
at the end of a lease term, and treat other leases, such as store rental
payments, as straight-line expenses.
“While it looks like we won’t have one complete
joint solution in the end, the actual impact of the differing models over
time may not be as be dramatic as one might first think,” said Nigel
Sleigh-Johnson, head of the Instituted of Chartered Accountants of England
and Wales’ financial reporting faculty.
The real estate industry has primarily been
concerned that the single financing model for lease accounting would force
them to front-load lease expenses. But when companies include the additional
lease service components or tenant improvements into the straight-line
expensing model, the final result is often similar to the financing model,
according to a study of dozens of real-world leases earlier this year by
leasing firm LeaseCalcs LLC.
“In practice, the difference in the IASB and FASB
positions is expected to result in little difference,” the IASB said in its
Neither the FASB nor the IASB will ever make headway with short-term lease
accounting rules until they factor in probabilities of lease renewals.
I never met a person who, after a close encounter with Bob Herz, did not really
like Bob Herz. I had only one encounter when Bob was still a partner with PwC
and one encounter when Bob was Chairman of the FASB. Both times I can away
better informed and entertained by his clever wit (truly like Will Rogers) and
humble style (also like Will Rogers).
I wish somebody who knew Bob Herz better than me would write a Wikipedia
module about him.
BOB HERZ, Accounting Changes: Chronicles of Convergence, Crisis,
and Complexity in Financial Reporting (No place: AICPA, 2013,
ISBN 978-1-93735-210-3, pp. xx, 268).
Chief Financial Correspondent The New York Times
Robert H. Herz always seemed like the Will Rogers
of the accounting world. He sounded down to earth even when discussing
arcane accounting rules, and he appeared to get along with everybody,
even those who did not get along with him.
Then he quit.
In 2010, he suddenly stepped aside as chairman
of the Financial Accounting Standards Board, with two years left in his
second term. If he had previously mentioned to anyone he was thinking of
such a step, that person has yet to mention it publicly.
Was he pushed? He insisted the departure was
Was he angry over the congressional upbraiding
he had suffered the year before, when it became clear that the
congressmen who planned the “hearing” had no interest in hearing his
views, only in assuring he heard and obeyed the demand of the banks that
the Board back away from fair value accounting enough to let the banks
look as healthy as they wished to appear?
If you long to hear the inside story of his
sudden retirement, or to hear what he really thought of the people who
forced the Board's rapid retreat after that congressional circus, Herz's
memoir, Accounting Changes: Chronicles of Convergence, Crisis and
Complexity, is not the place to turn.
If, unlike Rogers, he ever met a man he did not
like, that man is left out of the book.
Start with the story of the congressional
lynching. He chooses to remember comments from the one congressman who
showed any sympathy to the Board's position.
Over the next few weeks, the Board rushed out
changes to the accounting rules that he defends.
The principal change enacted then enabled banks
to treat impaired securities as being worth more than they were, at
least for earnings purposes, while the rest of the impairment was put in
“other comprehensive income.” This was a classic accounting rule-maker
approach, one that I wish Mr. Herz would have discussed in more detail.
In it, those who have gained political support forcing rule-makers to
back down get what they said they wanted—avoiding a hit to earnings—but
are forced to disclose the unfortunate truth to those who are willing to
read the footnotes.
Instead, he makes it sound like helping out the
banks was a byproduct of a perfectly reasonable decision, albeit one
that was rushed through in record time.
Although not one of our
specific goals in establishing this approach, an important practical
effect of it for the banks was to take some pressure off their
regulatory capital because only the portion of the impairments in
debt securities relating to credit would now be charged to
regulatory capital. (p. 175)
As for his departure from the Board, he simply
reprints an interview with The CPA Journal. “It was time to move
on,” he says (p. 238).
He is a little more inclined to discuss what
was probably the single biggest mistake of his tenure: the failed
attempt to deal with special purpose entities in the aftermath of the
Enron scandal. The Board's narrow solution set the stage for later—and
much larger—abuse by the banks.
“Knowing what I know now about how the use of
this device was sometimes stretched and became an important element in
the growth of the ‘shadow' banking system leading up to the financial
crisis,” he writes, “I would certainly have worked to eliminate it from
the standards much earlier” (p. 249). That episode, he says, “serves as
an example of the perils of creating exemptions that grant highly
coveted financial reporting outcomes.”
Herz is more interesting when discussing his
early life and career. He grew up in New Jersey and Argentina, where his
maternal grandparents lived and where his father was transferred when he
was 14. He chose to go to college at the University of Manchester in
Britain, and went to work for Price Waterhouse in Manchester after he
graduated in 1974, and later moved to the United States, where he ended
up at Coopers & Lybrand.
The result was a highly unusual résumé for a
young accountant, one that required him to know both British and
American accounting rules, something that would serve him well as he
became the top technical partner for the merged PricewaterhouseCoopers
and a part-time member of the International Accounting Standards Board
before leaving both jobs to take over the FASB in 2002.
Early in his career he had a job at Coopers
that perhaps should be mandatory for those who would write accounting
rules. In what he calls his “Bad Bob” years, his job in the firm's
corporate finance advisory service involved finding ways around
accounting rules to inflate profits.
He writes, “my experiences in transaction
structuring taught me that the areas that were most ripe for designing
transactions and arrangements to achieve desired accounting outcomes
were those where the accounting rules departed from basic principles of
economics and finance and areas where, because of the detailed
requirements and many exceptions and bright lines present in the
accounting rules, minor changes in the form of a transaction or
arrangement could produce a large change in the resulting accounting
treatment” (p. 13).
That sounds like a plea for a “principles
based,” rather than “rules based” set of accounting standards, something
Herz says he would like. But he seems resigned to the idea such a system
would not work in the United States, due in part to what he called, in a
2004 speech, the “real fear of being second-guessed by regulators,
enforcers, the trial bar, and the business press” (p. 207). Whatever
they say, he writes, companies and accountants often want “detailed
rules, bright lines, and safe harbors” (p. 209).
It turns out that Herz really is what he always
seemed to be: a nice guy with a sense of fair play. That does not help
the book much. He goes out of his way to explain all sides of some
accounting issues, without necessarily making clear his own opinions.
His memoir does an excellent job
of making some complicated accounting issues accessible. But it would be
nice if the author were not so nice to those who opposed—and ultimately
defeated—some of his efforts.
August 18, 2014 reply from Tom Selling
Thanks for forwarding this. I want to share a
couple of reactions to your observations and to Floyd’s review:
I consider myself fortunate to have interacted with
Bob Herz on a handful of occasions. One of the most memorable was when he
called me to clarify his views about one of my earliest Accounting Onion
postings. I don’t even remember which post it was. I was still pretty new to
blogging, and Herz didn’t call to complain, only to clarify. As you said,
Bob, he was extremely patient and cordial. One thing we did agree on, I
remember, is a preference for the IFRS impairment model for long-lived
tangible assets over U.S. GAAP. I still smart from the invective that Denny
Beresford directed toward me via a post to AECM (“outrageous and unsupported
assertions,” and more) after I published my view that Herz did not resign of
his own accord. (If anyone is interested, see here.) I took a measure of
satisfaction reading that Floyd is as skeptical as I continue to be about
the stated reasons for Bob having suddenly departed the FASB. Floyd focuses
on the loan measurement controversy, and he also recently published a column
in the NYT on the topic. His NYT piece was much more charitable to the
anti-fair value forces than the book review. It’s available here: Why a Rule
on Loan Losses Could Squeeze Credit. Related to that last bullet point,
Floyd quotes Bob Herz: “My experiences in transaction structuring taught me
that the areas that were most ripe for designing transactions and
arrangements to achieve desired accounting outcomes were those where the
accounting rules departed from basic principles of economics and finance…”
Evidently, Bob Herz —unlike Bob Jensen— is no defender of historic cost.
Based on comments to me by others closer to the FASB at the time, I think
that Bob Herz was coming around to the measurement approach that I favor,
replacement cost, just before he departed from the FASB. Given that FAS 157
had already been promulgated, I imagine that there was no way that the FAF
could have abided the shift in thinking toward the “the basic principles of
economics and finance."
I should have done so earlier, but I will be
purchasing a copy of Bob’s book tonight. I very much look forward to reading
August 18, 2014 reply from Dennis Beresford
I’m sorry that you still smart from the “invective”
I directed toward you re: Bob Herz’ resignation from the FASB. For the
record, the definition of invective that popped up on my email program is
“the harsh denunciation of some person or thing in abusive speech or
writing, usually by a succession of insulting epithets.” Suggesting that you
had made what I called “outrageous and unsupportable assertions” about such
a serious matter can hardly be called, in my opinion, abusive speech or a
succession of insulting epithets. Neither then nor now has there been any
evidence of which I am aware that Bob’s decision to leave the FASB was other
than a completely voluntary action by him. I urge that you be more careful
about your choice of word selection in future postings.
I have actually read Bob Herz’ book and I recommend
it highly to anyone who wants to understand more about the politics of the
standard setting process and much of the day to day activity. However, as
Floyd Norris observes, Bob doesn’t really break much new ground and
certainly doesn’t disclose any “Deep Throat” type information or enemies
list that wouldn’t have already been obvious. As Floyd states (and as you,
Tom, agree) Bob is just too nice a guy to write that kind of book.
I interacted with Bob in many professional
capacities before, during, and after my time at the FASB so our relationship
goes back at least 30 years. I always found him to be the consummate
professional – extremely bright on accounting matters but also a
well-rounded business person. And he has a wonderful sense of humor. While
all of these interactions were positive, I most enjoyed the year in which
Bob and I overlapped on the board of directors of Fannie Mae. I chaired the
Audit Committee and he was a new member of the board and of the Audit
Committee. He “hit the ground running” as both a board member and Committee
member and made a great contribution. But he was able to do so in a
constructive way that didn’t bruise any egos of board members or senior
management who had been working hard to deal with extremely challenging
issues long before he got there. In summary, he was a joy to work with.
The international accounting standards setter has
set up the group to support stakeholders in adopting the new reporting
standard, which forces banks to take a forward view of losses incurred from
The 12-strong panel includes members of the Big
Four, along with representatives from Barclays, Bank of China and Deutsche
Bank. A full list can be seen here.
Last month, the IASB replaced its discredited
incurred-loss model in favour of a forward-looking impairment model that
requires banks and financial institutions to provision for bad loans much
earlier under changes to IFRS accounting rules that will force organisations
to better accurately represent their financial health.
The new model will create challenges for preparers
of accounts, particularly because of the increased need for judgement. For
instance, a major issue for banks and investors will be how adoption of the
new standard will affect regulatory capital ratios. Banks will need to
factor this into their capital planning and users are expected to look for
information on the expected capital impacts.
The objective of the Impairment Transition Resource
Group is to provide a forum for stakeholders to discuss emerging
implementation issues arising from the new impairment requirements. The
group will also provide information that will help the IASB to determine
what, if any, action will be needed to resolve such diversity, although it
will not itself issue guidance.
Meetings will be observed by regulatory bodies
including members of the Basel Committee on Banking Supervision.
The IASB expects that the group will meet
approximately two to three times a year, depending upon the volume and
complexity of the issues raised. The first meeting is planned for the last
quarter of 2014, with details to be announced in due course. All meetings
will be public and chaired by IASB member Sue Lloyd.
One issue of loan impairment is that moving threshold where statistical
prediction of bad debts gives way to an evaluation of each debtor. For example,
predicting bad debt losses of millions of bad debts in each aging category of
accounts receivable at Sears is a statistical estimation problem where
individual accounts are not individually analyzed and compared for impairment
prediction. The IASB's Impairment Transition Resource Group is more concerned
with banks and other lenders having fewer very large investments that must be
individually evaluated such as investments in a particular class of Argentina's
The huge problem facing the Impairment Transition Resource Group is in
achieving some sort of consistency between financial statements of lenders
regarding loan impairment adjustments. As with most any principles-based
judgment taking the place of a bright-line rule, there is great risk of
inconsistencies between firms: Bright Lines Versus Principles-Based Rules ---
For example, given identical loan contracts such as a class of Argentina
bonds, the IASB's new ruling faces a high probability that one company and its
auditors may account for the contracts differently than another company and its
auditors (even though the audit firm is the same for the two different
A company with a high ratio of assets to
liabilities should, in theory, be better placed to service its debts than
one with fewer assets supporting its obligations. However, the balance sheet
– the primary record of an entity’s assets and liabilities – is rarely
employed by credit analysts as a standalone indicator of credit risk.
The three main shortcomings which limit its
usefulness are that:
Under the historical cost accounting
convention, the amounts shown on the asset side are unlikely to be a
good proxy for the real value of the entity’s resources;
Leased assets, and the related obligation to
pay the lease rentals, are mostly off balance sheet; and
Pension obligations are not reported
However, these obstacles are not completely
The value of the assets can be estimated by
reference to the earning power of the business;
Off-balance-sheet leased assets can be
factored in using either a multiple of the lease expense, or the
estimated present value of the obligation to pay the lease rentals; and
Inconsistencies in the reporting of pension
obligations can be rectified by including the actuarially-estimated
defined benefit obligation as a liability, and by transferring pension
assets to the asset side of the balance sheet where appropriate.
Using Western Europe’s 10 largest telecoms
operators as an example, this report shows that it is possible to construct
a metric – the ratio of total assets Go total liabilities – which not only
correlates nicely with our credit ratings for the telcos concerned, but also
provides additional insight into the strength of their balance sheets.
However, the adjustments required are not entirely robust, and Moody’s will
continue to focus on metrics which compare the cash generating capability of
the entity with the level of its debt.
Continued in article
Some of the underlying faults are being corrected such as OBSF lease
obligations. I would say that a much more overwhelming inability of accountants
to deal with intangibles and contingencies ---
The highest rate of decline in is "fallers" who cut down trees for paper,
lumber, and energy uses. For a few days I watched lumberjacks at work cutting
down a few acres of timber across from our cottage. I don't think the
lumberjacks even owned a chain saw or an axe. They moved in about $3 million
worth of logging machinery, including the cutting machine that downs the trees
and the chipping machine that swallows up whole trees (sometimes three or four
or more trees at a time) and fills an 18-wheel truck with wood chips in about 40
minutes on average. The trees themselves are untouched by the lumberjacks
running the big machinery. The wood chips were hauled off to a power plant in
nearby Whitefield, NH.
"Discussing (Revenue) Variance Analysis with the Performance of a
Basketball Team," by William R. Strawser and Jeffrey W. Strawser, Issues in
Accounting Education, August 2014 ---
This article is not a free download, but I think, like most AAA journal
articles, I think it can be distributed free to current students in accounting
While current cost and managerial
accounting texts devote extensive coverage to comparisons of actual and
expected costs, relatively scant attention is devoted to analyzing
comparable differences in revenues. Methods commonly used to identify
differences between actual and expected revenues include the calculation of
variances such as the sales price (SPV), sales quantity (SQV), and the sales
mix (SMV) variances. We decided to approach the discussion of these
variances in an innovative setting by presenting the SQV and SMV in the
context of analyzing the performance of a basketball team, providing a
setting that is both appropriate and interesting for illustrating revenue
variances. Also, there are trade-offs in the choice between two of these
“revenue” sources, for example, should the shooter attempt a two- or a
three-point shot? Other relevant questions propel the decomposition of the
SQV into the market size (MSV) and market share (MShV) variances. Was the
game an offensive showdown, tallying numerous shots, or a defensive
lock-down with relatively few shots? How effective was the team in
controlling the ball and scoring a dominant proportion of shots? Feedback
from students indicates that this illustration provides an interesting and
comprehensive discussion of revenue variances. Using this and similar
settings, a better understanding of quantity and mix variances, and the
impact of these variances on improving performance, may be obtained.
The new revenue recognition standard issued by the FASB and the IASB creates
a comprehensive source of revenue guidance for all entities in all
industries. Our Technical Lines consider certain implications for the
Prosecutors announced that Gabriel Bitran, a former associate dean
at Massachusetts Institute of Technology’s
Sloan School of Management, has agreed to plead
guilty to criminal charges of conspiracy to commit fraud for using a hedge fund
to secretly funnel investors’ cash into Bernard Madoff’s Ponzi scheme. His
son, Marco, will also plead guilty in the case. Bitran’s misdeeds were made
public as early as 2009, yet he stayed on Sloan’s faculty until 2013.
Bitran and his son paid almost $5 million in April 2012 to settle
Securities and Exchange Commission charges that they lied to investors. Years
Reuters reportdetailed his fund’s involvement in
the Madoff scheme. Bitran remained on Sloan’s staff until he retired in January
2013, teaching classes on operations and management. His lawyer did not return a
call seeking comment.
The elder Bitran was sued unsuccessfully in 1992 for sexual
harassment by a woman who worked as an assistant in his office on Sloan’s
campus. While her case failed, the decision spurred widespread protest and
prompted the school to overhaul its policies on such incidents.
In hindsight, it
seems obvious: Nathan J. Mueller’s pilfering of financial services giant ING
should have never been allowed to start, much less last as long as it did.
First, it was an
accident that gave Mueller, an employee in ING’s reinsurance division, the
authority to approve company checks of up to $250,000.
Then, the check his
credit card company returned to ING could have exposed his theft in the
first year, but the accounts payable department simply returned the check to
evidence that he was living far beyond his means—the expensive cars and
watches, the lavish nightlife, the frequent trips from Minnesota to Las
Vegas—could have raised a few eyebrows among his co-workers, but nobody
voiced any concerns for years.
In the end, Mueller
embezzled nearly $8.5 million from ING over four years and three months.
When he was caught, he was sentenced to 97 months in prison—a term that he
began in February 2009 at the Federal Prison Camp in Duluth, Minn.
Why should anyone
care about Nathan J. Mueller? His case is noteworthy because of the millions
of dollars involved and the length of time that his scheme went undetected
and because his scheme was made possible by a breach of controls. This
article describes the fraud in Mueller’s own words and examines the lessons
learned with strategies for management on how to prevent and detect similar
THE PATH TO
Mueller grew up in a
small town in south central Minnesota. A high school friend remembers that
Mueller was popular in school, decent at athletics, and competent at his
schoolwork, and that he liked to play rap music “pretty loud in his car”
whenever he could. The friend also remembers that Mueller’s family was
always on a tight budget and that Mueller didn’t like living that way.
Mueller attended a
private liberal arts college and graduated with an accounting degree in
1996. He enjoyed the inner workings of accounting systems, and in 2000 he
found himself part of ING after his employer, life insurance company
ReliaStar, was acquired for more than $6 billion.
Mueller played a
lead role in transitioning his old employer onto a new enterprise resource
planning (ERP) system. A mistake by his new employer created an opportunity
for Mueller to steal company funds. In the next section of the article,
Mueller describes the fraud scheme in his own words.
LOGGED ON AS SOMEONE ELSE
As a part of the
changeover team, I became an expert on all aspects of the ERP system
including financial reporting, journal entries, and, most importantly,
checks and wire payment processing. I was also, by mistake, along with a
co-worker, given the authority to approve checks up to $250,000. I
discovered this permission quite by accident some two years after the
Our accounting department consisted of a controller, assistant controller,
accounting manager (me), and three people under me. Together with a
co-worker (CW) and a subordinate (SUB), I was one of three of us in my
division who could request checks. CW and I also could approve checks. In
our small accounting department, we knew everyone else’s system passwords.
This was a practical workaround for when we needed to get something done
when someone was out of the office. We often logged on as someone else to
get the job done. One morning, while sitting at my desk, I realized that I
could log in as someone else, request a check, and then log in as myself and
approve my own request. I went to work every day for the next year tempted
by the pot of gold that was there for the taking.
reaches membership milestone The AICPA
announced Tuesday that its membership has eclipsed the
400,000 mark. The accounting profession's largest membership organization
worldwide has seen its number of members grow by more than 70,000 since
2005. Watch AICPA President and CEO Barry Melancon, CPA, CGMA, reflect on
this exciting achievement and what it means for members in this
Journal of Accountancy online
Robots are replacing skilled and well as unskilled workers. For example, welding
and surgery are popular areas for robotics, although the nature of the robotics
may differ. Specialty surgeons in rural areas may be replaced by robots
controlled by highly skilled surgeons in urban specialty hospitals. Specialty
welders on a factory floor may be replaced by robots that are not controlled by
The advantages of robots in surgery include allowing surgeons to do more
surgeries per day and allowing specialty surgeries in remote locations that do
not attract as many specialty surgeons. There are of course medial risks, and
general surgeons must be present when the surgeries are being performed to cover
emergencies such as hemorrhaging.
The advantage of robots in welding are primarily operating leverage where
variable labor costs (wages and benefits) are eliminated by adding fixed costs.
Also robots are not as subject to labor strife, although unions often influence
the extent to which their members can be replaced by robots. Concessions are
often made for for troubled factories on the verge of being closed down if
variable costs are not reduced. Robots may allow some skilled workers to remain
employed with high wages and benefits. For example, robots may allow factories
in the USA to compete with less costly labor in Mexico and Asia.
In a competitive environment, accurate costing information is crucial for
every business including manufacturing and service firms, fishing and
farming enterprises, and educational institutions. The Activity-Based
Costing (ABC) system, argued to be superior to the traditional volume-based
costing system, has increasingly attracted the attention of practitioners
and researchers alike as one of the strategic tools to aid managers in
better decision making. The benefits of the ABC system and its impact on
corporate performance have motivated numerous empirical studies on ABC; it
is considered to be one of the most-researched management accounting areas
in developed countries. China, an emerging market with a growing rate of
manufacturing industries, is no exception, as ABC entered China as a choice
for an innovative accounting system. Previous research on ABC conducted in
China examined pertinent issues related to ABC implementation, such as the
levels of ABC adoption in various countries, the reasons for implementing
ABC, the problems related to ABC and the critical success factors
influencing ABC. In their case studies, several authors declared ABC
implementation to be successful, but many have been reluctant to support
this seemingly novel system for many reasons. This paper reviews 48 research
studies on ABC carried out within the past decade in China, both case
studies and questionnaire-based research, from 2000 to 2013. We found that
ABC has been adopted in most manufacturing firms, many of which claim
success in cost reduction and performance improvement since its
implementation; in some service corporations, especially in logistics and
hospitals; and in only a few firms in the construction sector. In our study,
it should be noted that large firms with more than 1,000 employees were the
dominant group (65.58 per cent) applying ABC. Even though many firms in
China supported ABC’s use, many factors hindered its implementation: 1)
difficulty in establishing activities and linkages to existing systems for
gathering information to enter into an ABC system; 2) lack of adequate IT
resources; 3) insufficient knowledge of ABC among employees, which leads to
the fourth reason; 4) lack of management support. Despite these obstacles,
our research review leads us to believe that the rate of ABC implementation
in an emerging market like China will continue to rise.
I'm not certain that
"accurate costing information" is
the main goal of ABC costing. Perhaps a better phrase is "comprehensive costing
information." For example, ABC costing declined in popularity in product costing
in the USA due to derivation costs and limitations of ABC costing for product
The value of ABC costing may come more from the process of
investigating activity costs than from the dubious inaccurate product costs
using ABC models. One problem is that the benefits from a quality ABC costing
effort often do not exceed the costs of the effort. The above Terdpaopong et al.
paper suggests this may also be the case in China.
Academics love ABC costing because it is relatively easy to teach and is one
of the great 20th Century innovations (developed initially by practitioners) in
cost accounting. But academics may pass over the decline in popularity in
real-world implementations in practice.
• The GASB has proposed chang ing how state and
local governments calculate and report the costs and obligations
associated with defined benefit other postemployment benefit (OPEB)
• Government employers that fund their OPEB
plans through a trust that meets the specified criteria would have to
record a net OPEB liability in their accrual - basis financial
statements for defined benefit plans that would be based on the plan
fiduciary net position rath er than plan funding.
• The proposal would make a government’s
obligations more transparent, and m any governments would likely report
a much larger OPEB liability than they do today.
• The guidance would be effective for fiscal
years beginning after 15 December 2016 , and early application would be
• Comments are due by 29 August 2014 . Public
hearings are s et for September 2014.
The Governmental Accounting Standards Boa rd (GASB) has proposed
changing how state and local governments calculate and report the cost
of other postemployment benefits , which consist of retiree health
insurance and defined benefits other than pensions and termination
benefits that are provided to retirees .
By Michael Hicks, includes “This week marked the
full implementation of two new Government Accounting Standards Board
rules affecting the reporting of pension liabilities. These rules --
known in the bland vernacular of accountancy as Statements 67 and 68 --
require state and municipal governments to report their pensions in ways
more like that of private-sector pensions. …
One result of this is that governments with very
high levels of unfunded liabilities will see their bond ratings drop to
levels that will make borrowing impossible.
In some places, like Indianapolis or Columbus, Ohio, may have to
increase their pension contributions and perhaps make modest changes to
retirement plans, such as adding a year or two of work for younger
workers. Places like Chicago or Charleston, West Virginia, will be
effectively unable to borrow in traditional bond markets. Pension funds
in Chicago alone are underfunded by almost $15 billion. Under the new
GASB rules Chicago's liability could swell to almost $60 billion or
roughly $21,750 per resident. Retiree health care liabilities add
another $3.6 billion or $1,324 per resident, so that each Chicago
household will need to cough up $61,000 to fully fund their promises to
city employees. The promise will be broken. …”
From The Wall Street Journal Weekly Accounting Review on August 15, 2014
SUMMARY: A government accounting maneuver to pay for road repairs,
subways and buses will allow many U.S. businesses to delay billions of
dollars in pension contributions for retirees. President Barack Obama signed
a $10.8 billion transportation bill that extends a "pension-smoothing"
provision for another 10 months. In short: companies can delay making
mandatory pension contributions, but because those payments are
tax-deductible some businesses will pay slightly higher tax bills, which
will help pay for the legislation. But the accounting tactic is
controversial. The government's moves could undermine its own efforts to
shore up the pension system. Some worry about the strain it could put on the
government agency tasked with protecting the retirement of 44 million
CLASSROOM APPLICATION: This is useful for coverage of accounting
for pensions. The article also shows how politics can impact tax planning
and business decisions.
1. (Introductory) What extension is discussed in the article? What
is the reason for this extension?
2. (Advanced) What are the possible positive results of these
extension? What are the potential negative ripple effects of this extension?
Do the possible benefits outweigh the possible problems? Please explain the
reasoning behind your answer.
3. (Advanced) How are pensions entered into the accounting records?
How are pension liabilities calculated?
4. (Advanced) How are obligations to current and further retirees
affected by the extension? How is the accounting of those obligations
affected? How do the pension obligations differ from the accounting of those
pension obligations? (legal liability vs. cash flow vs. accounting rules)
5. (Advanced) What is the importance of properly accounting for
pension obligations? How are the financial statements impacted by accounting
for pensions? Why would this be of interest to users of the financial
Reviewed By: Linda Christiansen, Indiana University Southeast
A government accounting maneuver to pay for road
repairs, subways and buses will allow many U.S. businesses to delay billions
of dollars in pension contributions for retirees.
President Barack Obama on Friday signed a $10.8
billion transportation bill that extends a "pension-smoothing" provision for
another 10 months. In short: companies can delay making mandatory pension
contributions, but because those payments are tax-deductible some businesses
will pay slightly higher tax bills, which will help pay for the legislation.
Companies with 100 of the country's largest
pensions were expected to contribute $44 billion to their plans this year,
but that could be slashed by 30% next year, estimated John Ehrhardt, an
actuary at consulting firm Milliman.
International Paper Co. IP -0.25% , for example,
had planned to set aside $1 billion by 2016 to fund its $12.5 billion U.S.
defined benefit plan. The paper company says it now expects to funnel that
money into other projects, including share buybacks or investments in new
"It means more cash for us," says Chief Financial
Officer Carol Roberts.
But the accounting tactic is controversial. The
government's moves could undermine its own efforts to shore up the pension
system. Some worry about the strain it could put on the government agency
tasked with protecting the retirement of 44 million workers.
"To use the federal pension insurance program to
pay for wholly unrelated spending initiatives is just bad public policy,"
said Brad Belt, former executive director of the Pension Benefit Guaranty
Corporation, the government's pension insurer. "It has adverse implications
for the funding of corporate pension plans."
Companies have struggled to keep up with mounting
pension bills since 2008.
The present-day value of those promises increases
when interest rates decline. Currently, the largest pensions have a $252
billion funding deficit, which has increased by $66 billion since the
beginning of the year, according to Milliman.
The accounting maneuver was introduced in
Congress's last highway bill in 2012, and was backed by large business
groups, such as the Business Roundtable. The new bill, which expires in May,
will extend the method.
The bill essentially allows companies to base their
pension liability calculations on the average interest rate over the past 25
years, instead of the past two. The 25-year average is larger, because
interest rates were much higher before the financial crisis.
The accounting technique doesn't actually reduce
companies' obligations to retirees. Instead, it artificially lowers the
present-day value of future liabilities by boosting the interest rate
companies use to make that calculation.
The risk is that pension smoothing will ultimately
increase corporate pension deficits by encouraging executives to delay
payments, says the Congressional Budget Office. For instance, more companies
could default on their obligations to retirees.
PBGC executives and labor unions aren't worried
about the impact of the new transportation bill. "Even with this smoothing
provision, we'll be in a vastly better position," says Marc Hopkins, an
The financial health of the government's PBGC is
improving. The agency has mapped out different scenarios of economic growth
and estimated its fund to cover defaults will have an average deficit of
$7.6 billion in 2023, down from $27.4 billion late last year.
Pension smoothing measures will only add $2.3
billion to its estimated deficit, the agency says.
The AFL-CIO, the nation's biggest labor union
federation, says it supports pension smoothing because it reduces volatility
to balance sheets, which makes the prospect of offering pensions less
"We've been supportive of greater smoothing in
pension funding generally," said Shaun O'Brien, assistant policy director
for health and retirement at the AFL-CIO. "While we would prefer a
longer-term permanent change in the rules, we're supportive of the approach
Congress has taken."
Under a 2006 law, companies need to make their
plans whole over time. Pension smoothing provisions both artificially and
temporarily make funding levels look healthier, so companies can lower their
Exelis Inc., XLS +0.23% a defense contractor, now
expects to cut its pension contributions by as much as $350 million by 2017.
Chief Executive David Melcher told investors earlier this month that Exelis
would use the money to fund dividend payments, buybacks and to invest in the
Some companies will continue to finance their
pension plans. Boeing Co. BA +0.37% says it won't change its strategy and
still expects to make a discretionary $750 million payment to its $68.6
billion in pension obligations.
"All you're really doing is deferring payments,"
said Jonathan Waite, chief actuary at SEI Investments Co., an asset manager.
"It has to be put in someday."
The long-term outlook for the federal budget
is worse than you would gather from Wednesday’s
update from the Congressional Budget Office
(PDF), and the CBO’s report is worrisome enough to start with. It
says that “if current laws generally remain
unchanged,” budget deficits will start growing again in a few years, and by
2024, debt held by the public will equal 77.2 percent of gross domestic
The reality could be bleaker yet. The CBO is
required by Congress to assume in its baseline forecast that current laws
remain the same, even if that seems unlikely to happen. As a result, the
baseline forecast bakes in some unlikely projections. As the CBO notes, it
is assuming that three of the biggest items in the federal budget will
decline by 2024 to their smallest share of GDP since 1940*.
The three expenditure categories that are supposed
to wither away are discretionary spending on defense, discretionary spending
on everything other than defense, and mandatory spending on everything other
than interest payments, Social Security, and major health programs. Just to
be clear, that broad group includes the Pentagon, the federal courts, the
interstate highways, the prisons, immigration, agriculture, education, and
really just about everything the government does except transfer payments
and debt payments.
Here’s the chart that shows what the CBO is projecting. Again, this is not
what the CBO predicts will happen, but what it’s required to assume by order
The biggest cut that’s penciled in is to
discretionary spending. Here’s what the CBO has to say about that:
Discretionary spending encompasses a wide array of federal activities
funded or controlled through annual appropriations—including, for
example, most defense spending and outlays for highway programs,
elementary and secondary education, housing assistance, international
affairs, and administration of justice. Measured as a share of GDP,
discretionary outlays are projected to drop from 6.8 percent in 2014 to
5.2 percent in 2024; over the past 40 years, they have averaged 8.3
Could happen. But if you doubt that the federal
government will shrink to its pre-Pearl Harbor size, then you should be even
more concerned about the long-term outlook for balancing the federal budget.
SUMMARY: The Internal Revenue Service lowered a threshold for
renewable-energy projects to qualify for federal tax credits, potentially
providing a boon to developers and investors in the wind-power industry who
had been uncertain how heavily they could rely on them for financing. The
IRS and the Treasury Department said renewable-energy projects could qualify
for a pair of tax credits if they had incurred at least 3% of the total
project cost before the beginning of 2014, down from the previous threshold
of 5%. The guidance also clarified what sort of construction qualified as
work of a "significant nature," another test by which project developers -
and their investor partners - can be assured that they have qualified for
the credits, which provide the financial backbone of most major wind-farm
projects. This bulletin was the third attempt by the federal government to
clarify how projects could qualify for the tax-credit program, which expired
at the end of 2013 but is still open to developers, provided they began
installation in that year.
CLASSROOM APPLICATION: This is a good example of a tax credit
intended to encourage certain business activities. One of the most important
points in this article is that it shows how business decisions, strategy,
and planning are impacted by uncertainty about tax law.
1. (Introductory) What are the details of the guidance issued by
the IRS and Treasury Department? What is the specific tax issue?
2. (Advanced) In the article, one person was quoted as saying, "the
whole industry is waiting on it." What did he mean by that? Why were
businesses waiting? Who made them wait? What are the ramifications of
business in the industry having to wait on this information? How could this
wait and the related implications have been prevented?
3. (Advanced) What will be the impact of the announced changes?
What ripple effects could occur? Do you think the IRS and Treasury
Department realize these ripple effects could occur?
4. (Advanced) Has the uncertainty about these rules been resolved?
Why or why not? Is tax uncertainty good or bad for business? Why do
businesses sometime face uncertainty regarding tax law? How can uncertainty
impact tax and business planning?
Reviewed By: Linda Christiansen, Indiana University Southeast
"IRS Relaxes Renewable Energy Project Tax Credit Rule," by Ted Mann, The
Wall Street Journal, August 8, 2014 ---
The Internal Revenue Service lowered a threshold
for renewable-energy projects to qualify for federal tax credits,
potentially providing a boon to developers and investors in the wind-power
industry who had been uncertain how heavily they could rely on them for
In guidance released Friday, the IRS and the
Treasury Department said renewable-energy projects could qualify for a pair
of tax credits if they had incurred at least 3% of the total project cost
before the beginning of 2014, down from the previous threshold of 5%.
Credits would be proportionally reduced in value below the 5% threshold, the
The guidance also clarified what sort of
construction qualified as work of a "significant nature," another test by
which project developers—and their investor partners—can be assured that
they have qualified for the credits, which provide the financial backbone of
most major wind-farm projects.
Friday's bulletin was the third attempt by the
federal government to clarify how projects could qualify for the tax-credit
program, which expired at the end of 2013 but is still open to developers,
provided they began installation in that year.
"The whole industry is waiting on it," said Bruce
Hamilton, a director in the energy practice at Navigant Consulting Inc. NCI
-0.42% "There are thousands of megawatts that are on hold as far as the
Developers and investors in the wind industry have
been awaiting the federal guidance since this spring, people in the industry
said, when a number of the large-scale investors that provide much of the
cash to fund major wind-power projects began demanding more explicit
assurance that projects would qualify.
One uncertainty: what it means to have begun work
of a "significant nature" on a wind project. The IRS on Friday cited
examples of construction that would help qualify wind-power developers for
credits, including having begun excavating foundations for wind towers,
installing the anchor bolts that hold towers in place, and pouring the
enormous concrete pads on which the towers sit.
Uncertainty over which projects would qualify for
tax credits—and a resulting reluctance of investors to sign financing
agreements—has been felt for months throughout the wind-power industry,
according to developers, investors and equipment manufacturers.
General Electric Co. GE +0.31% told investors on
its second-quarter earnings call last month that the company had delayed
booking between 400 and 500 expected orders for wind equipment, totaling
roughly $1 billion, as a result of uncertainty about the credit.
Periodic uncertainty about whether federal tax
credits would still apply to wind-power development has been a drag on the
industry, according to data from the American Wind Energy Association, a
A record of more than 13,000 megawatts of new
wind-power capacity was installed in 2012, as the industry raced to finish
installations before the production tax credit expired at the end of that
year. While Congress eventually stepped in with a one-year extension of the
credit, installation of wind power fell 92%. Just a single wind turbine was
installed during the first six months of 2013, the association said.
The wind industry is trying to extend the
tax-credit program, arguing that the credits support billions of dollars in
construction work and are helping support innovation that will ultimately
bring the costs of wind power down.
The change in the 5% threshold is "relevant to more
than just wind farms," said Keith Martin, an attorney Chadbourne & Parke LLP
specializing in tax and project finance. Allowing the credits to apply to
projects that didn't reach the 5% threshold could allow other forms of
renewable energy to take advantage of the credits, including geothermal,
biomass, landfill gas and some kinds of hydroelectric and ocean energy
projects, he said.
Developers and equipment makers are focused on
extending the credits as a part of an omnibus tax "extenders" bill during a
lame-duck session of Congress later this year, after the midterm elections.
Egads! This is depressing.
College recruiters tell us colleges cannot get top students without promising
them A grades in their courses.
Purportedly Princeton university in 2004 started doing more than the other
Ivy League universities to limit the number of A grades somewhat, although
participation by faculty is voluntary. Cornell's efforts to embarrass faculty
about grade inflation by publishing grading distributions of all courses each
term was deemed a failure in curbing grade inflation. The program was dropped by
Cornell. Princeton's program for capping the number of A grades to 35% in most
classes may now be rescinded.
2004 policy adopted by Princeton sought to end grade inflation at the
university by recommending that departments place a 35% cap on A-range
grades for each academic course. However, The New York Times reports,
students have resisted the policy since it was
implemented a decade ago, saying that it
devalued their work and potentially gave their peers at rival schools a
competitive edge with post-graduate opportunities.
Now, Princeton may change its grading policy
following the release this week of a report commissioned by Princeton
President Christopher Eisgruber. The report recommends that Princeton remove
the "numerical targets" from their grading policy, as they are often
misunderstood as quotas or inflexible caps.
The report also found that this policy
inadvertently led potential applicants and their families to question
whether they should apply to Princeton, with students at other highly ranked
schools citing the policy to recruit applicants elsewhere:
perception that the number of A-range grades is limited sends the message
that students will not be properly rewarded for their work. During the
application process, students and parents consider the possible
ramifications in terms of reduced future placement and employment potential
... Janet Rapelye, Dean of Admission, reports that the grading policy is the
most discussed topic at Princeton Preview and explains that prospective
students and their parents see the numerical targets as inflexible. The
committee was surprised to learn that students at other schools (e.g.,
Harvard, Stanford, and Yale) use our grading policy to recruit against us.
When Princeton University set out six years ago to
corral galloping grade inflation by putting a lid on A’s, many in academia
lauded it for taking a stand on a national problem and predicted that others
But the idea never took hold beyond Princeton’s
walls, and so its bold vision is now running into fierce resistance from the
school’s Type-A-plus student body.
With the job market not what it once was, even for
Ivy Leaguers, Princetonians are complaining that the campaign against
bulked-up G.P.A.’s may be coming at their expense.
“The nightmare scenario, if you will, is that you
apply with a 3.5 from Princeton and someone just as smart as you applies
with a 3.8 from Yale,” said Daniel E. Rauch, a senior from Millburn, N.J.
The percentage of Princeton grades in the A range
dipped below 40 percent last year, down from nearly 50 percent when the
policy was adopted in 2004. The class of 2009 had a mean grade-point average
of 3.39, compared with 3.46 for the class of 2003. In a survey last year by
the undergraduate student government, 32 percent of students cited the
grading policy as the top source of unhappiness (compared with 25 percent
for lack of sleep).
In September, the student government sent a letter
to the faculty questioning whether professors were being overzealous in
applying the policy. And last month, The Daily Princetonian denounced the
policy in an editorial, saying it had “too many harmful consequences that
outweigh the good intentions behind the system.”
The undergraduate student body president, Connor
Diemand-Yauman, a senior from Chesterland, Ohio, said: “I had complaints
from students who said that their professors handed back exams and told
them, ‘I wanted to give 10 of you A’s, but because of the policy, I could
only give five A’s.’ When students hear that, an alarm goes off.”
Nancy Weiss Malkiel, dean of the undergraduate
college at Princeton, said the policy was not meant to establish such grade
quotas, but to set a goal: Over time and across all academic departments, no
more than 35 percent of grades in undergraduate courses would be A-plus, A
Early on, Dr. Malkiel sent 3,000 letters explaining
the change to admissions officers at graduate schools and employers across
the country, and every transcript goes out with a statement about the
policy. But recently, the university administration has been under pressure
to do more. So it created a question-and-answer booklet that it is now
sending to many of the same graduate schools and employers.
Princeton also studied the effects on admissions
rates to top medical schools and law schools, and found none. While the
number of graduates securing jobs in finance or consulting dropped to 169
last year from 249 in 2008 and 194 in 2004, the university attributed the
falloff to the recession. (Each graduating class has about 1,100 students.)
But the drop in job placements, whatever the cause,
has fueled the arguments of those opposed to the policy. The grading change
at Princeton was prompted by the creep of A’s, which accelerated in the
1990s, and the wildly divergent approaches to grading across disciplines.
Historically, students in the natural sciences were graded far more
rigorously, for example, than their classmates in the humanities, a gap that
has narrowed but that still exists.
Some students respect the tougher posture. “What
people don’t realize is that grades at different schools always have
different meanings, and people at Goldman Sachs or the Marshall Scholarship
have tons of experience assessing different G.P.A.’s,” said Jonathan
Sarnoff, a sophomore who sits on the editorial board of The Daily
Princetonian. “A Princeton G.P.A. is different from the G.P.A. at the
College of New Jersey down the road.”
Faye Deal, the associate dean for admissions and
financial aid at Stanford Law School, said she had read Princeton’s
literature on the policy and continued “to view Princeton candidates in the
same fashion — strong applicants with excellent preparation.”
Goldman Sachs, one of the most sought-after
employers, said it did not apply a rigid G.P.A. cutoff. “Princeton knows
that; everyone knows that,” said Gia Morón, a company spokeswoman,
explaining that recruiters consider six “core measurements,” including
achievement, leadership and commercial focus.
But Princetonians remain skeptical.
“There are tons of really great schools with really
smart kids applying for the same jobs,” said Jacob Loewenstein, a junior
from Lawrence, N.Y., who is majoring in German. “People intuitively take a
G.P.A. to be a representation of your academic ability and act accordingly.
The assumption that a recruiter who is screening applications is going to
treat a Princeton student differently based on a letter is naďve.”
Stuart Rojstaczer, a retired professor at Duke who
maintains a Web site dedicated to exposing grade inflation, said that
Princeton’s policy was “something that other institutions can easily
emulate, and should emulate, but will not.” For now, Princeton and its
students are still the exception. “If that means we’re out in a leadership
position and, in a sense, in a lonelier position, then we’re prepared to do
that,” Dr. Malkiel said. “We’re quite confident that what we have done is
Some of the pressure to limit the number of A grades comes from the very best
students admitted to an Ivy League university. They feel that it is no longer
possible to demonstrate that they are cream of the crop graduates when 80% of
the graduating class graduates cum laude, as in the case of Harvard
The very best students in graduate professional programs like prestigious MBA
programs. voice the same complaints if most of the students in every course
receive top grades.
It's a national disgrace in the USA both in higher education and K-12
I was hoping that there were enough genius students applying to Princeton
such that it could hang tough in its program to limit the proportion of A grades
in undergraduate courses. Apparently this is no longer the case!.
Back in 2004, Princeton University took a stand
against grade inflation with a policy recommending that academic
departments’ classes award grades in the A range no more than 35 percent of
the time. The policy was intended to standardize grading across departments
and give students a better sense of the distinction between "their
ordinarily good work and their very best work."
Now we’ve gotten a glimpse of how it all worked. A
faculty committee assembled to review the policy has issued a widely
discussed report describing the ways the anti-inflation plan has played
out—and recommending some big changes.
Among the committee’s findings: Around the time
that the faculty was discussing grade inflation, the distribution of grades
changed, as the graph below illustrates. Not surprisingly, the fraction of
A-range grades dropped, and the fraction of B-range grades grew. Most grades
at Princeton, though, continued to be A’s and B’s.
[Graph Not Quoted Here]
So, mission accomplished: The university stopped
awarding so many A’s. But now the Princeton committee advocates removing the
35-percent target. Why? In part because the committee found that the grading
policy also had a number of unintended consequences.
When an institution decides to take on grade
inflation, who exactly is affected? Let’s have a look at what the Princeton
professors found. The Losers
The admissions office: To the outside observer,
Princeton doesn’t seem to have much trouble in this department. We’re
talking about a place that admitted just 7 percent of its applicants and saw
close to 70 percent of those it admitted decide to enroll. Even so, the
grading policy is apparently a concern among prospective students and their
parents, putting the university at a competitive disadvantage.
What the report says: "Janet Rapelye, dean of
admission, reports that the grading policy is the most discussed topic at
Princeton Preview and explains that prospective students and their parents
see the numerical targets as inflexible."
The athletics department: Prospective students’
fears are of particular concern for the coaching staff.
What the report says: "Coaches find the perception
of the grading policy a significant obstacle to recruitment, making it more
difficult for them to attract the best student-athletes."
Engineering majors: While the policy was intended
to standardize grading across departments, there’s a wrinkle. Some
departments have more large introductory classes than others. If those
departments give out grades lower than A in introductory classes, they have
more of a cushion to award A’s to their own majors in upper-division
That phenomenon may be a double whammy for
engineering majors, the report explains. Those students are likely to find
themselves in large introductory physics and mathematics classes, exactly
the type of courses in which many non-A grades will be handed out. Their own
department, meanwhile, doesn’t offer the big intro classes that pull in lots
of nonmajors. That means fewer A’s to go around in their engineering
What the report says: "Our view is grades within
departments need to be meaningful in providing accurate feedback to students
but that this does not require identical grade distributions across
Students’ sanity: The committee found that the
grading policy adds to student anxiety, "in perception at least." Student
responses to a survey also suggest that the policy makes the classroom
environment more competitive and less collaborative.
What the report says: "One of the negative side
effects of the grading policy has been its contribution—in perception at
least—to the anxiety about grades and indeed about themselves that many
students experience while at Princeton."
Members of the Reserve Officers Training Corps: New
military officers commissioned through this program receive their first
assignments based in large part on their college grades. Those first
assignments set the stage for their military careers. For them, the
difference between A’s and B’s could be pivotal.
What the report says: "While it would be
unreasonable for Princeton to change its grading policy as a result of a
choice made by only a small number of students in each graduating class,
ROTC comprises a special group of students whose issues deserve to be taken
Faculty members: While the Princeton committee’s
report did not delve into the issue, a recent journal article—this one
evaluating Wellesley College’s somewhat different policy to curb grade
inflation—said that students evaluated their professors in affected
departments less favorably after the change was made.
What the Wellesley study found: "It is the case at
Wellesley that students in courses with higher average grades also tend to
have higher evaluations of the quality of their professors’ instruction, but
this correlation cannot be taken as evidence that higher grades yield higher
evaluations." The Unaffected
Graduate- and professional-school applicants:
Aspiring Ph.D.’s and medical doctors may see the grading policy as a
detriment to their chances at graduate-school admission. However, the
committee found, "it is not evident that Princeton’s grading policy has any
What the report says: "While departments sometimes
make first cuts in their applicant pool based on such factors as GPA, we
have no reason to believe that Princeton students are failing to gain
admission to Ph.D. programs."
(Most) job applicants: Some employers ask job
applicants for their GPAs—and not full transcripts. Some even have strict
GPA cutoffs. For the rest, the Princeton name may carry the day.
What the report says: "While it is possible that a
few different Princetonians would get jobs at, say, Goldman Sachs if grades
were higher, the committee heard evidence that the actual number of
Princetonians in such jobs would be the same." Further, looking beyond the
very top of the class, "Princetonians appear not to have unusual difficulty
convincing potential employers to hire them for jobs at companies that are a
notch below the most elite." The Big Winner
Other colleges: If Princeton—along with its allies
in the war on grade inflation, Wellesley and Boston University—has been
harmed at all, it has been only by making other colleges, like those in
Cambridge and New Haven, more competitive.
What the report says: "The committee was surprised
to learn that students at other schools (e.g., Harvard, Stanford, and Yale)
use our grading policy to recruit against us."
August 10 reply from Bob Jensen
The argument for grade inflation in Ivy League
schools is that students that easily be straight-A
students in most USA universities should not be
penalized with lower grades due to grading caps in
Ivy League universities.
The argument against grade inflation in general is that
students are not motivated to work as hard or learn as
much if they are assured of A grades without extra
blood, sweat, and tears.
The most disturbing evidence of harm caused by grade
inflation took place recently at Harvard in an undergraduate
political science course where students were all assured of
an A grade if they did the minimal work required. Because
they were assured of an A grade, there was no incentive to
even do the minimal work. Over 120 students in the course
cheated because there was no incentive to even do the
To its credit Harvard expelled over half of the 120+ students. I
don't know why the other half were allowed to carry on at
In reality being assured of an A-grade probably has varying impacts
on student blood, sweat, and tears to learn. A pre-med student
facing a tough MCAT medical school admission test probably works
very hard in biology courses and could care less about most required
courses in the social sciences and humanities.
I would love to see Harvard students earning final grades in their
courses face competency-based tests taken by students at the University
of Wisconsin in a program where students are not required to take
classes --- only competency-based examinations.
That reminds me of an old Professor Snarf cartoon. Professor Snarf is
sweating profusely when he exclaims: "Is it true that faculty are going to
make faculty take the student admission tests?"
Worried students will borrow more money and pay private school tuition to avoid
the state-supported university competition for grades.
One of my relatives gave up free tuition (I volunteered to pay) at a flagship
university and went deeply into debt for assurances of top grades Bob Jensen's threads on Gaming for grades ---
PwC "lacking the objectivity and integrity expected of consultants but not
actually breaking the law"
The giant consulting firm PricewaterhouseCoopers
occupies a position of trust on Wall Street, acting as a shadow regulator of
sorts that promises the government an impartial look inside the world’s
But the firm — hired and paid by the banks it
examines — has now landed in the regulatory spotlight for obscuring some of
the same misconduct it was supposed to unearth, according to confidential
documents and interviews with people briefed on the matter.
New York State’s financial regulator is poised to
announce a settlement with PricewaterhouseCoopers, according to the
interviews, taking aim at the consulting firm for watering down a report
about one of the world’s biggest banks, Bank of Tokyo-Mitsubishi UFJ. The
regulator, Benjamin M. Lawsky, will impose a $25 million penalty against
PricewaterhouseCoopers and prevent one of its consulting units from taking
on certain assignments from New York-regulated banks for two years, a
reputational blow that could cause some banking clients to leave.
The firm, which is accused of
lacking the objectivity and integrity expected of
consultants but not actually breaking the law,
agreed to pay the fine and accept the two-year sidelining of its regulatory
consulting unit. PricewaterhouseCoopers appeared to have had little choice:
Mr. Lawsky’s office, which has the authority under a little-known New York
law to censure erring consultants even without a legal violation, threatened
to otherwise inflict a more sweeping and lengthy prohibition.
SUMMARY: A new rule requiring accounting firms to tell investors
exactly who is in charge of each company's audit is expected to be completed
next month. The rule from the Public Company Accounting Oversight Board is
aimed at giving investors more information and making auditors more
accountable. It would require accounting firms to disclose the name of their
lead "engagement partner" in charge of each audit the firms perform, every
CLASSROOM APPLICATION: This article can be used for an auditing
class or in other classes when discussing auditing.
1. (Introductory) What is the PCAOB? What is its purpose?
2. (Advanced) What new rule was proposed by the PCAOB? Why is the
requirement deemed to be valuable or necessary?
3. (Advanced) What reasons do supporters offer for the rule? What
are some concerns raised by other parties?
4. (Advanced) How do other countries handle this issue? Why might
there have been a difference in the past?
Reviewed By: Linda Christiansen, Indiana University Southeast
A new rule requiring accounting firms to tell
investors exactly who is in charge of each company's audit is expected to be
completed next month, according to the chairman of the government's audit
The rule from the Public Company Accounting
Oversight Board is aimed at giving investors more information and making
auditors more accountable. It would require accounting firms to disclose the
name of their lead "engagement partner" in charge of each audit the firms
perform, every year.
PCAOB Chairman James Doty "anticipates that we will
move forward with the transparency project to disclose the name of the
engagement partner in September," Colleen Brennan, a PCAOB spokeswoman, said
Wednesday. The PCABO proposed the rule last December.
The rule's supporters, led by Mr. Doty, say
identifying the lead audit partner will encourage auditors to perform better
and help investors assess audit quality and performance, by making it
possible to get a sense of an individual partner's track record.
Some big accounting firms have opposed disclosing
the lead partners' names, citing potential liability and other concerns.
Previously, the PCAOB had said only that it
expected the rule to be completed before the end of 2014.
The PCAOB has said it is taking into account the
responses it received to its initial proposal over matters such as liability
and where the partner's name should be disclosed.
The Big Four accounting firms —
PricewaterhouseCoopers LLP, Deloitte & ToucheLLP, KPMG LLP and Ernst & Young
LLP—either didn't have any immediate comment or couldn't immediately be
Some other countries, such as the U.K., already
require disclosure of the lead audit partner's name in companies' audit
Hypothetical Illustration for Pacific Capital Bancorp Audit in 2012
Audits of broker-dealers improved slightly last
year compared with previous years, but a high percentage of the audits were
still deficient, had potential conflict-of-interest problems, or both, the
government's audit regulator said Monday.
Seventy-one of the 90 broker-dealer audits
inspected by the Public Company Accounting Oversight Board in 2013, or 79%,
had audit deficiencies or audit-independence problems, the PCAOB said.
Fifty-six of the 60 audit firms inspected had problems in one or more of
their broker-dealer audits, the board said.
The PCAOB has been inspecting audits of
broker-dealers for the past few years under an interim program after it was
granted new powers by the Dodd-Frank financial-overhaul law. The board said
it expects to make a proposal in 2016 for a permanent inspection program.
The 2013 results are better than those of the
previous two years, when virtually all of the broker-dealer audits the board
inspected had some sort of deficiency. The PCAOB's reports don't identify
the audit firms or the broker-dealers involved in the audits.
But the PCAOB said it was still concerned over the
extent and persistence of the deficiencies. High levels of deficiencies were
found across the board, the PCAOB said, regardless of whether the audit
firms also audited public companies, how many broker-dealer audits the firm
performed, or the size of the broker-dealer involved.
"Many of the observations noted during 2013 have
not changed from prior inspections and relate to fundamental auditing
principles," said Robert Maday, program leader of the PCAOB's inspection
program for broker-dealer audits. He urged firms that audit broker-dealers
to "re-examine their audit approaches."
The most frequent audit deficiencies found were in
areas including auditing revenue recognition, the auditor's response to the
risk of financial errors due to fraud, and audit procedures to rely on
reports from service organizations, the board said.
With regard to the permanent program, the PCAOB
said it is taking "a careful and informed approach" and will consider
whether it should exempt any category of firms from the inspection program.
It is widely held that better financial reporting
makes investors more confident in their predictions of future cash flows
and reduces their required risk premia. The logic is that more
information leads necessarily to more certainty, and hence lower
subjective estimates of firm "beta" or covariance with other firms. This
is misleading on both counts. Bayesian
logic shows that the best available information can often leave decision
makers less certain about future events.
And for those cases where information indeed brings great certainty,
conventional mean-variance asset pricing models imply that more certain
estimates of future cash payoffs can sometimes bring a higher cost of
capital. This occurs when new or better information leads to
sufficiently reduced expected firm payoffs. To properly understand the
effect of signal quality on the cost of capital, it is essential to
think of what that information says, rather than considering merely its
"precision", or how strongly it says what it says.
August 3, 2014 reply from David Johnstone
The idea is that we never know “true probabilities”, even if they “exist”,
we only have subjective beliefs. These beliefs are the basis on which
actions are chosen (i.e. by maximizing subjective expected utility, if we go
to this next step). Observed frequencies feed into our beliefs, and
sometimes they are the major influence. Similarly, subjective “symmetry”
arguments (we think we see symmetry in a coin) might be a major influence in
saying that “the probability of heads” is 0.5. But a coin does not have a
probability, at least not in the sense that it has weight, metal content,
and other physical attributes.
Big names Bayesian authors with this general philosophy are Kadane (ex
editor of J American Stat Assoc), Lindley, Savage, de Finnetti, Lad, O’Hagen,
Bernardo, and others. The only rule in this world is that your beliefs must
be “coherent” in the sense that they are mutually consistent in terms of the
laws of probability. New evidence must therefore be used via Bayes theorem
to get new probabilities.
In recent decades, there has been a substantial
increase in the use of complex fair value estimates in financial
reporting. These uncertain and forward-looking estimates pose additional
challenges for auditors who are required to evaluate the reasonableness
of accounting estimations. We extend prior literature by investigating
whether or not uncertain estimates create significant tension between
audit firms and their clients. Specifically, we use the context of
goodwill estimations to examine the effect of accounting estimates on
the auditor-client relationship. We find a positive and significant
relation between a material goodwill write-off and a subsequent auditor
change. In addition, our results indicate that the likelihood of an
auditor switch increases as the impairment decision becomes less
favorable to the client. Furthermore, we find that as the relative
magnitude of a goodwill write-off increases, the greater the likelihood
the auditor-client relationship will discontinue. In addition to
providing important insights into the challenges faced by auditors in
their evaluation of goodwill impairments, this study informs discussions
regarding the audit of other complex estimates, which is particularly
relevant given the continued expansion of fair value estimation in
SUMMARY: A proposed accounting change expected to force banks to
boost the amount of reserves they hold against soured loans could catch many
small and midsize lenders unprepared. The changes would require banks to
book loan losses much more quickly than they do now and force them to
dramatically increase their loan-loss reserves. Banks have some time to
adapt. The expected FASB changes likely won't take effect until 2017 or
2018. Global accounting rule-makers at the International Accounting
Standards Board already have enacted a similar change for banks outside the
U.S., beginning in 2018.
CLASSROOM APPLICATION: This article can be used for accounting in
the banking industry, and it is also useful to show how accounting rules can
and do change, as well as how rule changes can impact businesses. It is
particularly interesting that more than a third surveyed had little or no
familiarity with the coming changes, highlighting the importance for
accountants, and business professionals in general, to stay current with
1. (Introductory) What are the details surrounding the change in
accounting for bank reserves? What is the proposal?
2. (Introductory) What is FASB? Why is it involved in banking
3. (Advanced) The article says the changes might catch some lenders
unprepared. Why does the reporter make that statement? Why might some
lenders be unprepared?
4. (Advanced) How should bank management be preparing for these
changes? What will banks need to properly account for reserves under the new
5. (Advanced) How are the new rules expected to impact bank
financial statements? Will this impact the market values of the bank stock?
How might it affect business strategy?
6. (Advanced) How do the U.S. rules compare with rules for banks in
other countries? How do those differences affect comparability of financial
statements across the countries?
Reviewed By: Linda Christiansen, Indiana University Southeast
A proposed accounting change expected to
force banks to boost the amount of reserves they hold against soured loans
could catch many small and midsize lenders unprepared, according to a new
survey of bank executives.
More than half of the executives familiar
with the Financial Accounting Standards Board's expected changes said they
aren't planning to make significant modifications in their processes to cope
with the changes until after they're completed, according to the survey from
Sageworks, a financial-information company.
More than a third of the executives
surveyed have little or no familiarity with the changes that FASB, which
sets accounting rules for U.S. companies, hopes to finalize before the end
of the year, according to the survey.
The changes would require banks to book
loan losses much more quickly than they do now and force them to
dramatically increase their loan-loss reserves.
Banks have some time to adapt. The
expected FASB changes likely won't take effect until 2017 or 2018.
But banks should start preparing now
because they'll need to amass a lot of data on their loans' performance to
cope with the changes, and to make changes in their processes to store and
use that data, Sageworks said. If they don't, the company said, the banks
might not be able to assess and reserve for their loan losses as accurately.
With the changes, banks are "going to need
a lot more granular data for individual loans," perhaps three or four years'
worth of performance data, said Libby Bierman, a Sageworks analyst. "To get
that data, banks need to start today."
There are "good reasons" many banks aren't
yet prepared, said Donna Fisher, senior vice president of tax and accounting
for the American Bankers Association. Notably, FASB has yet to make some
decisions that could affect the final form of its new loan-accounting model,
and the board needs to make sure all banks are on the same page in
understanding what will be required of them, she said.
Also, "a lot of bankers are not focused on
it," said James Kendrick, vice president of accounting and capital policy
for the Independent Community Bankers of America. So much is happening now
in banking regulation that banks have to address that many aren't paying
much attention yet to the loan-accounting changes, he said.
Christine Klimek, a FASB spokeswoman, said
the board is "considering the feedback" it's received in response to its
loan-accounting proposal, and "will give banks and other lending
institutions sufficient time to incorporate the changes."
lFASB's changes, which the board has
proposed and is working toward competing, are expected to require banks to
record losses based on their future projections of loans going bad.
Currently, banks don't book loan losses until the losses have actually
occurred, an approach many observers think led banks to be too slow in
taking losses during the financial crisis. Under the new rule, banks will
have to record upfront all losses expected over the lifetime of a loan.
The new method is expected to speed up the
booking of losses and require banks to boost their loan-loss reserves
significantly, possibly by as much as 50%, according to FASB and some
Global accounting rule-makers at the
International Accounting Standards Board already have enacted a similar
change for banks outside the U.S., beginning in 2018.
The IASB rule is softer, however,
requiring to book upfront only those losses based on the probability that a
loan will default in the next 12 months, not all lifetime losses.
The survey, conducted for Sageworks by
SourceMedia Research, polled 236 managers who deal with credit-risk
management at banks and credit unions with between $250 million and $5
billion in assets. Of those surveyed, 37% had little or no familiarity with
FASB's planned changes, though the proposal has been in the works and
much-publicized over the past few years.
Sixty-five percent of those surveyed use
spreadsheets to calculate their loan-loss reserves, as opposed to external
or proprietary software or other methods. But Sageworks says that may not be
sufficient to handle the massive amount of data banks will have to collect
to accurately predict future losses under the new model, and many banks
aren't yet acting to update their processes.
Of those surveyed, 34% plan to acquire new
software to comply with the new requirements when they're completed. Another
21% say they'll acquire new software before the new model is enforced. Most
of the other respondents either already have new software or don't know when
they will acquire it.
I'm just not as confident in the profession of "independent valuation experts."
You get ten such experts to give you a number, and you will get ten possibly
widely divergent numbers to a point that management and/or auditors can
selectively manage earnings by using carefully chosen valuation "experts." Most
such valuations rely upon crucial assumptions that are highly uncertain,
especially in the case of foreign debt like Argentine bonds.
Secondly, I'm not certain about the benefit-cost of such valuations of banks
having a lot of branches spread across the USA. This is the Ole-versus-Sven
debate that I've used with Tom too often already and will not repeat in this
European banks and other banks outside the U.S.
will have to record losses on bad loans more quickly and set aside more
reserves for loan losses under an overhaul of finance-accounting rules that
global rule makers made final on Thursday.
Under the new standard, non-U.S. banks will have to
book loan losses based on their expectation that future losses will occur,
beginning in 2018. That is expected to speed up the booking of losses and
require greater loan-loss reserves.
Currently, banks don't record losses until they
have actually happened, but many observers believe that method led banks to
be too slow in taking losses during the financial crisis.
The move by the London-based International
Accounting Standards Board, which has been in the works for years, could
create a conundrum for the banking industry: Because U.S. and global rule
makers haven't been able to agree on the same accounting approach for
writing off bad loans, it could become more difficult to compare U.S. banks
and those outside the U.S.
U.S. and global rule makers have been striving for
years to eliminate differences between their rules in some major areas of
accounting, including loans and other financial instruments, but the effort
has been plagued by problems and delays. The two systems have gotten more
similar in some areas, but on this banking issue, some analysts say they are
growing more different.
The Financial Accounting Standards Board, the U.S.
accounting rule-setter, has proposed U.S. banks switch from the
incurred-loss model that both use now to the expected-loss approach, too.
But the two disagree on just how rapidly banks should book their loan
The IASB will require non-U.S. banks to immediately
book only those losses based on the probability that a loan will default in
the next 12 months. If the loan's quality gets significantly worse, other
losses would be recorded in the future. The IASB move will affect all
financial assets on non-U.S. companies' balance sheets, but the treatment of
bank loans is particularly important due to the role that soured loans and
credit losses play in their businesses.
The change "will enhance investor confidence in
banks' balance sheets and the financial system as a whole," said Hans
Hoogervorst, chairman of IASB, which sets accounting rules for most
countries outside the U.S.
The Institute of Chartered Accountants in England
and Wales, a London-based accountants' group, estimated that the IASB
changes will increase banks' loan-loss provisions by about 50% on average.
Iain Coke, head of ICAEW's financial-services faculty, said the new rule,
combined with tougher regulatory-capital requirements, may force banks to
hold more capital for the same risks. "This may make banks safer but may
also make them more costly to run," he said.
The FASB proposal, however, would require all
losses expected over the lifetime of a loan to be booked up front—so if it
is enacted, U.S. banks would record more losses immediately than banks in
other countries, and might have to set aside more reserves, hurting their
current financial results and making them look worse compared with foreign
banks, many banking and accounting observers believe. The FASB hasn't
completed its proposed changes, though it hopes to do so by year-end.
"It's unfortunate that we do have a different
standard being issued," said Tony Clifford, a partner with Big Four
accounting firm EY.
The IASB said in documents laying out its proposal
Thursday that although it and the FASB had made "every effort" to agree on
the same approach, "ultimately those efforts have been unsuccessful."
Christine Klimek, a FASB spokeswoman, said the FASB
believes its approach "best serves the interests of investors in U.S.
capital markets because it better reflects the credit risks of loans on an
institution's balance sheet." IASB's approach likely would lead to lower
loan-loss reserves than FASB's at U.S. banks, she said, "which would have
been counterintuitive to the lessons learned during the recent financial
In addition, Mr. Clifford said, the new IASB rule
requires banks to use their own judgment to a greater extent than existing
rules when determining their expected losses, and that could lead to
differences between individual banks that could make it harder for investors
to compare them.
Among other provisions of the new rule the IASB
issued Thursday, non-U.S. banks will no longer have to record gains to net
income when their own creditworthiness declines, and losses when their
creditworthiness improves—a counterintuitive practice known in the U.S. as
"debt/debit valuation adjustments," or DVA. Those gains and losses will be
stripped out of the banks' net income and be placed into "other
comprehensive income," a separate measurement that doesn't affect the main
earnings number tracked by most investors. Banks can adopt that change
separately, before the rest of the IASB rule.
The FASB has proposed a similar move for U.S. banks
but has yet to enact it.
From The Wall Street Journal Accounting Weekly Review on August 22, 2014
SUMMARY: Accounting is complicated: but accounting rule-makers are
trying to make it at least a little simpler. The Financial Accounting
Standards Board, which sets accounting rules for U.S. companies, is
expanding its effort to simplify some areas of accounting, to make financial
reporting a little less complex and reduce costs for companies and their
accountants. FASB has added five more projects it plans to tackle as part of
that initiative, covering areas like how companies report their debt and
when they record taxes on certain transactions.
CLASSROOM APPLICATION: This article offers an opportunity to
discuss the cost/benefit relationships between the costs of complex
accounting vs. the value of the resulting additional detail to the users of
the financial statements. You can also use this article for a general
discussion of FASB and accounting standards.
1. (Introductory) What is the Financial Accounting Standards Board?
What is its purpose?
2. (Advanced) The article states that accounting will be getting
less complex. How will a decrease in complexity impact financial reporting
and financial statements?
3. (Advanced) Why has accounting become complex? What value does
that complexity offer to users of the financial statements? What are the
benefits of decreasing complexity in accounting? What are potential problems
or costs of decreasing complexity?
4. (Advanced) What are the details of the various proposals? Please
explain each of them and provide explanations how journal entries will
change and how financial statements could be affected.
5. (Advanced) Can you think of other areas of accounting that could
be simplified without damaging the value of the financial statements? What
areas or features of accounting should not be simplified? Why?
Reviewed By: Linda Christiansen, Indiana University Southeast
Accounting is complicated – but accounting
rule-makers are trying to make it at least a little simpler.
The Financial Accounting Standards Board, which
sets accounting rules for U.S. companies, is expanding its effort to
simplify some areas of accounting, to make financial reporting a little less
complex and reduce costs for companies and their accountants. FASB has added
five more projects it plans to tackle as part of that initiative, covering
areas like how companies report their debt and when they record taxes on
The projects are low-hanging fruit – relatively
narrow, straightforward changes in accounting that clearly would help reduce
complexity and that the board expects to be able to make relatively quickly,
without the years of work that often accompany major revisions in accounting
“Complexity in accounting can be costly to both
investors and companies,” FASB Chairman Russ Golden said. The simplification
initiative, which FASB began in June, “is focused on identifying areas that
we can address quickly and effectively, without compromising the quality of
information provided to investors.”
The accounting industry is cautiously applauding
FASB’s effort. “The auditing profession welcomes initiative and efforts to
provide further clarity to financial statements,” said Cindy Fornelli,
executive director of the Center for Audit Quality, an industry group. But
the details and execution of FASB’s projects “will be critical,” she added.
One project the board has newly agreed to tackle
would simplify how companies classify debt on their balance sheets.
Currently, any debt coming due within the next 12 months is typically
categorized as “current” and any debt due beyond that period is
“non-current,” but accounting rules contain a lot of grey areas where that
classification isn’t so straightforward. The aim is to eliminate those grey
areas and make the 12-month standard more of a guiding principle that
applies in all cases.
In addition, FASB wants to simply the reporting of
a company’s costs to issue debt. Under current rules, companies report their
debt proceeds on one line of their financial statements and various
debt-issuance costs on different lines. The board wants to have only one
figure reported that would essentially be debt proceeds net of issuance
FASB also plans some tax-accounting changes. One
would have companies classify all of their deferred tax assets and
liabilities as non-current, instead of forcing them to determine whether
they’re current or non-current, as they must now. The other would ease the
process of recording taxes that result when one unit of a company sells
goods to another unit.
The five newly added projects follow the first two
simplification proposals which FASB formally issued in July to simplify the
measurement of inventory and eliminate the need for companies to break out
one-time “extraordinary” items on their earnings statements. FASB is also
researching about 70 other simplification ideas submitted by investors,
companies and accountants.
The framework is already in place. Teach For
America (TFA) is a highly successful nonprofit that enlists recent college
grads to teach in low-income communities throughout the U.S. In a similar
vein, Accounting For America would pair greenhorn accountants, presumably
recent college graduates, with small businesses in desperate need of
Similarly to the TFA mission, Accounting For
America would benefit both parties involved. The recent accounting grads
would gain hands-on experience and valuable work references, while the small
businesses would be able to get their bookkeeping in order at a presumably
lower rate than hiring a seasoned professional.
2012 study by the
American Institute of CPAs, the number of students
enrolling in accounting programs and graduating with accounting degrees has
been steadily increasing over the past decade. For graduating accounting
degree students, the Accounting For America program could provide a viable
source of employment, while also aiding the small-business economy.
In addition to providing jobs for recent grads, the
proposed program could solve a major problem that I see in many small
businesses – out-of-date financials and sloppy bookkeeping. A small-business
owner who isn't current on financials is at a significant disadvantage. It's
impossible to run a successful business without knowing where your money is
coming from and where it is going.
Many entrepreneurs fall into this trap because they
get so caught up in day-to-day operations. They get enmeshed in the tiny
details and simply run out of hours in the day to review and update balance
sheets, accounts receivable and even payroll.
Continued in article
Sometimes accounting students in top universities are less help than than other
students who often have more training in accounting and taxation software. For
example, top universities seldom provide training in the application of
Most often the highest possible teaching evaluations go to teachers who make
subject matter crystal clear and easy to understand.
If you read my previous teaching evaluations you would find that I was a
master of the opposite pedagogy. Often intentionally and sometimes
unintentionally I confused my students, particularly my graduate students. I
don't particularly recommend this pedagogy for introductory courses such as
Principles of Accounting. But in graduate courses I think it's a mistake to make
everything crystal clear --- at least in class. I also think it's a mistake in
some case courses and other student participation courses such as when I taught
sections of a Trinity University course called First Year Seminar where the
subject matter was on troubles in the world (not an accounting course).
It's important to note that I was careful about trying not to confuse
students about technical rules such as FAS 133 rules about accounting for
derivative financial instruments. Those were more like teaching mathematical
derivations. For those I assigned Camtasia videos before class where I tried to
make the videos crystal clear.
But in class when we took up cases and applications I introduced
complications to confuse students and make them think. A perfect example of what
I would do in class is the following reply to a posting on the AECM by Tom
Selling. This illustrates how I would intentionally confuse students while
teaching Tom's posting. Tom always ipso facto assumes without proof that
replacement cost accounting leads to more relevant accounting for investors.
However, I repeatedly muddied the waters for my students when teaching
historical cost versus exit value versus entry value accounting.
Some of the replies on the AECM to my posting below indicates that I also
confused veteran financial accounting professors.
"Since the company will inevitably have to replace
the inventory after selling its present stock, the current cost of
replacement is the best measure of its economic value."
I might note that if you read Tom's blog regularly it's clear that the
balance sheet is his priority in terms of defining "economic value." He does not
seem to care if fair value or replacement cost adjustments to carrying value
adjustments to the balance sheet will never be realized in net earnings
calculations at a future date.
I am more concerned with the income statement than I am with the balance
Consideration Must Be Given as To Why Companies Carry Inventory
The above assertion by Tom is not necessarily true when companies hold
inventories to avoid high marginal replacement costs of relatively small amounts
in markets where they never deal. Companies sometimes carry large and long-term
inventories to smooth out current spot price fluctuations of relatively small
I carry a four-year supply of heating oil in a 4,000-gallon tank to smooth
out "current" replacement costs of buying the typical homeowner amount of say
100 gallons at a time. I do get a rather sizeable volume discount when I
infrequently replace this oil sometime between 1-4 years. The typical homeowner
up here either takes the current (spot) replacement cost of each 100 gallons
purchased on average for each delivery or pre-purchases at a futures price set
by the oil dealer at the start of the season. However, the oil dealer will not
allow more than pre-purchase of a one-year quantity to be delivered over the
By carrying a huge 1-4 year inventory I have more flexibility as to timing
over a four-year horizon plus more negotiating power for a volume discount. That
is often the reason some companies carry what seems like an awful lot of
inventory. I would argue that the day to day spot prices for replacement of
fuel oil for me are not a good day-to-day measures of economic value. If I
measured "profits" based upon such replacement prices my "profits" would be
more fiction than fact based upon ups and down of daily fuel oil spot
And estimating my volume discount 1-4 years in advance is an unreliable vapor
estimate since neither buyer nor seller can predict spot prices up to four years
Here is My Main Point
If Bob Jensen (with a 4,000-gallon tank) and his neighbor John Smith (with a
200-gallon tank) both valued fuel oil inventories at the identical
currentspot replacement costs they might
both be declared equally profitable in each given month of a single year by Tom
Selling ceteris paribus. But they are not likely to be equally profitable
in aggregate 13-48 months. This is because Tom builds so much fiction into the
calculation using monthly replacement costs into the fictional calculation of
Bob Jensen's "profits." Bob Jensen, unlike John Smith, does not replace fuel oil
in the tank every month or even every year.
I'm not saying Bob Jensen will always do better than John Smith due more
flexible market timing of purchases over a four-year time span, because there
are other considerations such as cost of capital tied up in larger inventory and
risks of carrying larger inventories such as leakage and contamination risks.
Tom's reasoning about economic value might be more appropriate if Bob Jensen
could sell some portion of his inventory of fuel oil. But there are regulations
that prevent him from selling my inventory, and he can only use so much
day-to-day on average over the course of four years. I would argue that economic
value to him is the historic average cost of fuel currently in the tank. This is
fact and not fiction! The inventory value in a business should be written down
only when the inventory is in some way damaged such as when oil is contaminated
with water leakage.
What Does This Have to Do With the Current Blog Posting by Tom Selling?
The title of Tom's August 10, 2014 posting is "The FASB Wants to Dumb Down
Inventory Impairment." I consider impairment to be something other than
temporary spot price declines. For example, if my fuel oil tank leaked to a
point where water mixed with my fuel oil I would have "impaired" inventory. This
is his Scenario B which I don't think the FASB is trying to change. I
would have to write down my damaged inventory, possibly to zero or worse.
But apparently the FASB wants to also consider "impairment" in terms of
short-term price fluctuations as in Tom's Scenario A. I have trouble
considering short-term replacement cost declines or NRV declines as
"impairments." The key is whether such spot price declines are are "permanent"
or temporary. I don't buy into inventory write downs unless they are indeed
As to whether they should be replacement costs or NRV in Scenario A,
I'm in favor of NRV. Replacement costs are fiction unless we specify when the
inventory will be replaced. It would be misleading to re-value Bob Jensen's
remaining fuel oil at current spot prices if he does not have to replace the
fuel oil for 47 months. And estimating fuel oil prices 47 months from now is
best left to astrologers. If Bob could sell his inventory then I might consider
NRV relevant for permanent reductions in spot prices. But I don't think
inventories should be written down at all for short-term spot price declines.
August 13. 2014 Reply to David Albrecht by Bob Jensen
I don't think anybody is arguing that inventory cannot become obsolete or
damaged. Tom's Scenario B covered this with his fashion-industry
illustration. The FASB is not trying to change accounting for Scenario B.
Also I don't think anybody, including me, thinks that a four-year
inventory is always a better or always a worse investment than a JIT-like
alternative where the fuel truck fills a small tank at least once per month.
My dispute with Tom is whether replacement cost accounting for a
four-year inventory should be exactly the same as the inventory accounting
for the JIT-like alternative. My dispute is that replacement cost accounting
is misleading for four-year inventories.
My accounting theory argument My argument is that accounting outcomes
should be different for the company with four-year inventories versus an
identical company with monthly inventory supplies. The reason is that these
companies have different economic replacement strategies leading to
different economic outcomes. Nobody can say the one strategy is ipso facto
better than the other strategy.
Current replacement cost accounting for four-year inventories at frequent
reporting dates (say monthly or quarterly or even annually) adds fictional
ups and downs in assets and earnings that will never be realized in fact.
Also nobody can predict what volume discounts will be obtained years out in
fuel oil pricing. By the way, the degree of competition among fuel dealers
where I live is such that I get sizable volume discounts when I do
eventually fill my big tank. The discounts themselves, however, are
Advantages of the four-year inventories are volume price discounting and
the ability to time prices paid rather than having to always take the spot
price at each JIT-like delivery. Disadvantages include the cost of capital
tied up in long-term inventories and greater risk of obsolescence and
damage. I almost always buy oil in May when dealers want to reduce the
amount of money tied up in their idle summer inventories.
Rather than a owning a four-year tank it is theoretically possible to
hedge fuel inventory pricing in the derivatives markets. However, these
contracts have relatively short-term maturities rather than going out four
years. No heating oil dealer up here will enter into prepaid contracts for
more than one year.
A neighbor is fond of saying that Bob Jensen is prepared for Armageddon.
In the case of heating fuel there's an added safety that comes from a
four-year inventory of heating oil. I live in a climate where pipes can
freeze and burst in homes dependent upon heating fuel.
In 1974 during the Iran Oil Crisis some homes in New England could not
get their JIT deliveries of fuel oil at any price. Bob Jensen, then living
in Maine, had a sufficient inventory of heating fuel to ride out the 1974
crisis in an always-heated home.
In retirement here in the White Mountains I have both a four-year supply
of heating oil for our furnace and a four-year supply of propane under
ground for our four fireplace stoves. Some home owners up here with less
inventory of heating oil and propane have supplemental wood heaters, chain
saws, and timber that can be cut plus cords of wood beside their homes that
is already cut, dried, and split.
One of my neighbors down the road heats only with wood. Most all of his
summer days are spent cutting, splitting, and stacking mountains of wood. I
don't want to spend my summer days like that. And I think wood is a sooty
way to heat day in and day out. Wood smoke smells great but is probably not
healthy to breathe every day and night.
Have I sufficiently confused everybody on entry value (replacement cost)
Although I tend to agree with Tom that Golden is taking the wrong tack on
pension disclosures, I do take issue with the following quotation in Tom
If FAS 87 (1985) had not been so thoroughly jury
rigged to appease the country’s largest employers (and as a by-product to
create jobs for accountants and their less gregarious actuary cousins), how
many more employees would now be receiving their full pension benefits?
I tend to not place such heavy responsibility on accounting standard setters.
I don't think that the FASB has such tremendous economic power over USA business
or government. Firstly, the pension funds are tremendously impacted by interest
rates and monetary policies that are were heavily affected by Federal Reserve
low interest rate and Treasury Department fiscal policies.
Pension funds, especially municipal and state worker funds, were swamped in
egregious frauds such as those in Detroit and Chicago and Stockton. I doubt that
any GASB pension accounting rules would have stood in the way of those massive
Be that as it may, pension accounting can certainly be improved and reduced
disclosures contemplated by the FASB are not going to help matters. Tom's
correct about this.
The government’s official statistic for
college-tuition inflation has become somewhat infamous. It appears
frequently in the news media, and policy makers lament what it shows.
No wonder: College tuition and fees have risen an
astounding 107 percent since 1992, even after adjusting for economywide
inflation, according to the measure. No other major household budget item
has increased in price nearly as much.
But it turns out the government’s measure is deeply
that measure was based on the list prices that
colleges published in their brochures, rather than the actual amount
students and their families paid. The government ignored financial-aid
grants. Effectively, the measure tracked the price of college for rich
families, many of whom were not eligible for scholarships, but exaggerated
the price – and price increases – for everyone from the upper middle class
to the poor.
Here’s an animation that explains the difference
succintly. It shows the government’s estimate of how college costs have
changed since 1992 — and, for comparison, toggles between the changes in the
colleges' published prices and actual prices, according to the College
Board, the group that conducts the SAT.
When it comes to social media North American CFOs say
their companies have focused mostly on the risks so far rather than the
opportunities, such as using it to get customer feedback or foster internal
collaboration. They say most of their attention has been focused on
establishing policies for employees' use of social media, providing
education on related risks and managing the company's presence in key social
media channels, according to Deloitte's second-quarter 2014 CFO Signals™
From PwC on August 5, 2014
In depth: Consolidation - A new standard is imminent ---
Oops - A billion-dollar forecasting error in Walgreen’s Medicare-related
business: Key executives lost their jobs
From the CFO Journal's Morning Ledger on August 120, 2014
Good morning. Trying to profit amid the complex web of
regulations and pricing involved in Medicare is challenging enough. But a
recent management shake-up at
shows that it isn’t just risky for the bottom line—it can be hazardous for a
finance chief’s career as well.
A billion-dollar forecasting error in Walgreen’s
Medicare-related business cost the jobs of Chief Financial Officer Wade
Miquelon as well as its pharmacy chief Kermit Crawford,
Michael Siconolfi on the WSJ’s front page. Mr.
Miquelon said he wasn’t forced to leave, but people familiar with the matter
say both he and Mr. Crawford were under pressure to step down.
Walgreen had failed to take into
account a spike in the price of some generic drugs that it sells as part of
annual contracts, among other things, when it offered a rosier forecast in
April. But once the price spike was included, an $8.5 billion forecast for
pharmacy unit earnings before interest and taxes was chopped by $1.1 billion.
From the CFO Journal's Morning Ledger on August 120, 2014
watchdog reviews auditing of estimates, mark-to-market accounting The U.S. government’s auditing watchdog will review audit
procedures for complex accounting estimates and mark-to-market accounting,
with the aim to improve current practices,
CFOJ’s Emily Chasan reports.
Auditors’ use of mark-to-market accounting and their
reliance on management’s accounting estimates have raised frequent red
The key to reviewing estimates is to conduct serious analysis of underlying
I once wrote a research monograph on this topic for the American Accounting
Volume No. 19. Review of Forecasts: Scaling and Analysis of
Expert Judgments Regarding Cross-Impacts of Assumptions on Business
Forecasts and Accounting Measures
AAA Studies in Accounting Research
By Robert E. Jensen. Published 1983, 235 pages.
I think older AAA research and teaching monographs should be digitized and
made available free to the public.
From The Wall Street Journal Weekly Accounting Review on August 22, 2014
SUMMARY: The Public Company Accounting Oversight Board issued a
staff paper seeking input on whether it should update its rules on auditing
companies' use of estimates, as well as measurements of "fair value," in
various parts of their financial statements. Estimates are widely used when
companies determine matters like how much to set aside in reserves for bad
loans, or how much assets should be written down. Fair value is the closest
approximation of market value for a given asset or liability. But making the
estimates can be difficult, and auditors often have problems in assessing
CLASSROOM APPLICATION: This article can be used in financial
accounting and auditing discussions of estimates and fair value.
1. (Introductory) What is the PCAOB? What is its function? What is
it proposing in this article?
2. (Advanced) What is the PCAOB considering changing? What are the
reasons for these proposed changes?
3. (Advanced) The article notes that the PCAOB issued a "staff
paper." What is that? Why did the organization issue a staff paper instead
of changing the rule?
4. (Advanced) What challenges do auditors face when reviewing
estimates and fair-value measurements? How does it impact clients?
5. (Advanced) How important are estimates and fair-value
measurements in financial reporting? How significant are those components of
financial statements? Should there be cause for concern regarding how these
are calculated? Why or why not?
Reviewed By: Linda Christiansen, Indiana University Southeast
Regulators took a first step Tuesday toward
revamping how auditors review the use of key accounting estimates that can
have a big effect on companies' financial statements.
The Public Company Accounting Oversight Board
issued a staff paper Tuesday seeking input on whether it should update its
rules on auditing companies' use of estimates, as well as measurements of
"fair value," in various parts of their financial statements.
Estimates are widely used when companies determine
matters like how much to set aside in reserves for bad loans, or how much
assets should be written down. Fair value is the closest approximation of
market value for a given asset or liability. But making the estimates can be
difficult, and auditors often have problems in assessing them, said the
PCAOB, the government's audit-industry regulator.
The board, in introducing the paper, said it plans
to use input from investors, auditors and others in formulating potential
new rules on the auditing of estimates and fair value that would be more
comprehensive and consistent than current rules. It would likely be years
before any new rules on the matter were to take effect.
Reviewing estimates and fair-value measurements has
"proven challenging to auditors," the paper says—they require a company to
exercise judgment, and so they may be more susceptible to misstatement and
require more focus from auditors. The PCAOB has frequently found
deficiencies in those areas when it inspects audits.
"Accounting estimates and fair-value measurements
can be subjective and complex, yet they can be an important part of a
company's financial statements and critical to investors' decision-making,"
PCAOB Chairman James R. Doty said in a statement.
The risk measures adopted in this paper are Value at
Risk and Expected Shortfall. Estimates of these measures are obtained by fitting
the Generalized Pareto Distribution
"Risk Analysis for Three Precious Metals: An Application of Extreme Value
Theory," Qinlu Chen and David E. Giles, Department of Economics,
University of Victoria Victoria, B.C., Canada V8W 2Y2 August, 2014 ---
Gold, and other precious metals, are among the
oldest and most widely held commodities used as a hedge against the risk of
disruptions in financial markets. The prices of such metals fluctuate
substantially, introducing a risk of its own. This paper’s goal is to
analyze the risk of investment in gold, silver, and platinum by applying
Extreme Value Theory to historical daily data for changes in their prices.
The risk measures adopted in this paper are Value at Risk and Expected
Shortfall. Estimates of these measures are obtained by fitting the
Generalized Pareto Distribution, using the Peaks ‐ Over ‐ Threshold method,
to the extreme daily price changes. The robustness of the results to changes
in the sample period is discussed. Our results show that silver is the most
risky metal among the three considered. For negative daily returns, platinum
is riskier than gold; while the converse is true for positive returns.
The difference between physics versus finance models is that physicists
know the limitations of their models.
Another difference is that components (e.g., atoms) of a physics model
are not trying to game the system.
The more complicated the model in finance the more the analyst is trying
to substitute theory for experience.
There's a lot wrong with Value at Risk (VaR)
models that regulators ignored.
The assumption of market efficiency among regulators (such as Alan
Greenspan) was a huge mistake that led to excessively low interest rates and
bad behavior by banks and credit rating agencies.
Auditors succumbed to self-serving biases of favoring their clients over
Banks were making huge gambles on other peoples' money.
Investors themselves ignored risk such as poisoned CDO risks when they
should've known better. I love his analogy of black swans on a turkey farm.
Why don't we see surprises coming (five
excellent reasons given here)?
The only group of people who view the world realistically are the
Model builders should stop substituting
elegance for reality.
All financial theorists should be forced to
interact with practitioners.
Practitioners need to abandon the myth of optimality before the fact.
This also applies to abandoning the myth that we can set optimal accounting
In the long term fundamentals matter.
Don't get too bogged down in details at the expense of the big picture.
Max Plank said science advances one funeral at a time.
The speaker then entertains questions from the audience (some are very
James Montier is a very good speaker from England!
Mr. Montier is a member of GMO’s asset allocation
team. Prior to joining GMO in 2009, he was co-head of Global Strategy at
Société Générale. Mr. Montier is the author of several books including
Behavioural Investing: A Practitioner’s Guide to Applying Behavioural
Finance; Value Investing: Tools and Techniques for Intelligent Investment;
and The Little Book of Behavioural Investing. Mr. Montier is a visiting
fellow at the University of Durham and a fellow of the Royal Society of
Arts. He holds a B.A. in Economics from Portsmouth University and an M.Sc.
in Economics from Warwick University
There's a lot of useful information in this talk for accountics scientists.
The IASB and FASB's joint revenue transition resource
group met recently to explore a number of topics related to the
implementation of the new revenue accounting standard. Issues discussed
include the principal-agent assessment; shipping and handling costs related
to the definition of transaction price; royalty constraints in light of
contracts that contain multiple performance obligations; and potential
economic benefits of renewal periods when assessing the impairment of
capitalized contract costs.
More Fiction in Misleading Pension Deficit Underreporting
From the CFO Journal's Morning Ledger on August 8, 2014
A transportation bill signed by President Obama
on Friday will likely boost tax receipts that can then be used
to pay for road repairs, subways and buses. But that money has to come from
somewhere, and for the next 10 months at least, that somewhere is corporate
pension funds that were about to be subject to mandatory contributions,
CFOJ’s Vipal Monga reports.
With those contributions made optional for the time
being, some companies say that money previously earmarked for pension funds
will now go to dividends, buybacks or company investments.
The transportation bill achieved this by
extending a “pension-smoothing” provision, which allows companies to
calculate their liabilities based on the average interest rate over the past
25 years, instead of the past two. The 25-year average is larger, because
rates were higher before the financial crisis.
Many companies are understandably pleased to have a
freer hand in what they do with their cash for now. But that bill will come
due eventually, and the risk is that pension smoothing will ultimately
increase corporate pension deficits by encouraging firms to delay making
From the CFO Journal's Morning Ledger on August 8, 2014
Boston Globe: Is Shareholder Value Bad For Business? The decision this week by drugstore chain Walgreens to go against
the will of shareholders and remain domiciled in the U.S. following its
merger with a European outfit, is just one of many acts in the ongoing
morality tale about what it means to run a corporation in latter-day
America. Does one do ‘the right thing’ by opting for what’s best for
‘shareholder value’ or for wider ‘society’? That question is threatening to
rip apart Massachusetts-based, family-owned grocery store chain Market
Basket, whose unfolding story is being told in the
Operating across three New England states, Market Basket board members
dismissed the popular company CEO Arthur T. Demoulas and two executives on
June 23. Loyal staff and sympathetic
customers didn’t like that: so now the staff are on strike and customers
have boycotted the stores, threatening the business’ very existence. “This
controversy is the tip of an iceberg,” said James Post, coauthor of the 2002
book “Redefining the Corporation” and a professor emeritus at Boston
University School of Management. “And what’s below the iceberg is a much
larger debate about the relationship between shareholders and all of the
other parties that help account for the success of a company.”
It sounds like great management philosophy—but
critics say we need to get back to a broader vision of the purpose of
The uprising against the owners of Market Basket
that’s been unfolding over the past several weeks looks at first like a
classic showdown between the powers that be and the little guys who would.
In one corner stands a coalition of board members and major shareholders who
think it should be returning higher profits; in the other, a crowd of
employees fiercely devoted to the recently fired CEO, who won their loyalty
by paying high wages, providing generous benefits, and handing out regular
bonuses. Amazingly, even customers have joined the revolt, turning Market
Basket stores into ghost towns and costing the company millions of dollars
There’s something heartwarming about workers
risking their necks in the name of a beloved former boss. But to observers
who know how modern corporations work, the protests can seem a little naive:
After all, everybody knows that a corporation is an entity whose first job
is to maximize profits and deliver the highest return possible to its
owners. As some commentators have noted, Market Basket is a business, and
demanding that its investors forgo profits in service of some greater good
goes against everything we know about the natural laws of capitalism.
Unless, of course, it doesn’t. Related
Timeline of Market Basket events
Experts on the history of business say the Market
Basket saga is a window onto something deeper than a power struggle among
the Demoulas clan that owns it. They see it as emblematic of a war over the
future of the American corporation—what its purpose is, how it should be
run, and whom it should be engineered to benefit. They argue that maximizing
profit and shareholder value—an approach to running companies that drives
investment on Wall Street and serves as the closest thing to modern
management gospel—is only one way of defining corporate success, and a
fairly new one at that.
“This controversy is the tip of an iceberg,” said
James Post, coauthor of the 2002 book “Redefining the Corporation” and a
professor emeritus at Boston University School of Management. “And what’s
below the iceberg is a much larger debate about the relationship between
shareholders and all of the other parties that help account for the success
of a company.”
A company like IBM or General Motors could be the
heart of an entire ecosystem of suppliers, investors, and even civic
Post and others argue that a well-run company
can—and should—be managed in a way that benefits not just the investors who
own its stock, but a wide range of constituents. As opposed to
“shareholders,” they call these people “stakeholders”: a group that includes
employees, customers, suppliers, and creditors, as well as the broader
community in which the company operates, and even the country that it calls
home. According to that view, Market Basket’s employees and customers are
essential to the firm’s success and, thus, rightful beneficiaries of its
Importantly, it’s not just antimarket leftists who
are making this point: It’s pro-business thinkers who want to see a more
competitive future for American corporations. Critics like Post argue that
the singleminded emphasis on profits and shareholder value—which took hold
in the corporate world during the 1980s—has actually hurt corporations in a
number of ways, giving their leaders the wrong kinds of incentives, gutting
their future in pursuit of short-term profits, and often draining them of
their real value and putting them at odds with their communities.
To take seriously the idea of a
“stakeholder”-oriented corporation is to realize that firms like Market
Basket, which we rely on in our daily lives and which rely on us in return,
don’t have a fixed role in a capitalist society, but rather exist as tools
that can serve a variety of functions. While “shareholder value” is
attractive in its simplicity, a look at its track record suggests it might
be an idea that has reached its sell-by date.
Today, it’s widely taken for granted that the
American corporation functions as a standalone, self-interested entity
responsible exclusively to its investors. But it wasn’t always this way.
“The early corporations were chartered by the state to meet a social
purpose,” Post said. “Sometimes it was to build highways, sometimes it was
to run banks, but there was always public purpose that went with the grant
of a charter.” The message was straightforward: People who owned
incorporated companies ran them at the pleasure of the state, and, in
exchange for various legal protections, had a responsibility to do more than
Though such demanding legislative charters had long
fallen out of use by the mid-20th century, when American corporations
entered what is widely considered their golden age, historians say that many
executives nevertheless held onto the notion that they were overseeing
entities with a role in society, and were responsible for creating more than
the value that existed on paper. “They viewed their job as a sort of
stewardship of an economic and social institution,” said Lynn Stout, a
professor at Cornell University Law School and the author of “The Myth of
During this era of so-called managerial capitalism,
which began roughly in the 1920s, corporations were seen by both their
managers and much of the American public as institutions that mattered in
themselves: They produced useful products, gave workers and their families a
stable and often long-term source of income, and played a role in the cities
and towns where they did business. A company like IBM or General Motors
could be the heart of an entire ecosystem of suppliers, investors, and even
But a change was coming to American capitalism.
Facing unprecedented competition from Europe and Asia, these long-stable
firms began to look like sleepy behemoths. And economists had begun to worry
that top executives had become so powerful they were running companies with
their own personal interests at heart, lining their pockets at the expense
of the stockholders who, in theory, should have been benefiting in
proportion to the company’s success.
The solution to all these problems, famously
articulated by the University of Chicago free market economist Milton
Friedman in a 1970 New York Times article, was an elegant one: By framing
the corporation purely in terms of its monetary value to shareholders, and
setting aside the notion that it might be a valuable entity in and of itself
by virtue of what it did, corporate America suddenly had an easy way to
measure performance. The scheme had a kind of moral clarity: The risk of
operating a company is borne by stockholders, so they’re the ones who
deserve to reap the rewards.
A well-managed company, then, would have a high
stock price that reflected the best possible use of its assets. A poorly
managed one was a target for a new class of investor—the corporate
raider—who saw big companies as collections of assets that could be bought,
broken up, and sold at a profit.
CEOs got the message: The point of running a
company was to keep the share price high. And to keep their eyes on the
target, boards started tying executive pay to the share price, by paying
CEOs with stock options that were much more valuable than their paper
salary. In the wake of the “shareholder value” revolution, everything except
the value of a company’s stock—including its impact on the lives of its
employees, its contracts with suppliers and retailers, whether it was liked
or hated by its customers—came to be seen as almost irrelevant. Everything
you needed to know about how a company was doing was believed to be
reflected in its share price.
By the 1990s, the notion that a CEO had an
obligation to maximize shareholder value had become an unquestioned mantra
taught in business schools; ordinary people assumed it was simply the way of
the world. “People think it was brought down from Mount Sinai by Moses, as
the 11th Commandment,” said Richard Sylla, a professor who specializes in
the history of financial institutions at NYU Stern School of Business, and
the coauthor of a recent article in the journal Daedalus critiquing the
notion of shareholder supremacy. “If you’re younger than 50 or 60, you’ve
lived in a world where everyone taught you that this is what a corporation
is supposed to do—maximize profit and shareholder value. But the world used
to be different.”
The philosophy of shareholder supremacy, initially
a reform to curb irresponsibility in managers, has ended up causing
significant problems of its own, say Sylla and other critics. CEOs became
obsessed with stock price at the expense of all other considerations. Some,
like the executives at Enron, went so far as to defraud their own
stockholders by engineering bogus profits. Countless others made
short-sighted decisions intended to goose earnings, keep investors happy,
and enrich themselves—all without regard for the long-term health of their
The broader social effects of the shift toward
shareholder value are clear, critics say, with wages stagnating and
unemployment remaining stubbornly high even as the stock market has
rebounded after the recession. Meanwhile, if the point was to benefit
shareholders, it’s not clear that worked either. Roger Martin, the former
dean of the Rotman School of Management at the University of Toronto, points
out in his 2011 book, “Fixing the Game,” that from 1933 to 1976, returns on
investment in the S&P 500—the decades immediately before the “shareholder
value” took hold—were actually higher than they have been since. And Stout
notes that in the 20 years after 1993, when a change to the tax code
encouraged corporations to tie executive compensation to share price,
investors in the S&P 500 saw returns that were slightly worse than what they
were getting during the 40 years prior. The life expectancy of S&P 500
companies, meanwhile, has been cut dramatically—from around 70 years in the
1920s to 15 years today.
“We have been dosing our public corporations with
the medicine of shareholder value thinking for at least two decades now,”
Stout has written. “The patient seems, if anything, to be getting worse.”
As the effects of shareholder supremacy have begun
to make themselves evident—Stout points to Sears and Motorola as examples of
companies that have been hollowed out in the name of stoking share prices—an
alternative approach to running a corporation, known as the stakeholder
model, began gaining purchase among academics and business leaders. This
model, as described by its proponents, recommends taking a less simplistic
and short-term view of what makes a company successful, and calls for
measuring its value not just in terms of profits and stock price, but the
total impact it has on the lives of people who come into contact with it.
There are clear reasons this might be better for employees, customers, and
their communities. In the long run, say thinkers like Stout and Post, it is
going to be better for the competitiveness of the American company. Pointing
to firms like Market Basket, they argue that stakeholder-focused companies
are ultimately more stable and financially healthy—a win, ultimately, for
the very shareholders being forced to make room at the trough for other
Though lots of prominent companies now take pains
to cultivate reputations as conscientious corporate citizens, would-be
reformers want something more. “All that stuff is just window dressing,”
said Stout, referring to philanthropic programs financed by big corporations
in the name of good PR. “Corporate social responsibility means running a
business that contributes to public welfare—that’s the moral defense of
capitalism. Business should be a force for good, not for the enrichment of a
few small individuals.”
It would seem that anything that is bad for business adversely affects
shareholder value. However, is the opposite the case. Is everything good for
increasing shareholder value good for business. Most of the debate hinges on
long-term versus short-term values.
A classic problem is when tax laws and regulations allow companies to avoid
taxes in a way that hurts them with adverse publicity such as when Walgreens
contemplated moving its headquarters across the Atlantic Ocean --- a decision
that the company has since rescinded due to both bad publicity and governmental
pressures. The company would have benefitted in the short run by this inversion,
but it's not at all clear that the long-term benefits would have been positive.
It's clear that the private sector differs greatly from the public sector in
terms of social responsibilities. For example, the government is ideally
subjected to the democratic voting process with respect to controversial
decisions such as banning genetic modification certain food products. A company
deciding to modify or not modify its products via genetic modification is not
directly subjected to the will of the people except via government intervention.
Highly controversial decisions that are on surface socially responsible have
many possible favorable and adverse externalities. For example, if an enormous
electric power company elects to substitute coal and nuclear power generation
with solar, wind, and hydo power (as is the case with the power generating
companies in Vermont) there are many possible
externalities for which government would be accountable but not the power
companies themselves. For example, enormous increases in the cost
of power may cause a spike in unemployment and huge losses of tax revenues from
businesses depending on cheap power. In fact power-intensive companies may move
to another state where power is cheaper.
At the moment, there's huge political fight in New Hampshire over what is
termed the northern pass ---
Power companies want to destroy a significant portion of our forests for
enormous (80-foot) transmission towers to bring in hydro power from Quebec. What
is profitable for the power companies has adverse externalities on life in the
forests as well as life in Quebec if more and more land is flooded for newer and
larger hydro dams. But those are Canadians who are hurt. Why should our USA
companies care about Canadians if the Northern Pass transmission lines add
shareholder value to USA power companies.?
"When Did the U.S. Forfeit its Moral Leadership in the World?" by
Steven Mintz, Ethics Sage, August 6, 2014 ---
46 Senators Objecting to Plans to Change Tax Accounting to Accrual-Based
From the CFO Journal's Morning Ledger on August 8, 2014
Many Senators Object to Raising Cash from Small Businesses.
A group of senators object to plans by
to force small businesses to change accounting methods
in order raise revenue to support tax reform, the
WSJ’s CFO Journal reports. Some 46 senators sent a letter
Wednesday to Senate Finance Committee
Chairman Ron Wyden (D., Ore.) and Ranking Member Orrin Hatch (R., Utah),
opposing proposals that would force some small businesses to use accrual
accounting, rather than cash accounting. The shift would essentially force
firms to pay income taxes on money not yet received. The changes could raise
more than $23 billion in tax revenue over the next decade, but the senators
said the “negative impact” couldn’t justify the change. “The basic tenet of
taxation is ‘ability to pay,’” they wrote. The changes, which have been in
draft proposals by the House and the Senate in the past year, would affect
businesses with more than $10 million in revenue that don’t currently have
inventory, such as dentists, architects, engineers and attorneys and CPAs.
The senate version could also affect farmers.
From the CFO Journal's Morning Ledger on July 31, 2014
Regulatory requirements are making trading in
repurchase agreements, or repos, more expensive, and that has
banks backing away from
this critical part of the plumbing that keeps money flowing through the
Repos function as short-term loans, which are backed
by collateral, such as a government bond. Borrowers agree to sell the bonds
to another party for cash, with the promise to repurchase the bond at a
slightly higher price some time in the future.
Regulators are pleased with the changes. Before the
crisis, many Wall Street firms relied heavily on repos, but then lost access
to those funds when investors panicked about the value of mortgage bonds and
the solvency of firms that relied on repos for cash. But there are signs
that the reluctance of banks to facilitate huge amounts of repo transactions
is contributing to increased volatility.
As organizations migrate to cloud computing, they
could be putting their data at significant risk. Positioning the internal
audit (IA) function at the forefront of cloud implementation and engaging IA
to create a cloud risk framework tool can provide organizations a view on
the pervasive, evolving and interconnected nature of risks associated with
cloud computing. Such a tool can also improve efficiency in compliance and
risk management efforts and be used to develop risk event scenarios.
I think there is possibly a lot of missing data across the USA. I found the
property tax information for our former house in San Antonio but not our current
house in New Hampshire. However, towns in New Hampshire provide free and
detailed property tax information for each street address at the towns'
Websites. I think it is probably best to first try to get property tax data from
each taxing jurisdiction in the USA.
In general it's misleading to compare property taxes across different
jurisdictions and even within jurisdictions. For example, property may have
different homeowner exemptions in different jurisdictions. Property taxes may
seem high in a state having no income and/or sales taxes. Consideration should
also be given to what home owners are getting for their property taxes. For
example, very high property taxes in New York City get you lousy public schools.
Lower property taxes in South Dakota get you arguably the best public schools in
Unfairness or fairness in property taxation generally begins with the
fairness or unfairness of the value appraisals of a jurisdiction. For example,
Bexar County in San Antonio frequently changes appraised value. In towns and
villages in New Hampshire properties may not be revalued for years and may be
totally out of line with recent sales transactions in a given jurisdiction.
Comparisons on the basis of square footage or acreage may be totally misleading.
For example, in New Hampshire a five acre parcel with an outstanding view may be
assessed at ten times the value of a 20 acre parcel buried in the woods because
New Hampshire has a view tax that is factored into the property tax valuation.
Condos on the 40th floor will be valued much higher per square foot than condos
on the third floor in most any city in the USA.
FULL convergence with the United States - leading to the creation of one
single set of global accounting standards - is no longer an achievable
project, said Hans Hoogervorst, chairman of the International Accounting
Standards Board (IASB), at the Singapore Accountancy Convention (SAC) on
His grim pronouncement leaves no doubt as to the fate of collaborative
efforts that began over a decade ago; it also comes shortly after the IASB -
the global accounting standards setter - published its completed
international financial reporting standard (IFRS) on financial instruments,
IFRS 9, without the US Financial Accounting Standards Board's (FASB)
"The FASB decided to stick to current American practices and leave the
converged position," Mr Hoogervorst said.
"It's a pity. Convergence would have allowed the US to make the ultimate
p to IFRS. But nobody can force it to do so; if it wants to stick with US GAAP (Generally Accepted Accounting Principles - the US financial reporting
standard), that's its choice. But IFRS moves on - we have a large part of
the world to take care of."
July 31 (Reuters) - An employee complaint exposed
accounting misconduct at L-3 Communications Holdings Inc, according to
people familiar with the matter, prompting the aerospace and defense
supplier to fire four people, revise two years of earnings statements and
cut its earnings forecast.
L-3's shares plunged as much as 17 percent - their
biggest intraday percentage drop ever - after the company said on Thursday
it would take a pretax charge of $84 million for misconduct and accounting
errors, including cost overruns and overstated sales figures from 2013 and
The surprise announcement prompted some analysts to
cut ratings on the company, and raised concern about a broader problem at
L-3, which also suffered an ethics scandal in 2010.
The sources said the latest misconduct stemmed from
a single fixed-price contract for maintenance and logistics support with the
U.S. military that began in December 2010 and runs through January 2015.
The Pentagon has not barred L-3 from bidding on
other contacts as a result of the misconduct, the sources added.
The pretax charge includes adjustments for
accounting errors L-3 found as it scrubbed its books during the review, said
the sources, who spoke on condition that they not be named.
"The profit L-3 expected in the contract just
wasn't there," said one of the sources.
The sources declined to say which branch of the
military had the contract, or precisely which part of L-3 was involved,
other than that it was in its aerospace unit. They also would not say how
recently the employee lodged the complaint.
However, they said the New York-based company
quickly fired four employees and hired law firm Simpson Thatcher to conduct
the investigation and consulting firm AlixPartners to perform forensic
"We had some bad actors and they are no longer part
of L-3," Chief Executive Michael Strianese said on a conference call with
Another employee resigned in connection with the
review. The whistleblower is still with the company, and the review is
continuing, but not expected to turn up significant additional charges, the
L-3, founded in 1997 and built through mergers and
acquisitions of smaller companies, supplies a wide range of military and
civil electronics equipment and services, including aircraft "black boxes,"
communications transponders and cockpit display panels.
The accounting errors surprised investors, but they
stopped short of triggering a "restatement" of L-3's accounting. Instead,
the financial statements are being "revised" to reflect what are considered
non-material adjustments, and the statements can still be relied on by
investors, the sources said.
L-3 also reported on Thursday preliminary sales of
$3.02 billion for the second quarter ended June 27, but said the figure
could be revised lower after the review is finished.
The company cut its full-year earnings forecast by
30 cents a share, to $7.90-$8.10 per share from $8.20-$8.40, reflecting
expected charges in the second half related to the review.
Analysts peppered Strianese and CFO Ralph
D'Ambrosio with questions on the conference call about whether other
misconduct could appear elsewhere.
"We have no reason to believe that this issue
occurred at any other segment of the company," Strianese said.
Accounting irregularities tend to unnerve investors
and bring further scrutiny of company's operations, analyst said. The
incident raised memories of a 2010 event in which an L-3 unit was suspended
from doing contract work for the U.S. Air Force for allegedly using a
government computer to gather business information for its own use.
Strianese said that case found no evidence that
anyone at L-3 "did anything wrong" and "actually proved that we did not have
any bad actors."
Still, "situations involving accounting misconduct
with government contractors do not end quickly and generally are expanded in
scope," said CRT Capital analyst Brian Ruttenbur, who cut his rating on L-3
stock to "sell" from "fair value."
D'Ambrosio said the contract involved in the review
had average annual sales of about $150 million.
"It's a low-margin contract and with these
adjustments, it is now in a loss position," he said.
L-3 said about $50 million of the $84 million
charge related to periods prior to 2014 and about $30 million related to the
second quarter of 2014.
Defense contractor L-3 Communications said Thursday
that it fired four employees after discovering they overstated the company's
profit and sales from a contract with the U.S. government.
The New York company said a fifth employee
resigned. It said the employees, who worked for its aerospace systems
business, also inappropriately deferred some cost overruns associated with
the contract. L-3 described the contract as a maintenance and logistics
support contract with the U.S. Department of Defense, and said the deal
began Dec. 1, 2010, and ends January 31. The deal brings in about $115
million in annual revenue for the company.
"The misconduct included concealment from L-3's
Corporate staff and external auditors," L-Communications 3 Chairman and CEO
Michael Strianese said during a conference call.
The company did not disclose the names or positions
of the employees or provide other details about the contract. Government
spokespeople were not able to confirm the specifics of the contract.
L-3 Communications said it is conducting an
internal review and will take an $84 million charge associated with the
misconduct. It said $34 million of that total will come from the first half
of 2014. Separately, it will reduce its net sales by $43 million. The
company also cut its estimate for second-half operating income for the
aerospace systems business by $35 million.
Shares of L-3 Communications Holdings Inc. tumbled
$14.68, or 12 percent, to $104.96 Thursday as the markets slumped.
According to the Company, the adjustments primarily
relate to “contract cost overruns that were inappropriately deferred and
overstatements of net sales, in each case with respect to a fixed-price
maintenance and logistics support contract,”ť and are the result of
“misconduct and accounting errors”ť at the Aerospace Systems segment, which
“included concealment from L-3's Corporate staff and external auditors.”ť
If you purchased shares of L-3, if you have
information or would like to learn more about these claims, or if you have
any questions concerning this announcement or your rights or interests with
respect to these matters, please contact Casey Sadler, Esquire, of Glancy
Binkow & Goldberg LLP, 1925 Century Park East, Suite 2100, Los Angeles,
California 90067, by toll-free telephone at (888) 773-9224 or by telephone
at (310) 201-9150, by e-mail to firstname.lastname@example.org, or visit our
website at http://www.glancylaw.com. If you inquire by email, please include
your mailing address, telephone number and number of shares purchased.
This press release may be considered Attorney
Advertising in some jurisdictions under the applicable law and ethical
The title of the above article is a little misleading. Some of the NFL veterans
in the article took risks financial risks that paid off. The article does not
mention those that were more conservative with investments and probably are
better investment managers or hired better investment managers.
The article does not mention Hall of Famer John Elway who bought five car
dealerships and two restaurants that were almost sure-thing money makers. Elway,
however, did get burned in a Ponzi scheme, but I don't think his losses here
made a big dent in his fortunes. He has taken some other investment risks such
as his investments in arena football, but I think he could easily absorb the
losses. However, I do not know this for a fact. His 2004 divorce probably
cost him more than any of his business losses. He sure took some rough physical
beatings when he was still a quarterback for the Denver Broncos.
Former Denver Broncos quarterback John Elway and
his business partner gave $15 million to a hedge-fund manager now accused of
running a Ponzi scheme.
The Denver Post reported Thursday that Elway and
Mitchell Pierce filed a motion saying they wired the money to Sean Michael
Mueller in March. They said Mueller agreed to hold the money in trust until
they agreed on where it would be invested.
A state investigator says 65 people invested $71
million with Mueller's company over 10 years and it only had $9.5 million in
assets in April and $45 million in liabilities.
Elway's filing asks that the court put their claims
ahead of others so they can collect their money first. His lawyer declined
It's hard to feel sorry for rich people who play in games without rules (hedge
Better to play in games with rules and stand behind 325 lb linemen with missing
teeth, BO, and noses that look like corkscrews.
It's also hard to know how much celebrities really lose in some business
ventures. On occasion they are merely investing their names and promotion
efforts without sacrificing much in the way of personal investments.
Often professional athletes and other celebrities are so busy with their
non-financial activities and are so naive about finance and accounting and taxes
that they are especially vulnerable to con artists
who bleed them dry in one way or another. Examples are too
numerous to mention and include NBA star Ray Williams who become a homeless bum
and Debbie Reynolds of Hollywood fame who had to go back to working for food in
Every night at
bedtime, former Celtic Ray Williams locks the doors of his home: a
broken-down 1992 Buick, rusting on a back street where he ran out of
The 10-year NBA
veteran formerly known as “Sugar Ray’’ leans back in the driver’s seat,
drapes his legs over the center console, and rests his head on a pillow of
tattered towels. He tunes his boom box to gospel music, closes his eyes, and
generation removed from staying in first-class hotels with Larry Bird and
Co. in their drive to the 1985 NBA Finals, mostly wonders how much more he
can bear. He is not new to poverty, illness, homelessness. Or quiet
In recent weeks, he
has lived on bread and water.
“They say God won’t
give you more than you can handle,’’ Williams said in his roadside sedan.
“But this is wearing me out.’’
A former top-10 NBA
draft pick who once scored 52 points in a game, Williams is a face of
big-time basketball’s underclass. As the NBA employs players whose average
annual salaries top $5 million, Williams is among scores of retired players
for whom the good life vanished not long after the final whistle.
Dozens of NBA
retirees, including Williams and his brother, Gus, a two-time All-Star, have
sought bankruptcy protection.
“Ray is like many
players who invested so much of their lives in basketball,’’ said Mike
Glenn, who played 10 years in the NBA, including three with Williams and the
New York Knicks. “When the dividends stopped coming, the problems started
escalating. It’s a cold reality.’’
Williams, 55 and
diabetic, wants the titans of today’s NBA to help take care of him and other
retirees who have plenty of time to watch games but no televisions to do so.
He needs food, shelter, cash for car repairs, and a job, and he believes the
multibillion-dollar league and its players should treat him as if he were a
teammate in distress.
One thing Williams
especially wants them to know: Unlike many troubled ex-players, he has never
fallen prey to drugs, alcohol, or gambling.
“When I played the
game, they always talked about loyalty to the team,’’ Williams said. “Well,
where’s the loyalty and compassion for ex-players who are hurting? We opened
the door for these guys whose salaries are through the roof.’’
Williams, the NBA-related organizations best suited to help him have closed
their checkbooks to him. The NBA Legends Foundation, which awarded him
grants totaling more than $10,000 in 1996 and 2004, denied his recent
request for help. So did the NBA Retired Players Association, which in the
past year gave him two grants totaling $2,000.
Feedback on the question in my previous post could
take many directions. Around the same time that Elliott wrote about the 3rd
wave many authors were advocating various approaches to help U.S. companies
become competitive. Deming and Goldratt published books about the problem in
1986 and followed that with other books adding more specificity. CAM-I
published its conceptual design (edited by Berliner and Brimson) in 1988 and
numerous authors (e.g., McNair) have written about activity-based cost
management since that time. In 1990 Senge wrote about systems thinking (The
Fifth Discipline) and Hammer introduced the concept of Reengineering
adding more depth and specificity in Reengineering the Corporation
with Champy in 1993. In 1996 Womack and Jones published Lean Thinking
with recommendations similar to Imai's approach in his 1986 Kaizen.
More recently Johnson and Broms wrote about the living systems model (in
Profit Beyond Measure) and Baggaley and Maskell have described
value-stream management. I have developed a considerable amount of
information about the first three approaches, some information about
approaches 5, 6, and 7, but very little about the 4th approach
Reengineering. To consider the Reengineering approach see my summary of
Hammers' 1990 paper (Hammer, M. 1990. Reengineering work: Don't automate,
obliterate. Harvard Business Review (July-August): 104-112. ) at
My current view is that reengineering should be the
first step after one embraces systems thinking and then it can be followed
by other approaches. This is because approaches such as continuous
improvement (TOC, PDCA, etc.), and value-stream management should not be
used on obsolete process designs that companies should not be using in the
1. The systems thinking (Deming 1986, 1993, Senge 1990) approach.
2. The theory of constraints (Goldratt 1986, 1990) approach.
3. The activity-based cost management (CAM-I 1988, McNair 1990, etc.)
4. The reengineering (Hammer and Champy 1990, 1993) approach.
5. The self-organizing lean enterprise, including just-in-time (Womack and
Jones 1996, Imai 1986) approach.
6. The living systems model (Johnson and Broms 2000) approach.
7. The value-stream management (Baggaley and Maskell 2003) approach.
In a new research paper, Christian Terwiesch,
professor of operations and information management at Wharton, and Karl
Ulrich, vice dean of innovation at the school, examine the impact that
massive open online courses (MOOCs) will have on business schools and MBA
programs. In their study — titled, “Will Video Kill the Classroom Star? The
Threat and Opportunity of MOOCs for Full-time MBA Programs” — they identify
three possible scenarios that business schools face not just as a result of
MOOCs, but also because of the technology embedded in them. In an interview
with Knowledge@Wharton, Terwiesch and Ulrich discuss their findings.
An edited transcript of the interview appears
Knowledge@Wharton: Christian, perhaps you could
start us off by describing the main findings or takeaways from your
Terwiesch: Let me preface what we’re going to
discuss about business schools by saying that Karl and I have been in the
business school world for many, many years. We love this institution, and we
really want to make sure that we find a sustainable path forward for
The history of SACO 2006-8, as told through court
documents dating back more than six years, provides a view into how the
mortgage-backed security industry was built up and spectacularly collapsed.
For JPMorgan, it has become the mortgage-backed security from hell.
Last week, JPMorgan Chase’s costly legal troubles
took another step toward completion when trustees for 311 mortgage-backed
securities sold by the bank or inherited through acquisitions prior to the
financial crisis agreed to a $4.5 billion settlement. Another 14 got an
extension to still consider the deal, while five trusts wholly rejected the
settlement, leaving open the option for them to continue litigation against
the bank. SACO 2006-8, created and marketed by Bear Stearns two years prior
to its government-supported acquisition by JPMorgan in 2008, was one of the
trusts that rejected the deal.
The detailed history of this one trust’s creation
and sale, as told through court documents dating back to a lawsuit filed by
the bond insurer Ambac six years ago, provides a view into how the
mortgage-backed security industry was built up and spectacularly collapsed.
And it may be one of the very few chances that the investors who bought
these securities — and the insurance companies that guaranteed them — can
find out what actually happened.
More importantly, it may be the only chance left
for the public to get a granular view of what actually happened in the
run-up to the financial crisis.
The best way to understand the importance of SACO
2006-8 to both the inner workings of the mortgage-backed securities industry
and JPMorgan is to start in the present and travel back to the past.
A large chunk of JPMorgan’s more than $20 billion
legal tab last year over the bank and its affiliates’ practices in marketing
and selling mortgage-backed securities before the financial crisis is owed
to two settlements: one with the Department of Justice for $13 billion and
the previously mentioned $4.5 billion deal. (The latter deal still requires
approval by a judge, and if granted will finally remove the bulk of
financial crisis-era legal liabilities from the bank.) The combined $17.5
billion cost of those two settlements, reached less than a week apart,
nearly matched JPMorgan’s net income of $17.9 billion last year.
The settlement included a statement of facts that
JPMorgan agreed to — not a guilty plea — describing generally how its
employees (and those of Bear Stearns and Washington Mutual) marketed
mortgage-backed securities to investors even though some of the loans didn’t
comply with the loan underwriters’ own guidelines for selling and
securitizing them. The civil penalty of $2 billion only applied to what
JPMorgan did before the crisis, not Bear Stearns or Washington Mutual, and
released the bank from civil liability for claims arising from the
securities included in the settlement.
“Without a doubt, the conduct uncovered in this
investigation helped sow the seeds of the mortgage meltdown,” Attorney
General Eric Holder said when announcing the deal between the Justice
Department, several states, and other regulatory agencies and JPMorgan,
which ranks as the country’s largest bank by assets.
JPMorgan’s chairman and Chief Executive Officer
Jamie Dimon described 2013 in a letter to investors as “the best of times
[and] the worst of times,” and said that the bank came through “scarred but
strengthened — steadfast in our commitment to do the best we can.”
Many of the same mortgage-backed securities covered
by the Justice Department deal were also among those included in the $4.5
billion trustee settlement, SACO 2006-8 being one of them.
“We believe the acceptance by the Trustees of the
overwhelming majority of the 330 trusts is a significant step toward
finalizing the settlement,” a JPMorgan spokesman said in a statement earlier
this month. The spokesman declined further comment for this story.
SACO 2006-8 was one of many mortgage-backed
securities pumped out by Bear Stearns during the housing and credit boom.
Made up of almost 5,300 home equity lines of credit from California,
Virginia, Florida, and Illinois acquired by a Bear subsidiary called EMC,
the trust had a principal balance of $356 million. Its most senior notes,
the “Class A Notes” that would get paid off first by the stream of home
equity payments, got the highest possible ratings from Moody’s and Standard
& Poor’s, and were buoyed by an insurance policy from the AAA-rated
Wisconsin-based bond insurer Ambac that guaranteed payments on the senior
Almost a third of the home equity lines came from
American Home Mortgage Corporation, which would declare bankruptcy less than
a year later — not coincidentally, the same year home equity origination
would peak. By March 2008, Bear Stearns would be acquired by JPMorgan after
its stock plummeted as clients and investors got nervous about its
mortgage-backed securities holdings. Two years and a few months later, in
November 2010, Ambac would file for bankruptcy.
But SACO 2006-8 continued to live. It would be
quickly downgraded and, by the end of 2010, it had already experienced some
$141 million worth of losses and had 41% of its loans go delinquent or
charged off entirely.
A lawsuit filed in 2008 by Ambac, unsealed in 2011,
included an email from a Bears Stearns manager to a trader describing the
loans that would make up SACO 2006-8 as a “SACK OF SHIT” and, alternately, a
“I hope you’re making a lot of money off of this
trade,” the manager also wrote to a trader. When asked to explain himself in
a deposition, the manager said that “shit breather” was a “term of
SACO 2006-8 was hardly the only Bear Stearns
mortgage deal that Ambac and others have said was put together by hiding the
low quality of the underlying mortgages from investors and insurers. Ambac’s
complaint alleges that Bear “knew and actively concealed that it was
building a house of cards.”
Ambac further said in its complaint that less than
25% of the loans Bear Stearns had acquired from American Home Mortgage were
current and 60% had been delinquent for a month. Of those loans, 1,600 ended
up in SACO 2006-8. The four transactions covered in the first Ambac suit (it
has also filed a second suit against JPMorgan) had $1.2 billion in losses by
2011 and lead to Ambac paying out $641 million on their insurance coverage
JPMorgan, which inherited the suit from Bear,
responded in court documents that Ambac was a financially sophisticated
company that actively sought Bear’s business and had access to the
underlying loan data used in constructing the securities.
Selling mortgages based on home equity lines of
credit were a relatively new but quickly growing portion of Bear’s mortgage
securities business. Ambac’s complaint says that Bear’s EMC subsidiary in
2005 had 9,300 home equity lines worth $509 million, but by the end of 2006
those figures had grown to some 18,000 loans worth $1.2 billion. Moreover,
the home equity business was just one portion of Bear’s mortgage machine.
From 2003 to 2007, EMC would purchase and then package for investors over
345,000 loans worth some $69 billion.
As Ambac’s lawsuit was winding its way through the
courts, SACO 2006-8 emerged again, this time in a lawsuit brought by New
York Attorney General Eric Schneiderman.
As co-chairman of the Residential Mortgage-Backed
Securities Working Group, a group of law enforcement officials convened by
the Obama administration to investigate mortgage fraud before the financial
crisis, Schneiderman said Bear Stearns sold mortgage-backed securities
featuring “material misrepresentations and flagrant omissions.”
Bear’s representations as to the quality of the
loans “were false, misleading, and designed to conceal fundamental flaws and
defects in the defendants’ due diligence systems,” Schneiderman said.
The complaint said “thousands of investors” were
harmed by “systemic fraud” and that losses on more than 100 mortgage-backed
securities it identified from 2006 and 2007 were $22.5 billion on an
original balance of $87 billion. One of those securities was SACO 2006-8.
For its part, JPMorgan said that Schneiderman’s
suit was based on “recycled claims already made by private plaintiffs.” To
be sure, one of the lawyers in Schneiderman’s office, Karla Sanchez, was one
of Ambac’s lawyers during her time at Patterson Belknap Webb & Tyler. But a
source told the Wall Street Journal at the time that Sanchez did not work on
JPMorgan settled the Schneiderman case as part of
its $13 billion deal with the Justice Department, with the state of New York
receiving $613 million of that amount.
“We’ve won a major victory today in the fight to
hold those who caused the financial crisis accountable,” Schneiderman said
at the time of the settlement.
A 1,625-square-foot bungalow at 51 Perthshire Lane
in Palm Coast, Fla., is among the thousands of homes at the heart of J.P.
Morgan Chase JPM +0.55% & Co.'s $5.1 billion settlement with a federal
housing regulator on Friday.
In 2006, J.P. Morgan bought one of two mortgage
loans on the home made by subprime lender New Century Financial Corp. J.P.
Morgan then bundled the loan with 4,208 others from New Century into a
mortgage-backed security it sold to investors including housing-finance
giant Freddie Mac. FMCC +11.89%
By the end of 2007, the borrower had stopped paying
back the loan, setting off yearslong delinquency and foreclosure proceedings
that halted income to the investors, according to BlackBox Logic LLC, a
mortgage-data company. Current Account
Settlement Puts U.S. in Tight Spot
The Palm Coast loan wasn't the only troubled one in
the New Century deal: Within a year, 15% of the borrowers were
delinquent—more than 60 days late on a payment, in some stage of foreclosure
or in bankruptcy—according to BlackBox. By 2010, that number exceeded 50%.
"That's much worse than anyone's expectations when
the deal was put together," said Cory Lambert, an analyst at BlackBox and
former mortgage-bond trader. "It's all pretty bad."
J.P. Morgan sidestepped many of the
subprime-mortgage problems that bedeviled rivals during the financial
crisis, and avoided much of the postcrisis scrutiny that dragged down others
on Wall Street. But now its own behavior during the housing boom is coming
under close examination as investigators work through a backlog of cases.
The bank dealt with some of the biggest subprime
lenders of the time, including Countrywide Financial Corp., Fremont
Investment & Loan and WMC Mortgage Corp., a former unit of General Electric,
according to the Federal Housing Finance Agency complaint.
J.P. Morgan's relationship with New Century, a
subprime lender that went bankrupt in 2007 and later faced a Securities and
Exchange Commission investigation and shareholder suits, shows that the New
York bank was part of the frenzied push to package mortgages for investors
at the end of the housing boom.
The New Century deal, J.P. Morgan Mortgage
Acquisition Trust 2006-NC1, was one of 103 cited in the lawsuit against J.P.
Morgan brought by the FHFA, which oversees Freddie Mac and home-loan giant
Fannie Mae. FNMA +13.40%
The $5.1 billion settlement is part of a larger
tentative deal with the Justice Department and other agencies that would
have J.P. Morgan pay a total of $13 billion. That deal is expected to be
completed this week.
"While these settlements seem huge, given the
nature of the offenses, they are trivially small," said William Frey, chief
executive of Greenwich Financial Services LLC, a broker-dealer that has
participated in investor lawsuits against banks that packaged mortgages.
J.P. Morgan declined to comment on the settlement or any loans in the bonds
The FHFA has gotten aggressive in recouping losses
from mortgages and securities sold to Fannie and Freddie. In 2011 it sued 18
lenders, and J.P. Morgan was only the fourth to settle.
To be sure, the New Century deal was among J.P.
Morgan's worst performers, and other mortgage-backed securities it issued at
the time have held up better. An improving economy and housing market have
lifted many mortgage bonds sold in 2006 and 2007.
But that is of little consolation to Freddie Mac,
which bought more than a third of the $910 million New Century bond deal in
2006 and still is sitting on losses.
The group of loans backing Freddie's chunk of the
deal had more high-risk loans than the rest of the pool. Nearly 44% of
Freddie's piece had loan-to-value ratios between 80% and 100%, compared with
31% for the rest, according to the deal prospectus.
What's more, nearly half the loans backing the New
Century deal were from California and Florida, two states hit hard by the
housing bust. Of the 4,209 loans in the bond, more than half have some
experienced distress, according to BlackBox data.
Three debt-rating firms gave the top slice of the
deal AAA ratings. But as the housing market soured, a series of downgrades
starting in 2007 took them all into "junk" territory by July 2011. As of
last month, nearly a quarter of the principal of the underlying loans in the
deal had been wiped out, with a third of the remaining balance delinquent or
in some stage of foreclosure, according to BlackBox.
Continued in article
From the CFO Journal's Morning Ledger on October 28, 2013
J.P. Morgan settlement puts government in tight spot Will the U.S. government have to refund
J.P. Morgan part
of the bank’s expected $13 billion payment over soured mortgage securities?
The question is the biggest stumbling block to completing the record
settlement between the bank and the Justice Department,
writes the WSJ’s Francesco Guerrera.
The crux of the issue is whether the government can go
after J.P. Morgan for (alleged) sins committed by others. And investors,
bankers and lawyers are watching the process closely, worried that it could
set a bad precedent for the relationship between buyers, regulators and
creditors in future deals for troubled banks.
Thirteen billion dollars
requires some perspective. The record amount that
JPMorgan Chase (JPM)
has tentatively agreed to pay the
U.S. Department of Justice, to settle civil investigations into
mortgage-backed securities it sold in the runup to the 2008 financial
crisis, is equal to the gross domestic product of Namibia. It’s more
than the combined salaries of every athlete in every major U.S.
professional sport, with enough left over to buy every American a
stadium hotdog. More significantly to JPMorgan’s executives and
shareholders, $13 billion is equivalent to 61 percent of the bank’s
profits in all of 2012. Anticipating the settlement in early October,
the bank recorded its first quarterly loss under the leadership of Chief
Executive Officer Jamie Dimon.
That makes it real money, even for the
country’s biggest bank by assets. Despite this walloping, there’s reason
for the company to exhale. The most valuable thing Dimon, 57, gets out
of the deal with U.S. Attorney General Eric Holder is clarity. The
discussed agreement folds in settlements with a variety of federal and
state regulators, including the Federal Deposit Insurance Corp. and the
attorneys general of California and New York. JPMorgan negotiated a
similar tack in September, trading the gut punch of a huge headline
number—nearly $1 billion in penalties related to the 2012 London Whale
trading fiasco—for the chance to resolve four investigations in two
countries in one stroke. In both cases, the bank’s stock barely budged;
its shares have returned 25 percent this year, exactly in line with the
performance of Standard & Poor’s 500-stock index.
That JPMorgan is able to withstand
penalties and regulatory pressure that would cripple many of its
competitors attests both to the bank’s vast resources and the influence
of the man who leads it. The sight of Dimon arriving at the Justice
Department on Sept. 26 for a meeting with the attorney general
underscored Dimon’s extraordinary access to Washington
decision-makers—although the Wall Street chieftain did have to humble
himself by presenting his New York State driver license to a guard on
the street. As news of the settlement with Justice trickled out, the
admirers on Dimon’s gilded list rushed to his defense, arguing that he
struck the best deal he could. “If you’re a financial institution and
you’re threatened with criminal prosecution, you have no ability to
Berkshire Hathaway (BRK/A)
Chairman Warren Buffett told
Bloomberg TV. “Basically, you’ve got to be like a wolf that bares its
throat, you know, when it gets to the end. You cannot win.”
The challenges facing Dimon and his
company are far from over. With the $13 billion payout, JPMorgan is
still the subject of a criminal probe into its mortgage-bond sales,
which could end in charges against the bank or its executives. And other
federal investigations—into suspected bribery in China, the bank’s role
in the Bernie Madoff Ponzi scheme, and more—are ongoing.
The ceaseless scrutiny has tarnished
Dimon’s public image, perhaps irreparably. Once seen as the white knight
of the financial crisis, he’s now the executive stuck paying the bill
for Wall Street’s misdeeds. And as the bank’s legal fights drag on, it’s
worth asking just how many more blows the famously pugnacious Dimon can
Although the $13 billion settlement
would amount to the largest of its kind in the history of regulated
capitalism, it looks quite different broken into its component pieces.
While the relative amounts could shift, JPMorgan is expected to pay
fines of only $2 billion to $3 billion for misrepresenting the quality
of mortgage securities it sold during the subprime housing boom.
Overburdened homeowners would get $4 billion; another $4 billion would
go to the Federal Housing Finance Agency, which regulates
Freddie Mac (FMCC)
Fannie Mae (FNMA);
and about $3 billion would go to investors who lost money on the
securities, Bloomberg News reported.
JPMorgan will only pay fines (as
distinct from compensation to investors or homeowner relief) related to
its own actions—and not those of Bear Stearns or Washington Mutual, the
two troubled institutions the bank bought at discount-rack prices during
the crisis. Aside from shaving some unknown amount off the final
settlement, this proviso enhances Dimon’s reputation as the shrewdest
banker of that era. In 2008, with the backing of the U.S. Department of
the Treasury and the Federal Reserve, who saw JPMorgan as a port in a
storm, Dimon got the two properties for just $3.4 billion. Extending
JPMorgan’s retail reach overnight into Florida and California, Bear and
WaMu helped the bank become the largest in the U.S. by 2011. The
portions of the settlement attributable to their liabilities are almost
certainly outweighed by the profits they’ve brought and will continue to
The smoking gun in each state is not obvious. Some states are low in
opportunities for skilled workers who typically have an easier time finding
full-time work. Nevada. The sunshine states typically have more
opportunities for restaurant and travel employment notorious for part-time
work. California, Illinois, and Rhode Island have immense fiscal problems
that spill over into high taxation that discourages business expansion.
Obamacare especially discourages full-time employment in small and
medium-sized companies, but this is a problem in all 50 states.
Mysteries remain. Why aren't Texas, Alabama, Vermont, and Mississippi in the
list above? I don't know!
There has been a distinctive odor of hype lately
about the national jobs report for June. Most people will have the
impression that the 288,000 jobs created last month were full-time. Not so.
The Obama administration and much of the media
trumpeting the figure overlooked that the government numbers didn't
distinguish between new part-time and full-time jobs. Full-time jobs last
month plunged by 523,000, according to the Bureau of Labor Statistics. What
has increased are part-time jobs. They soared by about 800,000 to more than
28 million. Just think of all those Americans working part time, no doubt
glad to have the work but also contending with lower pay, diminished
benefits and little job security.
On July 2 President Obama boasted that the jobs
report "showed the sixth straight month of job growth" in the private
economy. "Make no mistake," he said. "We are headed in the right direction."
What he failed to mention is that only 47.7% of adults in the U.S. are
working full time. Yes, the percentage of unemployed has fallen, but that's
worth barely a Bronx cheer. It reflects the bleak fact that 2.4 million
Americans have become discouraged and dropped out of the workforce. You
might as well say that the unemployment rate would be zero if everyone quit
looking for work.
Last month involuntary part-timers swelled to 7.5
million, compared with 4.4 million in 2007. Way too many adults now depend
on the low-wage, part-time jobs that teenagers would normally fill. Federal
Reserve Chair Janet Yellen had it right in March when she said: "The
existence of such a large pool of partly unemployed workers is a sign that
labor conditions are worse than indicated by the unemployment rate."
There are a number of reasons for our predicament,
most importantly a historically low growth rate for an economic "recovery."
Gross domestic product growth in 2013 was a feeble 1.9%, and it fell at a
seasonally adjusted annual rate of 2.9% in the first quarter of 2014.
But there is one clear political contribution to
the dismal jobs trend. Many employers cut workers' hours to avoid the
Affordable Care Act's mandate to provide health insurance to anyone working
30 hours a week or more. The unintended consequence of President Obama's
"signature legislation"? Fewer full-time workers. In many cases two people
are working the same number of hours that one had previously worked.
Since mid-2007 the U.S. population has grown by
17.2 million, according to the Census Bureau, but we have 374,000 fewer jobs
since a November 2007 peak and are 10 million jobs shy of where we should
be. It is particularly upsetting that our current high unemployment is
concentrated in the oldest and youngest workers. Older workers have been
phased out as new technologies improve productivity, and young adults who
lack skills are struggling to find entry-level jobs with advancement
opportunities. In the process, they are losing critical time to develop
workplace habits, contacts and new skills.
Most Americans wouldn't call this an economic
recovery. Yes, we're not technically in a recession as the recovery began in
mid-2009, but high-wage industries have lost a million positions since 2007.
Low-paying jobs are gaining and now account for 44% of all employment growth
since employment hit bottom in February 2010, with by far the most
growth—3.8 million jobs—in low-wage industries. The number of long-term
unemployed remains at historically high levels, standing at more than three
million in June. The proportion of Americans in the labor force is at a
36-year low, 62.8%, down from 66% in 2008.
Part-time jobs are no longer the domain of the
young. Many are taken by adults in their prime working years—25 to 54 years
of age—and many are single men and women without high-school diplomas. Why
is this happening? It can't all be attributed to the unforeseen consequences
of the Affordable Care Act. The longer workers have been out of a job, the
more likely they are to take a part-time job to make ends meet.
The result: Faith in the American dream is eroding
fast. The feeling is that the rules aren't fair and the system has been
rigged in favor of business and against the average person. The share of
financial compensation and outputs going to labor has dropped to less than
60% today from about 65% before 1980.
Why haven't increases in labor productivity
translated into higher household income in private employment? In part
because of very low rates of capital spending on new plant and equipment
over the past five years. In the 1960s, only one in 20 American men between
the ages of 25 and 54 was not working. According to former Treasury
Secretary Larry Summers, in 10 years that number will be one in seven.
The lack of breadwinners working full time is a
burgeoning disaster. There are 48 million people in the U.S. in low-wage
jobs. Those workers won't be able to spend what is necessary in an economy
that is mostly based on consumer spending, and this will put further
pressure on growth. What we have is a very high unemployment rate, a slow
recovery and across-the-board wage stagnation (except for the top few
percent). According to the Bureau of Labor Statistics, almost 91 million
people over age 16 aren't working, a record high. When Barack Obama became
president, that figure was nearly 10 million lower.
The great American job machine is spluttering. We
are going through the weakest post-recession recovery the U.S. has ever
experienced, with growth half of what it was after four previous recessions.
And that's despite the most expansive monetary policy in history and the
largest fiscal stimulus since World War II.
In June 1997, THE Journal
published an article called “Computers
in Education: A Brief History.” That article is
still one of the most popular on our website, but — to put it mildly — a lot
has changed in ed tech since then. This is less a sequel to that article
than a companion piece that dips back into the past, traces the trends of
the present and looks to the future, all with an eye toward helping
districts find the right device for their classrooms.
When thinking about the role of technology in
education, the logical starting point is exploring why the connection
between computers and education was ever made in the first place. My
starting point is Logo, an educational programming language designed in 1967
at Bolt Beranek and Newman (BBN) by Danny Bobrow, Wally Feurzeig, MIT
professor Seymour Papert and Cynthia Solomon. This language was a derivative
of the AI programming language LISP, and ran on the PDP-1 computers from
Digital Equipment Corp. Seymour Papert had studied with constructivist
pioneer Jean Piaget, and felt that computers could help students learn more
by constructing their own knowledge and understanding by working firsthand
with mathematical concepts, as opposed to being taught these concepts in a
more directed way.
In 1973 the Xerox Palo Alto Research Center
introduced the Alto computer, designed as the world’s first personal
computer. At Xerox, Papert’s push to turn kids into programmers led to the
development of Smalltalk — the first extensible, object-oriented programming
language — under the direction of Alan Kay. Because these early computers
were captive in the research lab, local students were brought in to explore
their own designs.
Another path to educational technology began that
same year, when the Minnesota Educational Computing Consortium (MECC) was
started in an old warehouse in Minneapolis. Part of the state's educational
software push, the original programs were simulations designed for a
timeshare system running on a mainframe, with terminals placed in schools.
Using this system, students could take a simulated journey along the Oregon
Trail, for example, and learn about the importance of budgeting resources
and other challenges that faced the early pioneers. Another simulation let
the students run a virtual lemonade stand. Years later, the MECC software
was rewritten for early personal computers.
In the early days, educational computing was
focused on the development of higher-order thinking skills.
Drill-and-practice software only became commonplace much later, with the
release of inexpensive personal computers. By the late 1970s, personal
computers came to market and started showing up in schools. These included
the Commodore PET (1977) and Radio Shack TRS-80 (1977), among many other
systems. But the computer that ended up having the greatest impact on
schools at the time was the Apple II, also introduced in 1977. One
characteristic of the Apple II was that it used floppy disks instead of
cassette tapes for storing programs and also supported a graphical display,
albeit at a low level. The first generation of computers in schools was not
accompanied by very much software, though. The customer base was not yet big
enough to justify the investment.
The Uses of Ed Tech, Past and Present
In 1980, Robert Taylor wrote a book,
The Computer in the School: Tutor, Tool, Tutee. The
underlying idea in this book was that students could use computers in three
different ways: 1) As a tutor running simulations or math practice, for
example; 2) as a tool for tasks like word processing; or 3) as a tutee,
meaning the student teaches the computer to do something by writing a
program in Logo or BASIC. This model touches on several pedagogical models,
spanning from filling the mind with information to kindling the fire of
curiosity. Even though technologies have advanced tremendously in the
intervening years, this model still has some validity, and some contemporary
technologies are better suited for some pedagogies than others.
Jensen Comment and Question
This is currently a sick joke because under long-standing low-interest
policies of the Fed savings accounts pay virtually nothing to be taxed.
Also I wonder what proportion of the disabled people are among the 48% of
USA taxpayers who pay zero income taxes?
The bill to make savings accounts for the disabled appears to me to be a
political stunt rather than one of economic caring.
This bill also complicates taxation on joint returns where the income of
the disabled spouse in general is a very small proportion of the taxable
income of the bread-winning spouse. What if the
a huge proportion a couple's $10 million in savings is transferred to the
savings accounts of the disabled spouse? Will these savings then be tax free
if the couple files separate returns?
I don't know if the bill places a limit on the
amount of savings income that can be tax exempt.
Rachel Shteir suggests that the sex trade would be less of a problem if
prestigious universities were cheaper for poor and middle-class families.
Possibly for some young women and men in the sex trades this is true, but for
those like Belle Knox, who turn pornography or prostitution into big money. A
college diploma becomes an insurance policy against poverty or serves as an
ego-satisfying accomplishment for Belle Knox.
It seems to me that how students finance their higher education should not be
a major concern. Most students engaged in the sex trades are not media stars
like Belle Knox and/or are not prostitutes bringing their johns to campus.
One issue is when students commit crimes to finance their educations.
Pornography is not necessarily a crime like prostitution, bank robbery, and drug
dealing. Students should probably be expelled for crimes that would get college
employees fired. For example, a faculty member who is convicted prostitution or
bank robbery would probably get fired from virtually any USA college, although
this may not be the case for re-hiring after the sentence is served. To my
knowledge Belle Knox, however, is not being expelled from Duke University.
A year after vowing to take more of its
law-enforcement cases to trial, Securities and Exchange Commission officials
now say the agency will increasingly bypass courts and juries by prosecuting
wrongdoers in hearings before SEC administrative law judges, also known as
ALJs. "I think you'll see that more and more in the future," SEC Enforcement
Director Andrew Ceresney told a June gathering of Washington lawyers, adding
that insider trading cases were especially likely to go before
The 2010 Dodd-Frank law vastly expanded
SEC discretion to charge wrongdoers administratively, and this summer the
agency increased the number of administrative law judges on staff to five
from three in anticipation of an increased workload. This follows a recent
string of SEC jury-trial losses in federal courts, though agency officials
insist the timing is coincidental.
Coincidence or not, a surge in
administrative prosecutions should alarm anyone who values jury trials, due
process and the constitutional separation of powers. The SEC often prefers
to avoid judicial oversight and exploit the convenience of punishing alleged
lawbreakers by administrative means, but doing so is unconstitutional. And
if courts allow the SEC to get away with it, other executive-branch agencies
are sure to follow.
To begin with the obvious,
executive-branch agencies like the SEC are not courts established under
Article III of the Constitution. These agencies exercise legislative power
through rule-making and executive power through prosecution, but the
Constitution gives them no judicial power to decide cases and
controversies—especially not the very cases they are prosecuting. Executive
agencies usurp that judicial power when they shunt penal law-enforcement
prosecutions into their own captive administrative hearings.
Nearly 70 years ago, the Administrative
Procedures Act established today's system of quasi-judicial tribunals
overseen by administrative law judges. But these tribunals are not courts,
and the administrative law judges are not life-tenured judicial officers
appointed under Article III of the Constitution. They are executive-branch
employees who conduct hearings at the direction of agency leaders following
procedural rules dictated by the agencies themselves.
The SEC's rules favor the prosecution. The
rules give the accused only a few months to prepare a defense—after SEC
prosecutors have typically spent years building the case—and they give
administrative law judges only a few months after the hearing to evaluate
the mountains of evidence presented and write detailed decisions that
typically run several dozens of single-spaced pages. The rules also allow
SEC prosecutors to use hearsay and other unreliable evidence, and they
severely limit the kinds of pretrial discovery and defense motions that are
routinely allowed in courts.
Administrative hearings also do not have
juries, even when severe financial penalties and forfeitures are demanded.
And because these hearings are nominally civil rather than criminal, guilt
is determined by a mere preponderance of the evidence—the lightest
evidentiary burden known to modern law—rather than beyond reasonable doubt.
In short, while administrative prosecutions create the illusion of a fair
trial, and while administrative law judges generally strive to appear
impartial, these proceedings afford defendants woefully inadequate due
More important, the proceedings violate
the Constitution's separation of powers. Every phase of the proceeding, and
every government official involved, is controlled by the agency in its role
as chief prosecutor. The SEC assigns and directs a team of employees to
prosecute the case. It assigns another employee, the administrative law
judge, to decide guilt or innocence and to impose sanctions. Appeals must be
taken to the same SEC commissioners who launched the prosecution, and their
decision is typically written by still other SEC employees.
The entire process ordinarily takes years,
during which many SEC targets are bankrupted by legal costs and their
inability to find work with reputable companies. Only after SEC
commissioners decide all appeals can the accused finally seek relief from a
federal court. But appeals rarely succeed because the law requires courts to
defer to the agency's judgment, especially on disputed facts.
The SEC used to employ administrative
proceedings for relatively uncontroversial purposes such as preventing
suspicious stock offerings, suspending rogue brokers or consummating
settlements where no court involvement was necessary. But through a series
of laws beginning in the 1980s and continuing through
the SEC has been transformed from a conventional regulator into a penal
law-enforcement prosecutor with enormous power to punish private citizens
and businesses. In 2013 the agency obtained a record $3.4 billion in
monetary sanctions, and it now routinely seeks million-dollar sanctions
against accused wrongdoers.
On its website, the SEC accurately
describes itself as "first and foremost" a law-enforcement agency. As such,
the agency should play no role in deciding guilt and meting out punishment
against the people it prosecutes. Those roles should be reserved for juries
and life-tenured judges appointed under Article III of the Constitution.
Today's model of penal SEC law enforcement is categorically unsuited for
rushed and truncated administrative hearings in which the agency and its own
employees serve as prosecutor, judge and punisher. Such administrative
prosecution has no place in a constitutional system based on checks and
balances, separation of powers and due process.
Mr. Ryan, a former assistant director of enforcement
at the SEC, is a partner with King & Spalding LLP, and his clients include
companies and individuals involved in SEC law-enforcement proceedings.
Auditors experience significant problems auditing
estimates, and this increasingly puts financial reporting quality at
risk. Based on analyses of the specific errors that auditors commit, we
propose that auditors need to be able to think more broadly and
incorporate information from a variety of sources in order to improve
audit quality for these important accounts. We experimentally
demonstrate that a deliberative mindset intervention improves auditors’
ability to identify unreasonable estimates by improving their ability to
identify and incorporate into their analyses contradictory information
from other parts of the audit. We perform additional analyses to
demonstrate that our intervention improves auditor performance by
causing them to think differently rather than simply to work harder. We
demonstrate that thinking more broadly can improve the identification of
unreasonable estimates and, in doing so, we provide new directions for
addressing audit quality issues.
The Balanced Scorecard is one of the most well-known concepts in the field
of management accounting and
control. Since its introduction in 1992, the Balanced Scorecard has been the
subject of much attention in academic research and in practice. The concept
has diffused to many countries and regions, including Norway, where the
concept is often referred to as "balansert mĺlstyring". This article
presents a case study of the concept's evolution pattern in the Norwegian
context. The study shows that the Balanced Scorecard concept was very
popular around the turn of the century, but also that the concept's
popularity has not fallen as much as would be predicted by management
fashion theory. Instead, the data show that the concept has become "good
practice" in Norway. It can therefore be argued that the concept has become
institutionalized, and that it has become an "enduring fashion". Towards the
end of the paper these results are discussed in relation to extant research
on Balanced Scorecard and theories of management fashions.
U.S. retailers are facing a steep and persistent
drop in store traffic, which is weighing on sales and prompting chains to
slow store openings as shoppers make more of their purchases online.
Aside from a small uptick in April, shopper visits
have fallen by 5% or more from a year earlier in every month for the past
two years, according to ShopperTrak, a Chicago-based data firm that records
store visits for retailers using tracking devices installed at 40,000 U.S.
outlets. Even as warmer temperatures replace the harsh winter weather this
year, store visits fell by nearly 7% in June and nearly 5% in July,
according to ShopperTrak.
New data from Moody's Investors Service shows that
the shift to online sales has prompted retailers to scale back store
openings and will likely lead them to pare back their fleets even more in
coming years, as more than $70 billion in lease debt expires by 2018. Growth
in store counts at the 100 largest retailers by revenue has slowed to less
than 3% from more than 12% three years ago, according to Moody's.
The pressure comes as consumer tastes are changing.
Instead of wandering through stores and making impulse purchases, shoppers
use their mobile phones and computers to research prices and cherry-pick
promotions, sticking to shopping lists rather than splurging on unneeded
items. Even discount retailers are finding it harder to boost sales by
lowering prices as many low-income consumers struggle to afford the basics
regardless of the price.
Here in the boondocks we buy many of our grocery items and virtually all of our
clothing online. We love Amazon Prime and Amazon's very efficient and free
I don't buy bigger items online that are more likely to need service. For
this I love the Sears local-store for things like lawn mowers, leaf blowers,
lawn sweepers, power trimmers, snow throwers, chain saws, refrigerators,
freezers, etc. I especially like Sears home service warranties on heavy items
like snow throwers, lawn sweepers, dehumidifiers (for the basement), and air
conditioners. A Sears home service warranty includes one free annual at-home
maintenance and cleaning service for things like filters on air conditioners,
freezers, and refrigerators. Years ago I grew tired of over-stuffed
refrigerators. Even though there are only two of us in the cottage, in the
basement we have two extra large refrigerators plus an upright freezer. Since
Erika is troubled by stairs we also have an elevator that I recommend highly for
multi-story homes. Retirement is not all that bad.
What is the most useful thing that I now use that I never owned before
The bucket loader on my tractor. Back surgeons must hate bucket loaders. An 80lb
bag of top soil is now a piece of cake as long as the store workers load it into
the back of my jeep. At home I simply roll heavy things into the bucket loader.
How did I ever manage in my previous life without a bucket loader?
When plagiarism is detected, professors and celebrities seem to me to be the
least likely to lose their jobs or pay a heavy price. Punishments vary, but they
seldom are expelled. Doctoral students may pay a heavy price by having theses
rejected and a scarlet letter in the job market.
An investigation into plagiarism allegations
against an Arizona State University professor of history in 2011 found him
not guilty of deliberate academic misconduct, but the case remained
controversial. The chair of his department’s tenure committee resigned in
protest and other faculty members spoke out against the findings, saying
their colleague – who recently had been promoted to full professor – was
cleared even though what he did likely would have gotten an undergraduate in
Now, Matthew C. Whitaker has written a new book,
and allegations of plagiarism are being levied against him once again.
Several blogs – one anonymously, and in great detail – have documented
alleged examples of plagiarism in the work. Several of his colleagues have
seen them, and say they raise serious questions about Whitaker’s academic
Continued in article
Celebrities often do not care very much when their plagiarism is detected,
especially if they've already achieved celebrity status. Vladimir Putin not only
did not write a single word in his Ph.D. thesis, it's not clear that he ever
read a single word in his Ph.D. thesis ---
I think he could care less that the world knows he cheated for his doctorate
(which is not all that uncommon in Russia).
Arianna Huffington is set to appear at the
University of Virginia this week to meditate on its famed “lawn” with
spiritualist Deepak Chopra. But a petition started by a former graduate
student there calls for Huffington’s invitation to be rescinded, citing
allegations that she once plagiarized a revered professor’s work.
The Massachusetts Institute of Technology had the
most instances of digital piracy and other copyright infringements among
American colleges and universities in 2008 for the second year in a row,
according to a report released by Bay-TSP, a
California company that offers tracking applications for copyrighted works.
There are times when a single, unexpected
death sparks a change in medical practice. In 2012 a 12-year-old boy named
Rory Staunton died after being misdiagnosed in a New York City emergency
room. Multiple physicians missed the symptoms, signs and lab results
pointing to a streptococcal bacterial infection that led to septic shock and
overwhelmed Rory's body. The tragedy prompted New York state in January 2013
to introduce "Rory's regulations," a set of stringent protocols aimed at
preventing similar incidents in hospitals.
Comparable initiatives to prevent
misdiagnosis have not happened on a national level—but there might be reason
to expect change soon.
New research my colleagues and I published
in April in the journal BMJ Quality and Safety shows the extent of the
problem. Based on previous studies of patients seeking outpatient care, we
extrapolated data on diagnostic error to the entire U.S. adult population.
Each year an estimated 5% are misdiagnosed based on currently available
This may sound like a decent track
record—95% accuracy—given that doctors are grappling with more than 10,000
diseases in patients who present a staggering array of symptoms. But a 5%
error rate means that more than 12 million adults are misdiagnosed every
year, and our study may understate the magnitude.
Still, after years of taking a back seat
to problems such as medication and treatment errors, misdiagnosis is getting
attention. In 2011 my research colleague in projects on misdiagnosis Mark
Graber founded the nonprofit Society to Improve Diagnosis in Medicine, which
now holds an annual medical conference on diagnostic error. More recently,
the Institute of Medicine, an influential branch of the National Academy of
Sciences that advises Congress on health care, is preparing a comprehensive
action plan and hosting its second major expert meeting on Thursday and
Friday. In 2015 the IOM will issue a report on misdiagnosis.
Meantime, the U.S. health-care community
can take steps to reduce the problem.
The first is to improve communication
between physicians and patients. Patients tend to be the best source of
information for making a diagnosis, but often essential doctor-patient
interactions such as history and examination are rushed, leading to poor
decisions. As new forms of diagnostic and information technologies are
implemented, managing large amounts of data will become increasingly
complex, and physicians could become more vulnerable to misdiagnosis.
This problem exists in large part because
time pressures and paperwork often force physicians to spend more time
struggling to get reimbursed than talking with patients. Extra hours spent
pursuing a correct diagnosis are not compensated beyond the payment for the
visit, an already small sum for primary-care physicians.
Patients can't solve this problem, but
insurers can streamline administrative paperwork and re-examine the logic
behind reimbursement policies. Hospital systems can help by providing
high-tech decision support tools and encouraging physicians to collaborate
on tough cases and learn from missed opportunities.
Metrics also need work. As the old
business adage goes, you can't manage what you don't measure. Yet most
health-care organizations aren't tracking misdiagnosis beyond malpractice
claims. Doctors need mechanisms to provide and receive timely feedback on
the quality and accuracy of our diagnoses, including better patient
follow-up and test-result tracking systems.
Electronic health records will help
eventually, but slow innovation in this area has frustrated many physicians.
And most doctors still lack access to electronic patient data gathered by
other physicians. Doctors can make a more informed diagnosis when they can
see the disease progression or learn what other doctors have discovered
about the patient.
Finally, patients must start keeping good
records of each meeting with a doctor, bringing the information to
subsequent medical appointments and following up with the physician if their
condition doesn't improve. No news from the doctor is not necessarily good
There is much we don't understand about
the burden, causes and prevention of misdiagnosis. The IOM report will spur
progress, but health-care providers, patients, hospitals and payers can all
help. The health outcomes of at least 12 million Americans each year depend
Dr. Singh is chief of Health Policy, Quality and
Informatics at the Michael E. DeBakey VA Medical Center, and an associate
professor at Baylor College of Medicine.
For me this raises the question of why so many mistakes are made by
professionals. For auditors and physicians the reason may be budgeted time and
Auditors are often led by budgets to conduct cheaper analytical reviews as
opposed to detail testing. Physicians are sometimes led by third party insurance
payment bounds (e.g., what Medicare) will pay for an office visit) to hurry
their time spent with patients.
There's an exploding trend to have patients screened by non-physicians in HMO
factories and even in physician offices where physician assistants do much of
the initial screening.
In CPA auditing by big firms it's systemic to send out teams of neophyte
auditors, many of them newly graduated, to do a lot of the audit work under
supervision that is sometimes questionable.
Company Accounting Oversight Boardhas
issued a Release discussing the provision of the Sarbanes-Oxley Act of 2002
that authorizes the PCAOB to impose sanctions on registered public
accounting firms and their supervisory personnel for failing to reasonably
supervise associated persons.
“Through its inspections and investigations,
the PCAOB has observed that supervision processes within firms are
frequently not as robust as they should be, and that supervisory
responsibilities are often not as clearly assigned as they should be," said
PCAOB Acting Chairman Daniel L. Goelzer. "This Release seeks to highlight
the Board’s views on the scope for using the authority provided in the Act
to address those problems."
The PCAOB issued a two-part Release
addressing matters related to the application of Section 105(c)(6) of the
Sarbanes-Oxley Act, which authorizes the PCAOB to sanction registered firms
and their supervisory personnel for failing to reasonably supervise
associated persons who violate certain laws, rules, or standards.
Part I of the Release serves to highlight
the scope of the application of Section 105(c)(6) for the information of
registered firms, their associated persons, and the public generally. Part I
is not a rule or rule proposal, and the PCAOB is not seeking comment on Part
Part II of the Release discusses concepts
relating to possible rulemaking or standard setting that, without imposing
any new supervision responsibilities, would require firms to make and
document clear assignments of the supervision responsibilities that are
already required to be part of any audit practice.
The PCAOB is considering whether such rules
would further the public interest and protect investors by increasing
clarity about who, within a firm, is accountable for various
responsibilities that bear on the quality of a firm’s audits.
The PCAOB is soliciting public comment on
the concepts discussed in Part II. The comment period is open until Nov 3,
Finally, on Friday November 22nd, the
publicly reprimanded Deloitte for its failure to
adequately address quality control problems related to its audit practice by
releasing the previously nonpublic portions of the PCAOB’s April 16, 2009
inspection report. And as usual, we see that this audit “emperor has no
clothes.” Is an audit being done in name only? The PCAOB raised
the following serious audit quality concerns in its report (PCAOB Release
Did Deloitte perform appropriate
procedures to audit significant estimates, including evaluating the
reasonableness of management's assumptions and testing the data
supporting the estimates (page 10).
How appropriate was Deloitte's
approach in using the work of specialists and data provided by service
organizations when auditing significant management estimates (page 11).
Specifically, the PCAOB raised questions about Deloitte’s testing of
controls and data, audit documentation, etc.
Did Deloitte fail to obtain
sufficient competent evidential matter, at the time it issued its audit
report, to support its audit opinions, specifically as it related to the
exercise of due care, professional skepticism, supervision and review
really depressing about the these audit quality problems, is that they were
almost exactly the same as those noted in the PCAOB’s
May 19, 2008 report (pages 12
through 16). Also, problematic is the waning interest of the popular press
in these PCAOB report releases, suggesting that GAFS’ strategy to downplay
and even ignore the PCAOB just may be working.
We’ve all heard the expression that “cash
is king.” This well-worn phrase often is used when
assessing the financial health or investment prospects of a firm.
Those of you that have followed the Grumpies for a while, may recall
a past rant on how companies increasingly “manage” reported cash
balances and cash flows (see
What’s Up With Cash Balances?). In that
diatribe, we described the games that global financial managers now
play with cash to overstate performance, as well as the competence
decline in entry-level accountants in the auditing and reporting of
cash. Unfortunately, things have not improved during the past three
years from either an academic OR a real world perspective.
First, the bad news from the
classroom front. A month ago, I surveyed my summer graduate
students (Master of Accounting candidates) on their undergraduate
accounting/auditing education in the area of cash. These students,
most of whom attended well-regarded bachelor degree programs, almost
unanimously reported that their accounting instructors devoted
little or no time to cash or related controls (e.g., bank
reconciliations, etc.), and none had even heard of a
proof of cash. When it came to cash
disclosures, the results were equally troubling. None had ever been
exposed to cash policy disclosures or the notion of restricted cash
balances. Obviously, cash is NOT king to some of my ivory tower
Surely, it can’t be this bad in
the real world, right? WRONG! The recent fascination with
corporate inversions, transactions in
which U.S. companies make overseas acquisitions to reduce their tax
burden on income earned abroad, has drawn this grumpy old
accountant’s attention to yet another potentially misleading
disclosure…this time one associated with “trapped cash.”
Trapped cash generally refers to corporate
cash balances held in wholly-owned foreign subsidiaries.
The Bigger Sin: “Trapped
Cash” or Non-Payment of Taxes?
So what’s the problem? To avoid U.S. taxation of
foreign income earned abroad, companies commonly assert that they
have no intention ofreturning the “trapped cash”
associated with foreign earnings to the United States. Here are a
couple of examples from three well-known tax minimizers:
My beef is not with their obvious and
well-publicized tax avoidance practices, but rather that they report
“trapped cash” balances as unrestricted cash in
their consolidated balance sheets. Clearly, such cash balances are
not available for general corporate use as intimated by Google
above, therefore the use of these liquid assets is
restricted to the jurisdiction where the cash resides.
Consequently, restrictions on “trapped cash” and related assets
should be reported in the financial statements, and 10Q and 10K
disclosures expanded to enhance reporting transparency.
The Mystery is Why Bank of America Does not Appeal It's New $17 Billion Fine
All the Way to the Supreme Court
Why isn't former Treasury Secretary Hank Paulson being punished?
These Countrywide Financial mortgage lending crimes were committed before
Paulson foreced BofA to buy out Countrywide Financial.
After the subprime collapse then BofA CEO, Ken Lewis, most certainly did not
want to use BofA money to stop the free fall of Merrill Lynch and Countrywide
Financial. However, U.S. Treasury Secretary Hank Paulson resorted to personal
blackmail according to Ken Lewis.
"Bank Chief Tells of U.S. Pressure to Buy Merrill Lynch," by Louise Story
and Jo Becker, The New York Times, June 11. 2009 ---
If you thought the last financial crisis was
expensive, wait until taxpayers see how much it costs to rescue banks when
they have to do it all on their own. The U.S. Department of Justice aims to
extract as much as $17 billion from Bank of America BAC +0.26% for the crime
of taking problems off Washington's hands in 2008.
Regulators were high-fiving when the bank bought
Countrywide Financial and then Merrill Lynch during the crisis. But now
Washington seems intent on making bank shareholders pay again for the
problems that caused these firms to need a rescue in the first place. Come
the next crisis, CEOs will know to run in the other direction when the
government offers a deal on a failing firm. And when private capital flees,
guess whose money will be used to prop up the banking system.
In some earlier post-crisis settlements, the feds
at least pretended that the cases were about making mortgage investors or
borrowers whole. But the pending Bank of America settlement appears to
consist largely of a penalty for alleged mortgage sins committed by the two
failing companies the feds wanted the bank to buy, and in one case pressured
it to buy.
The new game at Justice seems to be to come up with
a big dollar figure to be paid by bank shareholders—big enough to persuade
progressives that the department is being tough on Wall Street—and then fill
in the blanks on the alleged legal violations. So we can't say for sure what
the final deal will claim the bank did. But BofA must be taking the fall for
Countrywide and Merrill Lynch because the bank itself originated only 4% of
the bad mortgage paper for which it is now responsible.
The bank has already shovelled out roughly $60
billion in mortgage settlements to various public and private parties, far
more than any other bank. Now the feds are coming back to further punish
Bank of America for its foolish acquisitions. But at the time the bank made
these deals, the regulators were celebrating.
In 2008 Federal Reserve officials were concerned
about their exposure to Countrywide. As BofA prepared for an early July
closing on its purchase of Countrywide, New York Fed banking supervisor
Arthur Angulo told the Federal Open Market Committee that Countrywide's use
of one Fed lending facility "should come to a close next week, knock on
In his recent memoir, former New York Fed President
and Treasury Secretary Timothy Geithner, who thought Countrywide was a
systemic threat, wrote that Bank of America's investment "eased fears of a
When the bank agreed to buy Merrill a few months
later, regulators were once again gratified. St. Louis Fed President James
Bullard said at a September 16 meeting of the Federal Open Market Committee
that the Merrill deal had removed one of the "large uncertainties looming
over the economy." Regulators were so pleased that when BofA CEO Ken Lewis
later expressed a desire to back out of the deal, then-Treasury Secretary
Hank Paulson threatened to fire him and gave the bank another $20 billion in
TARP rescue money to absorb Merrill.
Bank of America finished repaying its $45 billion
in TARP loans in 2009. But we wonder if its shareholders will ever stop
paying Washington for the deals Washington wanted—and even demanded—during
SUMMARY: Top executives of Florida computer-equipment company QSGI
Inc. have been charged with misrepresenting the company's books to increase
the amount of money they could borrow. The authorities allege that
co-founders Messrs. Sherman and Cummings misled the company's external
auditors and had poor internal controls. The deficiencies continued until
the company filed for bankruptcy in July 2009.
CLASSROOM APPLICATION: This article is good to use for coverage of
both internal controls and also misrepresentation. The case is a good
illustration of the implications of having weak internal controls that lead
to intentional or unintentional misstatements in the financial statements.
1. (Introductory) What are the facts of the case in the article?
What agency was involved? Why was it involved in the case?
2. (Advanced) What were the inventory control problems detailed in
the article? Do those problems seem to be a result of negligence or
intentional actions? Why? What responsibilities do CEOs and CFOs have to
insure that financial records properly record the situation in the company?
3. (Advanced) What sanctions did Mr. Cummings agree to accept? Do
these seem appropriate sanctions for his actions?
4. (Advanced) The article states that Mr. Cummings did not admit or
deny wrongdoing. Why would the SEC not require an admission of wrongdoing?
Why did he agree to sanctions if the SEC did not prove he participated in
Reviewed By: Linda Christiansen, Indiana University Southeast
Top executives of Florida computer-equipment
company QSGI Inc. QSGI -42.50% have been charged with misrepresenting the
company's books to increase the amount of money they could borrow, the
Securities and Exchange Commission said Wednesday.
QSGI Inc.'s Co-Founder and former Chief Financial
Officer Edward L. Cummings has agreed to pay a $23,000 a penalty to settle
the charges, the agency said. Under the terms of the settlement, Mr.
Cummings, who didn't admit or deny wrongdoing, agreed to a five-year ban
from practicing as an accountant of any entity regulated by the SEC and from
serving as an officer or director of a publicly traded company, the agency
The case against Co-Founder and Chief Executive
Marc Sherman is pending. Mr. Sherman is to file an answer within 20 days,
according to the SEC.
Attempts to reach Mr. Sherman and the company for
comment were unsuccessful.
The authorities charge Messrs. Sherman and Cummings
misled the company's external auditors, withholding, for example, that
inventory controls at the company's Minnesota operations were inadequate.
The authorities charge the West Palm Beach, Fla.,
company failed to design inventory-control procedures that took into account
such things as employees' qualifications and experience levels. Sales and
warehouse employees often failed to document the removal of items from
inventories and when they did, accounting personnel often failed to process
the paperwork and adjust inventory in the company's financial reporting
system, the SEC said.
The inventory control problems emerged at the
Minnesota facility beginning in 2007, when key personnel left, according to
the SEC. Workers assigned to replace the accounting staff, however, lacked
the necessary accounting background, the authorities said, adding, training
either didn't take place or was inadequate, the SEC says.
The deficiencies continued until the company filed
for bankruptcy in July 2009, the SEC added.
Also, the authorities alleged, Mr. Sherman directed
Mr. Cummings to accelerate the recognition of certain inventory and accounts
receivables by as much as a week at a time, improperly increasing revenue,
to maximize how much money the company could borrow from its chief creditor.
Rich Kinder was the President and Chief Operating Officer of Enron from
1990-1996. He resigned from Enron several years before the Enron scandals broke.
To my knowledge he was never implicated in those scandals.
A going away party given for him by his Enron colleagues in 1996 is quite
hilarious. Among other things it features Ken Lay, Jeff Skilling, and then Texas
Governor George W. Bush.
Watch the Video, especially the part where Jeff Skilling proposes Hypothetical
Future Value (HPV) accouinting ---
Be patient. This uncompressed video is very slow to load. Note that close
friends are playing the parts of key players in the video like Jeff Skilling and
Rich Kinder (played by a woman named Peggy in this home video). Governor Bush
plays his own part.
From The Wall Street Journal Weekly Accounting Review on August 22, 2014
SUMMARY: Kinder Morgan may be giving up the tax-advantaged
partnerships that it popularized, but the pipeline giant is unlikely to pay
more taxes itself soon. In fact, projected tax savings are a big part of
what is fueling the $44 billion deal to consolidate Kinder's four entities
into one. The Houston-based company says the deal will generate about $20
billion in income-tax savings for it in the next 14 years.
CLASSROOM APPLICATION: This article presents an additional angle of
the Kinder Morgan consolidation. It offers an interesting look at tax
planning/strategy in structuring a deal.
1. (Introductory) What are the facts of the consolidation and tax
strategy discussed in the article?
2. (Advanced) Why is Kinder Morgan making this change? What is the
business purpose (other that tax implications)?
3. (Advanced) What tax benefits will Kinder Morgan derive from the
business changes it is making? Are these significant benefits, given the
size of the business?
4. (Advanced) How will Kinder Morgan record the consolidation
changes in its accounting records? What journal entries will make? How will
the financial statements change?
Reviewed By: Linda Christiansen, Indiana University Southeast
SUMMARY: Kinder Morgan Inc.'s $44 billion plan to consolidate its
pipeline companies was greeted with excitement by Wall Street, which expects
the new streamlined company to snap up other pipeline partnerships. But some
investors in Kinder Morgan's master limited partnerships may not be happy as
the consolidation could leave them with big, unexpected tax bills.
Houston-based Kinder Morgan it would swallow three affiliated companies, two
of which are organized as MLPs. Such partnerships have attracted investors
because they offer hefty distributions that qualify for deferred taxes.
CLASSROOM APPLICATION: This article is useful for use when covering
partnership accounting and deferred taxes. It is also interesting to show
how a change in the form of business can result in a tax bill.
1. (Introductory) What are the facts of the Kinder Morgan situation
discussed in the article? What is Kinder Morgan planning?
2. (Advanced) What is the tax impact of the changes planned by
Kinder Morgan? Who will be affected? Did those parties anticipate these
changes might happen? Have they planned for it?
3. (Advanced) Why is Kinder Morgan making this change? What is the
business purpose? Has the company acknowledge the tax impact of these
changes? Is the benefit of the changes on business worth the tax impact on
4. (Advanced) What were the plans of some investors' when they
purchased investments in Kinder Morgan? What long-term plans did some
investors have? What tax advantages were they planning to use?
5. (Advanced) How will Kinder Morgan record these changes in its
accounting records? What journal entries will make? How will the financial
Reviewed By: Linda Christiansen, Indiana University Southeast
Kinder Morgan Inc. KMI -1.01% 's $44 billion plan
to consolidate its pipeline companies was greeted with excitement by Wall
Street, which expects the new streamlined company to snap up other pipeline
But some investors in Kinder Morgan's master
limited partnerships may not be happy as the consolidation could leave them
with big, unexpected tax bills, tax experts said.
Houston-based Kinder Morgan said Sunday it would
swallow three affiliated companies, two of which are organized as MLPs. Such
partnerships have attracted investors because they offer hefty distributions
that qualify for deferred taxes.
Richard Kinder, the company's founder and chief
executive, said on Monday that energy MLPs are a "fertile field to do a
little grazing in." Once a sleepy corner of energy-infrastructure investing,
the number of MLPs has grown rapidly, from just 38 a decade ago to 120 today
with a combined market value of around $560 billion.
Mr. Kinder said in a call with investors that the
deal for investors in publicly traded MLPs Kinder Morgan Energy Partners KMP
-1.19% LP and El Paso Pipeline Partners EPB -1.24% LP was a "tremendously
valuable transaction" because dividend growth at the surviving company would
be faster than the payouts at those MLPs.
Investors had been concerned about how Kinder could
continue to increase the payouts from its partnerships. With a market value
of over $40 billion, Kinder Morgan Energy Partners would have needed large,
high-return projects to make meaningful increases to its revenue.
Pressure to increase their distributions is likely
to lead other MLPs into mergers or other deals, said Jason Spann, a Deloitte
Tax LLP partner who advises on mergers and acquisitions.
"It looks like the stock market is treating this
well, so I expect to see some copycats," he said. MLPs also might convert to
regular corporations as rising interest rates make the partnerships less
attractive as investments, as occurred in the 1980s, he said.
Shares of Kinder Morgan Energy Partners and El Paso
Pipeline Partners, rose 17% and 21%, respectively, on Monday, while Kinder
Morgan Inc.'s stock advanced 9%. Shares of Kinder Morgan Management KMR
-1.49% LLC, which isn't an MLP, rose 24%. Under the proposed deal, owners of
the three Kinder-related companies would receive cash and shares in Kinder
Kinder Morgan Energy Partners also was paying about
half its cash-flow to its manager, Kinder Morgan Inc. Analysts said that
made it hard for the MLP to invest in the pipelines and other projects
needed to service the country's new oil and gas fields. "You've got to be
structured financially to be a faster-growing company," said UBS analyst
Expectations that the deal would require Kinder
Morgan investors to move cash to other MLPs helped lift prices overall for
such partnerships, said Greg Reid, a managing director at Salient Partners
LP, a Houston-based asset manager with $4.3 billion in MLPs under
Energy companies created MLPs as a way to raise
money and issue debt backed by pipelines and other assets. But Moody's
Investors Service warned in a recent research report that such partnerships
provide "less protection to investors than that of a typical public
company." MLPs typically don't have annual meetings to elect directors or
have independent directors who oversee strategy.
Several tax advisers said individual investors in
Kinder's MLPs could face unwelcome tax bills.
Because Kinder Morgan Energy Partners is organized
as a partnership that benefits from substantial deductions, the taxes on its
substantial quarterly payouts were deferred.
When the units are sold or exchanged—as they will
be in the reorganization—the deferred taxes come due.
"In this deal, one group of stakeholders will owe
tax so that the company as a whole can benefit," said Robert Willens, an
independent tax expert in New York.
Most of that income will probably be taxed at
ordinary rates, which are higher than long-term capital-gain rates, said
Robert Gordon, a tax strategist who heads Twenty-First Securities Corp. in
The tax could be especially unwelcome for investors
who planned to hold the units until death, when they could skip paying the
deferred taxes. In effect, Mr. Gordon said, these people will owe tax they
wouldn't otherwise have had to pay. The individual impact would vary widely,
depending on when the units were bought and other factors, he said.
SUMMARY: Cloud computing can yield significant benefits, from
increasing speed to market and achieving better economies of scale to
improving organizational flexibility and trimming spending on technology
infrastructure and software licensing. As organizations increasingly migrate
to cloud computing, however, they could be putting their data at significant
risk. Positioning the internal audit (IA) function at the forefront of cloud
implementation and engaging IA in discussions with the business and IT early
on can help address potential risks.
CLASSROOM APPLICATION: This article offers an example how the
internal audit function of a business operates, in this case specifically
with cloud computing.
1. (Introductory) What is the internal audit (IA) function of a
business? Why would a business use IA?
2. (Advanced) What is cloud computing? What is it value to a
business? What new issues might it bring to the business?
3. (Advanced) What value can the IA function bring to an
organization's adoption of cloud computing? What problems could occur if the
organization does not engage internal auditors in the process?
4. (Advanced) What are the various stages of the process in which
IA can help? In which stage do you see the greatest value added by IA? Why?
Reviewed By: Linda Christiansen, Indiana University Southeast
Cloud computing can yield significant benefits,
from increasing speed to market and achieving better economies of scale to
improving organizational flexibility and trimming spending on technology
infrastructure and software licensing. As organizations increasingly migrate
to cloud computing, however, they could be putting their data at significant
risk. Those risks include reduced levels of control as information
technology (IT) departments are bypassed, as some business owners opt to
obtain services more quickly and cheaply by creating their own “rogue”
technology environments via the cloud.
Positioning the internal audit (IA) function at the
forefront of cloud implementation and engaging IA in discussions with the
business and IT early on can help address potential risks. “Internal
auditors view the business through a risk lens,” says Michael Juergens, a
principal at Deloitte & Touche LLP. “With their deep understanding of risk
mitigation, internal auditors can work with the business and the IT function
to build a framework for assessing and mitigating the risks associated with
Broadly defined, cloud computing is a model for
enabling ubiquitous on-demand network access to a shared pool of
configurable computing resources and services, which can be rapidly
provisioned and released with minimal management effort or service provider
interaction. The IA function can provide assurance on the effectiveness of
risk mitigation efforts tied to cloud utilization, explains Mr. Juergens.
“Before entering into agreements with cloud vendors or potential customers,
a thorough assessment of the current vendor procurement process should be
conducted by IA to determine how to mitigate cloud risks the company may be
taking on,” he says. “And while an organization’s information security group
can build cloud monitoring capabilities, IA can assist and assess the
effectiveness of the control environment and prevent the IT department being
left out of the loop.”
A Steady Migration to the Cloud
Companies are migrating to the cloud in such
numbers because of significant advantages it can provide. Once the migration
to cloud functionality is complete, organizations no longer face the task of
creating and maintaining large data centers and developing proprietary
complex systems. The expense of software upgrades or application patches is
carried by the provider, which can allocate these costs across a wide
customer base. Freed from large up-front capital investments, time-consuming
installation and hefty maintenance costs, IT departments can focus on
value-added activities that promote the business. While not every
organization today has fully embraced cloud computing, chances are cloud
services will be the norm within the next decade.
The growing consumer use of social media and mobile
technologies has also added to the demand for cloud services, as businesses
seek better and faster ways to reach out to existing and potential
customers. Some companies go beyond using the cloud to provide customer
services. For instance, in an effort to focus its IT operations on business
services, an online video rental and streaming company moved its internal
applications to a cloud service provider and began using software as a
service (SaaS) applications. Even governments are getting in on the game: A
large metropolitan city equipped all its employees with an application for
both email and cloud-based collaboration.
The shift to cloud computing has essentially
extended the boundaries of the traditional computer processing environment
to include multiple service providers,” says Khalid Wasti, a director at
Deloitte & Touche LLP. “This brings a complex set of risks to an
organization’s data as it travels through the cloud.” When a company opts
for the speed and convenience of moving to the cloud, it must often
relinquish control not only of its own data, but that of its customers.
Confidentiality, security and service continuity become critical
considerations—as does regulatory compliance, which remains the
responsibility of the business,” Mr. Wasti adds.
How IA Can Help Assess Risks
As an initial step, an organization should work
with IA to create a Cloud Risk Framework Tool. “The tool can help the
organization get to the heart of risks by providing a view on the pervasive,
evolving and interconnected nature of risks associated with cloud
computing,” adds Mr. Wasti. These include governance, risk management and
compliance; delivery strategy and architecture; infrastructure security;
identity and access management; data management; business resiliency and
availability; and IT operations. Such a tool can also improve efficiency in
compliance and risk management efforts and be used to develop risk event
scenarios that require integrated responses.
To be more effective, the tool should be customized
to include regulatory, geographic, industry and other specific issues that
impact the organization. As IA modifies its organizational risk framework
and guides the risk conversation with IT and the business, the following
issues pertaining to infrastructure security, identity and access management
and data management should be taken into account.
1. Infrastructure Security—Companies
should verify that cloud providers have acceptable procedures in areas such
as key generation, exchange, storage and safeguarding, as flawed security
could result in the exposure of infrastructure or data.
Are there security vulnerabilities that might
have been introduced by other customers sharing the same environment?
Are security patches performed in a timely manner?
What is the risk that a denial-of-service
attack will occur, and how will the organization respond?
What security practices should be introduced
as part of the move to the cloud? Do conflicting customer priorities
have the potential to compromise cloud service security?
If the organization is unable to independently
test security, what are the implications?
Has the vendor developed an encryption and
Who should manage the keys?
2. Identity and Access Management—Organizations
should consider how their authorization and access models will integrate
with new cloud services and assess whether they are using appropriate
identity and authorization schemes.
Can internal and cloud-based identity
management components be securely integrated?
Has the organization conducted adequate due
diligence prior to assigning cloud management privileges?
Are there proper access controls for cloud
Has the cloud provider implemented segregation
of duties for its staff?
3. Data Management—Because
organizations may have to relinquish control over their data to cloud
providers, it is crucial that they fully understand how data will be handled
in the cloud environment.
Will the complexity of multiple cloud data
stores compromise data retention?
What is the risk of unauthorized access to or
inappropriate use of sensitive data, and how will this be handled? How
will the cloud vendor notify the organization of a violation?
Will transfer of data between jurisdictions
violate any data privacy laws?
Will the organization be able to remove data
from multiple cloud data stores?
Implementing a cloud strategy changes the risk
landscape in profound ways. As some risks are minimized, others spring up in
their place. “Recognizing and responding to this shifting organizational
risk profile is IA’s purview,” says Charlie Willis, a senior manager at
Deloitte & Touche LLP. “Because internal auditors understand the interplay
between business processes and risk, they can help business leaders to
articulate their appetite for risk and help develop strategies for
mitigating it,” he adds. As the organization adopts technology initiatives
that involve cloud computing, IA should consider taking proactive steps to:
IT and business executives to have an informed conversation about the
move to the cloud. Help stakeholders understand the potential for rogue
IT environments. Explore which applications and data are candidates for
transfer to a cloud environment and be prepared to discuss the risk
implications of the move.
Review the organizational risk
framework—Revise the company’s risk framework, minimizing risks
that are no longer a concern. This framework tool should measure the
organization’s cloud capability state across the different cloud risk
Evaluate potential cloud vendors—IT
will be most familiar with the range of vendors, and the business
leaders will be able to articulate the objectives of a move to the
cloud. But IA should also be engaged in risk discussions, along with the
organization’s security, risk and compliance groups, and help the
organization develop an assessment profile for vendors.
The next time you’re presiding over an intense philosophical
debate, feel free to use these hand signals to referee
things. Devised by philosophy prof
Landon Schurtz, these hand signals were jokingly meant
to be used at APA (American
Philosophy Association) conferences. Personally, I think
they would have made a great addition to the famous
Monty Python soccer match where the Germans (Kant,
Nietzsche & Marx) played the indomitable Ancient Greeks
(Aristotle, Plato & Archimedes). Imagine Confucius, the
referee, whirling his hand in a circle and penalizing
Wittgenstein for making a circular argument. Priceless.
AECM (Accounting Educators) http://listserv.aaahq.org/cgi-bin/wa.exe?HOME The AECM is an email Listserv list which
started out as an accounting education technology Listserv. It has
mushroomed into the largest global Listserv of accounting education
topics of all types, including accounting theory, learning, assessment,
cheating, and education topics in general. At the same time it provides
a forum for discussions of all hardware and software which can be useful
in any way for accounting education at the college/university level.
Hardware includes all platforms and peripherals. Software includes
spreadsheets, practice sets, multimedia authoring and presentation
packages, data base programs, tax packages, World Wide Web applications,
Roles of a ListServ --- http://www.trinity.edu/rjensen/ListServRoles.htm
CPAS-L (Practitioners) http://pacioli.loyola.edu/cpas-l/
(closed down) CPAS-L provides a forum for discussions
of all aspects of the practice of accounting. It provides an unmoderated
environment where issues, questions, comments, ideas, etc. related to
accounting can be freely discussed. Members are welcome to take an
active role by posting to CPAS-L or an inactive role by just monitoring
the list. You qualify for a free subscription if you are either a CPA or
a professional accountant in public accounting, private industry,
government or education. Others will be denied access.
http://groups.yahoo.com/group/xyztalk This forum is for CPAs to discuss the
activities of the AICPA. This can be anything from the CPA2BIZ portal
to the XYZ initiative or anything else that relates to the AICPA.
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 theshift from Gemeinschaftto
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