Career Passed Away

Bob Jensen at Trinity University

A futuristic letter that Bob Jensen anticipates receiving

Bob Jensen's Email Message 1 and Janet Flatley's Email Message 1

Message 2 sent by Janet Flatley

Message 1 from Barry Rice 

Message 1 sent by Robert Holmes

Message 1 sent by William Mister

Message 1 from Robert B. Walker

Message 2 from Robert B. Walker

Bob Jensen's Reply on the Future of Double Entry and Historical Cost Accounting

Message 3 from Robert B. Walker

Message 1 from Scott Bonacker

SEC Proposes New Auditor Oversight

New Strategy and Organization Within Arthur Andersen to Protect Against Independence Allegations

Message 1 From John D. Tongren

Message 1 from Elliot Kamlet

Message 1 from Ron Tidd 

Message 1 from Ed Scribner

Message 1 from Andrew Thom

Message 3 from Janet Flatley

Message 1 from Roger Collins 

Message 2 from Scott Bonacker

Message 3 from Scott Bonacker

Andersen Consulting Partners With Microsoft

Ernst & Young's DareStep

Accounting in the Knowledge-Based Economy

Compensation in the Form of Equity Shares in Holdings of Andersen Consulting

Updates following the Enron Scandal

Bob Jensen's Threads on Accounting Fraud, Forensic Accounting, Securities Fraud, and White Collar Crime

Bob Jensen's Commentary on the Above Messages From the CEO of Andersen
     (The Most Difficult Message That I Have Perhaps Ever Written!) 

Suggested Reforms (Including those of Warren Buffet and the Andersen Accounting Firm) 

Bottom-Line Commentary of Bob Jensen:  Systemic Problems That Won't Go Away




March 17, 2020

Dr. Robert E. Jensen
Department of Business Administration
Trinity University
715 Stadium Drive
San Antonio, TX  78212

Dear Professor Jensen:

It has been a long time since we last communicated.  Since the demise of the CPA examination, we have not hired a CPA.  It is my understanding that accounting majors are now part of your Computer Science Department.  However, legacy SEC rules require that public accounting firms have at least one old-style CPA, and therein lies our problem.  We need to make contact with former students having old-style CPA credentials.  None of the accounting graduates in the past decade could become CPAs.  What also makes it difficult is our firm's policy requiring that applicants have a graduate degree in penmanship.  If you can think of any qualified applicants, please forward their names to us.

Each of the Big 5 public accounting firms has one CPA.  He's called the Signer.  On the occasion of his 100th birthday on June 14, our Signer named Ebenezer Overhill will retire.  Since he only gets $5 for each signed audit report, he could not afford to retire until this year.  Mr. Overhill takes great pride in his signature and can only manage two per hour.  We are very proud of our Mr. Overhill.  Last year the entire membership of the AICPA met in a restaurant to honor him.  He received the AICPA Lifetime Signer Award.  Our firm strives to carry on the signature TQM that is a tradition due to our wonderful Mr. Overhill.

You may wonder who conducts the audits and generates the reports that the SEC requires Mr. Overhill to sign.  Our auditor's name is HAL EVERY.  HAL's a massive parallel processor capable of tracking every transaction of every worldwide client during every hour of every day.  Ironically, our prospering Consulting Division was sold in Year 2000 due to SEC concerns about audit independence.  Now we outsource all HAL design and operation duties to our former Consulting Division.  But the SEC requires that our CPA sign each and every audit report.  Mr. Overhill does not have clue about HAL.  Just between us, he can't even remember HAL's name.  But nobody in public accounting has a finer signature than our Mr. Overhill.

I do miss the days when our home office was on the top floor of a New York skyscraper.  Leasing such luxurious space is no longer necessary since Mr. Overhill and I are the only employees of the firm.  Mr. Overhill used to dictate all the letters that I typed.  Alas, a stroke on July 7, 2016 made his speech incoherent.  But he will sign this letter.  He still likes to sign all correspondence going out of this office.  Thus far this year, there were five letters typed and mailed the old fashioned way.  We have not had to worry about client correspondence since the 2014 SEC ruling that all domestic and international clients  must be randomly assigned to the Big 5 firms.  Our clients communicate directly with HAL.  We do see their names on the tops of the audit reports that must be signed.

There's plenty of room in Mr. Overhill's garage for our office since his old car was sold.  The State of New York refused to renew his driving license after he became blind.  But at his advanced age, it is nice that his desk is only 12 feet from the bedroom door and 23 feet from the commode.  With help, he can make it more than half the time without wetting himself.  And I only have to run over here from my house next door. 

Even though Mr. Overhill will sign this letter, please remember that my name is Barbara Pawalski if you telephone our office.  Please address all mail to Mr. Overhill.  I read every letter aloud  to him, although there have been no letters in the past two years.  He would so enjoy getting a letter. I regularly read parts of HAL's audit reports to Mr. Overhill until he dozes off.

Very truly yours,

Ebenezer Overhill, CPA

Bob Jensen's Earlier Email Message and Replies

Hi Janet,

You always challenge me.

Very few accounting educators have been more concerned about independence issues than me.  I am very concerned when public accounting firms both design and operate enormous information systems for client.  For example, I worry about such public accounting firm deals as the $1.1 billion PricewaterhouseCoopers contract to both design and operate a British Petroleum AMOCO’s  information system.   See “BP Amoco to Outsource Accounting, Back-Office Work to Pricewaterhouse," The Wall Street Journal, November 10, 1999, Page A4. 

But let me ask you this Janet. Suppose that in 1960, the railroads are the developers and owners of several major promising airlines such as American Airlines, Continental Airlines, Pan Am, and TWA and several large interstate trucking and bus line companies. Now suppose that the ICC and the Transportation Department steps up and pressures the railroads in 1960 to confine themselves to "rail roads," because 1960 railroad companies are (hypothetically) too dominant in the "transportation business." Shareholders of railroads are delighted. Either they get cash or spin off ownerships of the airline, bus, and trucking companies. Existing owners make out like bandits from the breakup.

But where does this leave the railroad companies themselves and their thousands of employees wanting to be part of a viable industry? When confined to "rail roads," the railroad industry each year has a smaller and smaller piece of the transportation action. Profits are low and the sheer cost of maintaining the "rail roads" makes railroads one of the worst investments on the market. Some have given up and sold their land and buildings. Morale is low and few, if any, people dream about working for a railroad in the 21st Century.

For example, in the 1970s Nick Salgo purportedly bought the B&A Railroad for purposes of shutting down the company and cashing in on the undervalued B&A land. So long B&A employees and towns in New England who depended upon the B&A Railroad. I know about this, because for 10 years of my life I was the Nicholas Salgo Professor of Accounting at the University of Maine. In a rather weird twist of fate, I had a job somewhat at the expense of laid off railroad workers in Bangor (where I lived at the time).  The former President of the B&A Railroad was my neighbor.

Would railroad companies and their employees have been better off as multiple-product transportation companies? The answer is most likely yes from the standpoint of the railroad industry.

What I am afraid of is that partners are breaking the piggy banks (choice of the word "piggy" is not accidental) at the expense of the profession and its present and future employees. The CPA of the future may become an auditor up against the rails.

As an educator with roots in the CPA profession that is breaking apart, I can take on new professional allegiances (I am already active in the FEI) and offer new courses (I will spend much of my summer designing an e-Business course), but I hate to be forced out of "accounting" education because fewer and fewer students want to spend five years for a CPA career up against the rails. I would much prefer to educate "accounting" students for careers in a much more viable accounting information profession than a profession of auditors on the rails.

There must be some other solution to independence issues of auditors in the 21st Century. 

Will CPA eventually stand for Career Passed Away? Should we ask the SEC to administer last rites for our accounting education programs? At a minimum we should ask partners hauling the loot to their golf courses and yachts to divvy up a bit for CPA funeral expenses.

Bob (Robert E.) Jensen Jesse H. Jones Distinguished Professor of Business Trinity University, San Antonio, TX 78212 Voice: (210) 999-7347 Fax: (210) 999-8134 Email: 

Email Message 1 from Janet Flatley
-----Original Message----- From: Janet Flatley []  Sent: Tuesday, March 07, 2000 10:47 AM To: 'Prof. R. Jensen' Subject: a view from the other side of the world

Professor Jensen:

From a commentary in a recent Sunday Times (United Kingdom) on how SEC might be doing the Big 5 a favor by pressuring them to divest or reorganize to prevent conflicts of interest. c=100 

Big auditors prepare to lose an arm or a leg [European Intelligence Wire ]

... Some accountants want to stand pat and fight the SEC. They argue that the fear of lawsuits from shareholders, the requirement that accounting firms reveal to investors any consulting contracts they receive from audit clients and the fact that audit partners do not share in the profits of the consulting wing of these multidisciplinary firms provide protection enough for investors.

The SEC disagrees and is keeping the heat on the accounting firms to divest or, perhaps, come up with some reorganization scheme that protects shareholders from conflicts of interest.

When the dust settles the accounting firms, for all their grumbling, may end up all smiles. If disposal is required, the partners will receive a nice payout for their consulting business; the consulting arm will be free to raise capital and take stakes in start-up firms; and the auditing arm will not have to look over its shoulder at regulators or face the prospect of still more lawsuits from shareholders who feel that audited reports were a bit more favourable than financial reality suggests they should have been.

Perhaps we are witnessing one of the rare instances in which regulators actually improve things, both for the firms they regulate and for investors.

Email Message 2 from Janet Flatley
Dear Professor:

Wow - I felt your passion on this topic light up my PC monitor!

But having performed as a messenger in delivering the earlier note, I would now like to switch hats & become commentator.

Your example about the railroads struck a chord with me because I am of an age to wish I had lived when rail was the way to travel across the country. But nostalgia aside - and to stay within the transportation metaphor - the same decline can be seen in the maritime industry. I have 3 children who trained as merchant mariners and must compete for an ever dwindling supply of jobs in an American industry that is being squeezed by foreign competitors who are unencumbered by US federal regulators. Ironically, one of the problems maritime companies face is the erosion of the rail industry and therefore erosion of the infrastructure next to port cities. Ships have long (expensive) waits to unload cargo unto rail transportation.

As for the accounting industry ... a fact of life in corporate America is the e pluribus unum syndrome where company mergers, acquisitions and expansions are creating one-out-many behemoths in many industries. Pull up the Time-Warner web site <  > and you'll find the footnote: Substantially all of the assets of Home Box Office and Warner Bros. and most of Time Warner's Cable Systems are held in Time Warner Entertainment Company, L.P. Time Warner owns 74.49% of the residual equity and certain priority interests of TWE. A portion of the Cable Systems is held in a partnership of which approximately two thirds is owned by TWE.

And this only hints at the scope of the e pluribus unum syndrome.

So, can the firm that audits HBO also consult on an IT project for TWE without compromising its audit independence or incurring the increased heat of regulators? Can its auditors hold stock in TWE, or vice versa, can its consultants own shares of HBO?

And what of the client? If TW Cable Systems, who is audited by Big 5-A, acquires a XYZ Cable, who is in the middle of a 2-year contract with Big 5-B to overhaul its network billing system, does the smaller firm have to now find another IT consultant?

Or does the Big 5 firm pull an Arthur Andersen and, according to an online article in Financial Times < ve=true&tagid=ZZZ5MWH2B0C&subheading=services > , "argue its internal controls are strong enough that it can satisfy regulatory concerns by amending its existing structure" rather than seeking to split the audit and consulting units?

I am no more a predictor of the future than anyone else, but I find this topic intriguing for what I don't hear in the commentaries: a creative eyebrow-raising solution that does not result in "auditors on the rails" for the many and a lucrative short-term solution for the few.

Fast Company < >  magazine describes in an online article the people who create rifts. Walt Disney was a rifter, "one of the few people who have successfully managed to find a rift in the continuum of life, to bet everything on it, and to make a profit by doing so." He was a pioneer in animated movies, theme parks and television before anyone realized the magnitude of change that would be wrought in the entertainment world by each. He mobilized his organization to take maximum advantage of a "change in the continuum of life."

I believe the accounting industry is at just such a rift. It'll be fascinating to see what happens ... and who makes it happen.

Janet Flatley [

Message 1 from Barry Rice

You are truly a treasure! BTW, I think Ebenezer Overhill was one of my students.

For any of you subscribers who have not read Bob's futuristic letter at , please take the time. It's a classic.


Message 1 from Robert Holmes
You ask would the employees be better off if the railroad companies kept the airlines. I doubt many locomotive engineers would qualify as airplane pilots, nor would the locomotive mechanics turn into airplane mechanics. The reservation and scheduling people might transfer. The big conglomerates tend to keep their businesses separate and I believe the employees of the dying businesses would not fare much better in the conglomerate than they did when the businesses were separate.
Robert C. Holmes [rcholmes@GLENDALE.CC.CA.US]

Reply from Bob Jensen
I agree with Robert to a point, but does the CPA profession have to end up with only the "rail road?" Can't we choose something besides low profitability audits that will be taken over more and more by robots and computers?

Would the airlines lobby so vigorously against bullet trains?   In Texas, the proposed bullet trains between Dallas, Houston, Austin, and San Antonio were shot down by the vigorous lobbying effort of Southwest Airlines. That may not have been the case had trains and planes been part of the same conglomerate. 

In addition, airlines probably do not have to rely upon locomotive pilots and mechanics. This may not be the case with respect to auditors and computer consulting experts. Computers will be doing most of the auditing in the future, and auditing firms may be very sorry that they spun off or sold off their leading computer experts.

Message 1 from William Mister
I enjoyed reading your letter. A couple of brief points:

I am not sure if, or why, auditing is unprofitable. Direct value added to the auditee may be difficult to discern. However, for the economy there is tremendous value added. To be able to rely on the integrity of financial information (yes, there are some notable exceptions) is of great value. What is the cost of raising capital, say in Russia, where less reliance can be placed on financial information? I believe out capital markets work better because the audit places an underlying level of integrity in financial information. It may be a giant leap, but if there is value added, then profit should be justifiable. Was the profession too quick to abandon the old prohibition against competing for clients? A competitive model may not be best for a profession entrusted with a public good. Somehow, with appropriate structural changes, I believe accounting firms will not only survive but prosper, without consulting practices.

Enforcement and less liberal interpretation of independence is long overdue. Perhaps with less pressure from doing injury to a highly profitable consulting practice, (here I presume restructuring will continue) accounting firms will not allow clients' changes in reserves, depreciation lives, etc. to meet analysts' forecasts. The SECs Chairman and Chief Accountant have spoken clearly and forcefully about the quality, or lack thereof, of accounting numbers and the pressure to meet analysts' forecasts.

Where your futuristic letter might be right on is with the educators. If we continue to jump on the bandwagon of the month or year maybe our students will not be needed. Perhaps this is why we are already seeing contractual arrangements between accounting firms and educational institutions. It does not take much imagination to see how these arrangements could be expanded and become the sole source of supply of entrance level accountants for a firm. If we forget what brought us to where we are we may loose out. Yes, change in accounting education is needed; but, change to make better accountants rather than changing to train systems people who do not know accounting. As usual, "balance" is needed.
William G. (Bill) Mister [

Reply to Professor Mister's Message 1 ( Bob Jensen)
Robert K. Elliott, Chairman of the Board of Directors of the AICPA and an executive partner of the KPMG has long contended that the auditing side of the has diminishing profitability as it becomes priced more like a commodity with little, if any, distinction in value to shareholders with respect to what major public accounting firm performs the audit.  Also he contends that traditional financial statement auditing is not a growth market relative to assurance services and consulting.  He further adds that computers will be performing more and more of the audit tasks.  Bob Elliott was the Chair of the AICPA Special Committee on Assurance Services.  The AICPA has a major website on this topic at  One of the key documents is at 

The market for traditional CPA accounting and auditing services will become more competitive. Revenues have been flat for the past 7 years on an inflation-adjusted basis. Price competition among CPAs will continue to hold down revenues.

Sources: Accounting Today and U.S. Department of Labor 
(The data shown are for the 60 largest firms.)

The above AICPA report has another section that reads as follows:

The traditional output of accounting and auditing and tax work has lost market share for decision information. Users look to many other sources for information on which to base their decisions. As they turn to other sources, they are less likely to insist on traditional CPA services.

Users are already demonstrating their willingness to make decisions on different types of information. For example, rather than insist on audited or even reviewed financial statements many lenders make loan decisions based on computerized "credit scoring" techniques.

Herein lies what I call the "rail road" problem of traditional auditing and accounting services.  If CPA firms are not allowed to enter into assurance and consulting service markets, I think the general consensus of AICPA leaders is that the profession will diminish in vitality, relevance, growth, and profitability that will be lost to other professions.

In my original message to Janet, I did not elaborate on alternatives to solving the independence conflicts without having to deny expansion of public accounting firms into assurance service and consulting practices.  One possibility is to "trust" our many attorneys to keep public accounting honest. If one arm of PwC operates BP Amoco’s entire information system (which it does for over $1 billion dollars), perhaps the other arm of PwC can be forced and inspired to conduct an independent audit of that system.  Actually I don’t advocate auditing one’s own system, but one of the best motivators is the cloud of class action lawsuits having enormous punitive damages.  Recently, CPAs in the U.S. sighed with relief at legislation providing joint and several protections against the auditors being the deep pockets in class action lawsuits.  However, if PwC audits an information system that it both designed and operates, PwC puts itself back into deep pocket risk.  It is less troublesome to have PwC audit its own system as long as PwC is willing to be the deep pockets in lawsuits having enormous punitive damages.  Even better is to have E&Y or some other firm audit BP Amoco's information system designed and operated by PwC ---  then investors can now sue E&Y, BP Amoco, and PwC in one giant legal lottery (which is why PwC might not be willing to design and operate a multi-billion dollar information system within the U.S. where over 80% of the world's lawyers reside).  What better way is there to force “independence” upon E&Y and PwC?  I am not being facetious here.  Probably the main thing that truly restrains professionalism among physicians in HMO plans is the legislative protection of HMOs and their physicians from class action lawsuits and punitive damages.  If the doctors, hospitals, and HMO plans could be sued to high heaven, medical professionalism would be dramatically restored (at increased insurance rates) to HMO plans that met certain minimal requirements preventing penniless con artists from setting up such HMO plans.

In conclusion, it seems to me that aiming the SEC's powerful guns at "the appearance" of independence is a misdirection vis-à-vis "the reality" of independence.  My suggestions for greater independence reality include:  

Message 1 from Robert B. Walker
I thank Janet for raising this subject. It is the most crucial issue facing our profession as is evidenced by the fact that several respondents have implied that the twin pillars upon which our discipline rest - assurance (auditing) and accounting (book-keeping) - are implied to be, let us say, 'mature' functions compared to the more go ahead consulting services accountants now offer.

The problem, I believe, is that accountants have lost their faith. They no longer see book-keeping and audit for what they are - the glue that keeps our complex societies held together. In my country, New Zealand, we have the bizarre spectacle of our main professional body for accountant (the Institute of Chartered Accountants of New Zealand) wishes to reconstitute itself as an organisation that has Chartered Accountants (CPA equivalents) and Chartered Business Professionals (i.e. people with nothing to do with accounting.

Unfortunately, the 'powers that be' see themselves at the forefront of something. What they are doing, in reality, is mimicking the image of the 'Big 5' 'service firms just at the point where those organuisations are about to fracture and rediscover their true purpose.

This process has been going on for many years. The previous time ICANZ had a strategic review I tried to point out that they had lost their sense of purpose. I quoted the Chinese philosopher Lao Tzu who said 'When the people lack a sense of awe, then some awful visitation will descend upon them'. So it proves.

I take a view of accounting as something that is transcendental. That is, something of great mystery and great utility - something to be revered and nurtured not cynically exploited as our 'friends' in the 'big 5' have done.

Some of you will know that I link this to Ijiri (though no one ever comments when I say this). For those of you who think book-keeping (or double entry) is for robots and computers, read Ijiri and think again. All of the answers lie there within. If Ijiri made a mistake these are perhaps 2 in number. First, he linked himself too closely to historic cost and second he named his magnum opus Theory of Accounting Measurement when he should have called it Zen & the Art of Accounting and it would have sold millions!

As for auditing I know about that too. People refer to it as a commodity. Low and behold it becomes so (the power of language!). I was once in the auditing business. I was driven out by predatory pricing by those who saw it as a loss leader. As the only service I sold was auditing I could not compete. (Perhaps it did not help that I tried to take issue with the Government's Auditor, upon whose contract work I was dependent, when he relaxed the strict independence rules. He ended up in prison - not because of me - but I was out of work by then anyway.)

I tried to work thru' the Institute to stop these conflicts. I proposed a resolution at the ICANZ AGM and was putting my case on the endemic conflict of interest that had become pervasive. The President of the Institute would not let me speak after I was half way through. The worthies could not bear to contemplate the nakedness of the emperor.
Robert B Walker [walkerrb@ACTRIX.GEN.NZ]

Reply to William Walker's Message 1 (Bob Jensen)
It is interesting that you mention Professor Ijiri.  Yuji was one of my major professors in the doctoral program at Stanford University before he moved back to Carnegie-Mellon University.  I don't think that leaders such as Bob Elliott (mentioned in my reply to Professor Mister above) that are promoting expanded markets of public accounting services are denying the elegance of the historic accounting information system.  To my knowledge, however, Dr. Ijiri never argued that public accounting be limited to a particular scope of service such as audits of historical cost financial statements.  Nor did he or Pacioli ever answer some key questions such as "What is an asset?" or "What is a liability?"   One problem that we are having in modern times is that contracts are much more complex than those envisioned in the works of Pacioli and Ijiri.  Interest rate swaps now constitute over 50% of the seven trillion dollar market in derivative financial instruments and such swaps never existed until Salomon Brothers invented them for IBM in the 1980s.  These and other newer types of contracts just do not  fit neatly into traditional financial statements.  Financing contracts have all sorts of mezzanine features and embedded options that make them almost impossible to classify.  And we must face Bob Elliott's facts that demand for traditional accounting reports is shrinking (see the picture above).

Scott Bonacker subsequently asked how to find out more about Professor Ijiri.  He and others can find a small amount of information by using the Search button and the term Ijiri at 

The website is rather sparse at  
But there are many honors to kill for listed in that page.

Some of Professor Ijiri's important AAA research monographs are listed at 

Message 2 from Robert B. Walker

I thank Bob for putting my piece up on his board. His answer to me was that the exponents of double entry (Pacioli & Ijiri) did not have the wherewithal to deal with complex instruments.

I do not agree. I accept that neither specifically address the matter. However, they present a generic framework in which to solve the problem - that is double entry.

The reason complex instruments are so baffling is that they are not dealt with properly in accounting. The answer is formulated in 'single entry' format before being brought to the general ledger. (I can give a reference to a book published in the US called 'Fair value of insurance liabilities' that says much the same thing.)

Each complex instrument (liability or asset) comprises a set of irreducable elements. These will be contracted for cash flows; probabilities; interest rates and so on. Each of these components can be expressed in double entry form and understood easily - as can anything economic that is purely or simply stated.

The double entries are then configured in juxtaposition with one another and aggregated according to the art of the accountant so that, ultimately, the 'rich picture' that is financial position will 'pop out' at the top.

The same thing can apply with other complex assets entailing cash flows. Take a long term crop (e.g. a nut or fruit grove, forest etc.). The fair value of such an asset (say, applying Australian AASB 1037 - binding in my jurisdiction being New Zealand) comprises a commodity; a set of cash flow predicated upon current commodity prices (an observable event); a discount rate (interest free - based on FASB's pv work).

Each of these can be presented in double entry format. This problem is in some ways more difficult than a purely mono-currency financial instrument as it is advisable (necessary?) to employ what Ijiri refers to as a 'multi-dimensional ledger' (which is routinely used only for currencies). In any event I have prepared a model of this. To get the value of a long term crop took 15 individual entries at a given point in time.

It is not for the accountant to necessarily derive all of the components of this. The probabilities central to valuation, including the effect on discount rate, may be done by another. It is the job of the accountant to configure the accounting, in all its glory, and then cause the actual flow of cash to run thru' the general ledger accounts so derived (again the art of the accountant) and report in much the same way as one would with a standard costed ledger. In other words, the general ledger becomes the vehcile for reporting what the actuary calls the 'experience'.

This system can be applied to anything. It certainly needs to be computerised or is unmanageable. However, it is wholly dependent upon the accountant, in human form, to express any given economic event in double entry form - element by element; especially as much of the economic events that accountants have to deal with are unique.

In considering double entry, I find comfort in the words of Confucius who said in the Analects:

The Master said, 'Ssu, do you think that I am the kind of man who learns widely and retains what he has learned in his mind? 'Yes I do. Is it not so?' 'No. I have but a single thread binding it all together.'

Robert B Walker [walkerrb@ACTRIX.GEN.NZ]

Reply to Robert Walker's Message 2 (Bob Jensen)
The Future of Double Entry and Historical Cost Accounting
We are running somewhat astray from the original theme of this document.  However, I do appreciate Robert Walker's considerable effort to argue that double entry bookkeeping can be the "thread binding it all together."  Truly this is the case as long as we are dealing in a mathematical (accounting equation) view of the world.  I do not agree, however, that it becomes this simple when we try to apply that model to complex contracts and intangible-asset frims not envisioned  by Pacioli in the 1400s and Professor Ijiri in 1967 when he published his classic Foundations of Accounting Measurement (Prentice-Hall).  Firms of the 21st Century do not fall neatly into the any definitions of Asset, Liabilities, and Equity that are simply assumed to be definable in Foundations.  The Foundations cannot help us improve accounting off-balance-sheet financing.  We cannot turn to any pages of Ijiri's classic for guidance on how to account for diamond structures where three oil companies each own a third of an unconsolidated  pipeline company that obtained billions in debt due to throughput guarantees from the three shareholders.  

Professor Ijiri developed Foundations for transactions-based accounting of organizations where intangibles did not dominate the economic future of the firm.  Would Microsoft,,  and Yahoo balance sheets that adhere perfectly to the Foundations help investors make decisions about value and risk of shares?  Does the world really care about precise audits of the relatively miniscule tangible assets of those firms?  Professor Lev contends that intangibles are the black holes of our antiquated accounting systems.  We need an entirely new basis of accounting for intangibles and accounting for value and risk of firms loaded up with human resources, in-process R&D, and other intangibles.  See the article entitled "The New Math for the New Economy" at

Accounting, says Baruch Lev, the Philip Bardes Professor of Accounting and Finance at New York University's Leonard N. Stern School of Business, is increasingly irrelevant. And, for that reason, it is increasingly essential and interesting to all of us. The problem, says Lev, is that the systems of accounting and financial reporting that are being used today date back more than 500 years. These systems are not only part of the old economy, they're part of the old, old economy. Luca Pacioli, an Italian mathematician who lived in Venice in the 1400s, developed double-entry bookkeeping in order to offer businesspeople a simple method for keeping track of their transactions -- and, even more important, for making sense of the way that they did business. "If you cannot be a good accountant," Pacioli wrote, "you will grope your way forward like a blind man and may meet great losses."

In the past several decades, there has been a dramatic shift, a transformation, in what economists call the production functions of companies -- the major assets that create value and growth. Intangibles are fast becoming substitutes for physical assets. At the same time, there has been complete stagnation in our measurement and reporting systems. I'm not talking only about financial reports and Internet investments but also about internal measurements -- accounting and reporting inside companies. These systems all date back more than 500 years.

Nor can Foundations help us account for value and risk in the messy contracts illustrated in FAS 133 such as a levered inverse floater (Para. 179), an equity-indexed note (Para 185), a crude oil knock note (Para 187), a specific equity-linked bond (Para. 193), and a a convertible bond (Para. 199).  How does Professor Ijiri's measurement theory help us measure  value and risk of such contracts as convertible bonds (Para. 100) and hedges thereof with derivative contracts?  From the standpoint of accounting for value and risk, Ijiri's Foundations are rarely, if ever, cited in any standard setter documents in the past two decades.  The recent IASC research report on computerized and high-tech disaggregative database reporting  seems abandon (or simply ignore) simplistic double entry aggregation and suggests that modern reporting must move beyond the elegant  (but too simplistic and abstract) Foundations --- see .  Professor Ijiri's work also seems to be abandoned in the fair value arguments of the IASC white paper at  

Professor Ijiri devoted Chapter 6 of his Foundations to "The Linear Aggregation Coefficient and the Identifiability of Accounting Valuation."  This theory is just not operational in the world of intangibles.  We must abandon hope of simplistic aggregations even though the world thirsts for simplicity.  My point is that the world of global transacting and complicated investment and financing contracts just cannot be "threaded" sufficiently by older historical cost "Foundations" for a world hungering for better reporting of value and risk.  There are too many loose ends of the thread.  Auditors took great comfort in the simplicity of the wonderful Foundations, but the shift from transactions auditing to risk evaluation merely reflects that the needs of the world are too intangible and too complex for our old Foundations that simplistically assumed a tangible-asset firm..   Professor Ijiri is a brilliant professor who one day may extend his Foundations for the 21st century --- I most certainly hope he does so in my lifetime.

Message 3 from Robert B. Walker
Bob believes that my view of accounting is unable to accommodate a world dominated by intangible assets.

I realise this is a problem I must deal with. I do so by taking a strict solvency (realisable value) view of the world.

My search for answers led me to a man named William Hackney (also co-incidentally based in Pittsburgh) (see Accounting Issues for Lawyers Ted Fiflis West Publishing - a brilliant source book). He is a lawyer who wrote some 15 years ago about the role of GAAP in the law - specifically the law of corporate solvency.

He sent me a case decided in Delaware which is entitled Klang v Smiths Food & Drug. All of the issues are wrapped up therein. The point at issue was whether US GAAP ruled supreme in solvency test determination. The judge ruled no - he took some merchant bankers 'one line balance sheet' as being more authoritative.

I have written an article on this. What I have done is to attempt to determine what would have been the verdict under the much more liberal NZ GAAP. Issues of intangibles haunt this matter.

If anyone wants a copy let me know. Perhaps Bob you could post it on your site.
Robert B Walker [walkerrb@ACTRIX.GEN.NZ]

Note from Bob Jensen:  I found the following at the Barnes & Nobel website:

Accounting Issues for Lawyers, Teaching Materials 
Ted J. Fiflis Price: $69.75 
Special Handling 
Format: Hardcover, 4th ed., 706pp.
ISBN: 0314862803
Publisher: West Publishing Company, College & School Division
Pub. Date: January  1991
Edition Desc : 4th ed

Message 1 from Scott Bonacker
Hi Bob,

I am writing to say that I very much enjoyed the letters at cpaaway. I'd pass it on to my partners, but they are too busy making money (it's tax season, you know) for many other concerns. Not that there is much wrong with that, as they say "all politics is local" and "we all live in the here and now".

Don't forget, though, that there is a whole lot more to the CPA profession than the people who are the subject of the cpaaway discussion ever see. I mean the subjects, the amorphous "they" - not those who are writing the letters back and forth.

Personally, I don't do any audits - and haven't for about ten years. I provide comfort and confidence just the same, but on a much more personal level. I take pride in being a CPA and there is certainly economic value to the designation, but the things they do in New York don't really have as much effect on privately held "domestic enterprises" here in the heartland as they might think. I may invest based on some other CPA's audited financials, but I make the money here first.

Scott Bonacker [scottbonacker@CLAND.NET]
CPA McCullough, Officer & Company, LLC Springfield, Missouri

Reply from Bob Jensen
Your points are well taken Scott.

The following appears in my March 15 Edition of New Bookmarks
From Phil Livingston (President of the Financial Executives Institute) in FEI Express, March 8, 2000

SEC PROPOSES NEW AUDITOR OVERSIGHT The SEC is calling for a new regulatory system for the CPA profession. SEC Chairman Arthur Levitt and Chief Accountant Lynn Turner recently announced they would like to transfer regulatory authority for how CPAs conduct their audits from the AICPA to a "self-regulatory" organization with more power and authority. According to Turner, the AICPA's Professional Ethics Executive Committee (the group that serves as the profession's oversight board) "has been unable to take timely action due to an inability to protect its files from subpoena, and in numerous financial reporting cases ... it has failed to take any action." For more information, see the Electronic Accountant article at

Also see 


There's nothing like being proactive, and Arthur Andersen is exhibiting signs that it plans to restructure itself internally in order to defend itself against potential mishaps. The goal, though, is to keep the firm in tact. Why? For starters, Andersen does not want to face independence issues like the ones that surfaced late last year for Big 5 rival PricewaterhouseCoopers. Second, and perhaps more importantly, Andersen wants to keep the firm as one unit, and not split off its consulting unit (different than Andersen Consulting) like other firms are doing.

Andersen is justifying it's position by saying that it's internal controls are strong, and even plans to possibly report more financial data to regulators in hopes of not disguising any of its processes or operations.

The firm also is concerned that more personnel will leave in favor of the "dot.coms," and hopes to restructure it's benefits and compensation packages to meet expected demand.

Message 1 From John D. Tongren
Very enjoyable letter Bob -- I passed in on in one of the MBA courses I teach and it provoked quite a bit of discussion. Thanks!

I'd be very interested in your views on SysTrust. While this is not the time for me to get involved in a detailed discussion on the listserve (heading out for a month long overseas trip) I'm wondering if you might share my concerns.

As a starting point let me share my original note to the AICPA on the exposure draft.

While I enthusiastically support the concept of Assurance Services as envisioned by the Elliott Committee, I am disappointed that SysTrust as proposed is simply yet another history focused attest service rather than an assurance service with the objective of furthering "better decision making."

In my view SysTrust as proposed is basically a 1999 version of a traditional "EDP Audit" which provides a past history administrative audit rather than assurance regarding ongoing management processes and their potential impact on future operations. Specific observations are:

1. The criteria proposed are extensive -- and appear to be a combination of audit program steps from an application audit program as well as a general controls audit program. To conduct such an engagement professionally with thorough testing would be both extremely extensive and expensive.

2. The proposed SysTrust engagement reports on past activities, and the report specifically advises that errors and fraud may occur and not be detected. Furthermore, the report states that projection of any conclusions to future periods is subject to the risk that things may change. Now you really have me wondering -- what indeed were we trying to accomplish going through this SysTrust exercise anyhow?

3. The probable net result (IMHO) -- an expensive engagement that reports that nothing material went wrong, and covers much of the same ground as the annual audit. (after all, who would ask for such an engagement if they had material problems with their system?) As a local TV station advertises about its early news program -- at 10 it is news, at 11 it is history.

With all due respect I would urge revision of your thinking about assurance services -- to focus on ongoing process rather than past results. As now proposed, I would think the engagement would provide significantly less value and relevance than an audit of financial statements -- and many of the steps would be performed in an annual audit anyhow. Perhaps a somewhat stretched analogy might help. If I've just completed a major business trip and am back in my office, I'm not interested in how the airlines bought, equipped, secured, maintained or any of the myriad other things they did for the planes I was on during that trip. But I am interested in how an airline maintains its planes on an ongoing basis, for that is information that has value to me. ISO 9000 auditors have made a good start on focusing on process, and hopefully ISO 9000:2000 will drastically improve current efforts. Wasn't that the objective of Assurance Services -- better decision making, more value than historical attest services?

With apologies for irreverence with the AICPA motto --

SysTrust. Don't Overestimate The Value.

John D Tongren [


Reply to John Tongren (Bob Jensen)
Bob Jensen's off-the-wall comment on SysTrust  is that "Fools rush in where angels fear to tippy toe."
For our other readers, a key SysTrust website is at 

Message 1 from Elliot Kamlet
Are we only a profession catering to the causes of the very rich and major corporations? Don't small business owners and middle income people deserve the kind of advice help and support only a CPA can provide? Do we need to be blind to their needs?

For those who think that providing services needed the aforementioned clients signaled the end of the profession, you are confusing the profession with Big 5 Professional Service Firms.

Elliot Kamlet Binghamton Elliot Kamlet [ekamlet@BINGHAMTON.EDU
University Binghamton, New York

Reply (from Bob Jensen)
But in this era of computerized technology, the issue of independence versus systems consulting/operation arises in virtually all sized CPA firms who conduct audits.

Message 1 from Ron Tidd
When the profession started to earn most of its revenues from tax & bookkeeping
work, that is when some of us think the profession died.
Ron Todd [rltodd@IX.NETCOM.COM]

Message 1 from Ed Scribner

Are some of us getting too hung up on traditional labels? Perhaps the CPA profession, or at least the people who would otherwise enter the profession that still goes by that name, will move on to "bigger and better" things, leaving auditing to the robots and computers. This is not to trivialize either auditing or bookkeeping, but today we look back on the accountants of the 19th century as really bookkeepers. Those who kept doing bookkeeping as modern financial reporting emerged were, in a sense, left behind as the CPA profession came into its own. The tax partners and audit partners were doing more sophisticated things and bringing in more fees than were the members of the firm who were doing write-up work. Many firms dropped the write-up work altogether. What came out of that was a wonderful profession but one whose shape is now going through another wrenching change.

With high-tech embedded audit modules and smoothly-running automated internal controls, traditional auditors may either find themselves out of work or will be freed to do other things, albeit at considerable retooling cost. Just as bookkeeping is still vital, so auditing will always be vital; nevertheless, both will be highly automated.

Thus what we now call a CPA will be more like what we now call a consultant, but perhaps with a public-trust/assurance orientation (e.g., an expert on systems controls). Maybe we're just going through the growing pains, which include traumatic reorganization of practice units.

Not sure this is making any sense, and I know it doesn't directly address your points, but I guess it's "a thought." By the way, air travel is great, but I still miss the Super Chief.

Ed Scribner New Mexico State ( )

Message 1 from Andrew Thom 
Let me take a break from preparing tax returns and put my few cents into this discussion. The CPA profession won't die but it is inevitable that it has to change and the perception of the CPA has to change. I believe that having the CPA after one's name will still denote a higher level of professional expertise worth pursuing. Sure, many of the things a CPA has traditionally performed will go to other professions but that's the constitutional right of our competitors to work and that is wonderful. The CPA will continue to stand as a uniquely respected and honored professional. 

To use an analogy in the martial arts, a brown belt is a brown belt and until he/she attains a black belt status, they're just brown belts. I view the CPA professional as the black belts of the accounting and financial world and as such , the CPA profession will never go away unless every body just wants their work done by a brown belt and who would want that?

Message 3 from Janet Flatley
Not to start a controversial tangent but ... I echo Mr. Andrew Thom's contention that the CPA designation denotes "a higher level of professional expertise worth pursuing." And I really like Mr. Elliot Kamlet's point about not confusing the profession with Big 5 professional services firms. I would like to go one step further & humbly suggest we not forget CPAs who toil worthily in industry.

I am in the middle of 3-year business plans, strategic planning, financial projections, and budget allocations for our fiscal year which begins July 1. As a community bank we are facing the challenge of competing with the banking industry's "one-out-of-many" behemoths I mentioned in my earlier message. Our customers are financially more sophisticated and placing greater demands on us for different products and services. And our deep-pocketed competitors are rushing to meet those demands in a more technologically sophisticated market. Although it would be more comfortable to continue operating as we always have, we realize that life has changed. We must change or disappear as the did the buggy whip industry when horseless carriages arrived.

Before we get caught up in what will happen and what will vanish, maybe we should look back to where we've been. In the late 60s, I took intermediate accounting with a cantankerous, cigar-smoking professor, who was head of the department. He looked out over the class on the first day and fixing his eyes at the only 2 female students, he clamped his cigar in his mouth and sternly informed us that the tax-and-audit Big 8 was not meant for women.

I've always wondered what happened to him.
Janet Flatley [jflatley@FFPA.COM]

Reply from Bob Jensen
You must've started college when you were eight years old Janet.  Your cantankerous professor was quite correct for the wrong reasons.  Women are too nervous, busy, and moody to be Signers.  What woman accountant has the patience to sprawl out with a case of beer through an entire episode of Monday Night Football, send dirty jokes six times a day to cronies via email,  and sign two audit reports per hour day in and day out?  Her place is to be wed to HAL.  (I meant that as a compliment.  It was claimed on TV last night that women are becoming dominant in businesses on the web.)

As for your professor, he was divorced for the fifth and final time after having one lung, his prostate, and and half his tongue removed.  At the moment he's glued to the porn sites that gave him a reason to buy a computer.  Those notes receivable discounting lectures and "really advanced" reciprocal cost allocation equations in three variables that he expounded for fifty four years in his accounting classes now lie yellowed in boxes under his bed.  They smell bad, but he's ready to go if the college needs part time help.  The main thing he's got going for him is a willingness to teach a class for $1,200 per semester.  It used to be $1,200 for the entire year, but your professor knows that accounting instructors are in short supply and is holding out for double what he used to make.

Message 1 from Roger Collins
For an interesting non-US perspective on this it's worth taking a look at the situation in the UK, where the Institute of Chartered Accountants of England and Wales is apparently afflicted with a death wish. Its current exam policy of "every Chartered Accountant should qualify via the same examinations by the same route", together with the rigidity of the exam structure, has piqued the Big 5 to such an extent that some of them are recommending that their articled students qualify with the Scottish rather than the English institute. It so happens that the current President of the ICAEW is a partner in one of the Big 5 firms recommending this course of action

.All this appears to come down to a fight between small practices (who appear to represent the majority of Institute members - many of whose practices do not train CA's, preferring to rely instead on Association of Certified and Corporate Accountants trainees) and the larger practices, who train the most Chartered Accountants.

Roger Collins [rcollins@CARIBOO.BC.CA
Associate Professor - Accounting UCC School of Business

Message 2 from Scott Bonacker 
--- Original message ---

... "When the profession started to earn most of its revenues from tax & bookkeeping work, that is when some of us think the profession died." ...


This touches on one aspect that presents a problem to me every once in a while, and it is one of the primary reasons I joined a group practice after ten years solo. How can I be more things to more people? The answer is: I can't. But a group of us can do more together.

Another sentence in my earlier message was: "Don't forget, though, that there is a whole lot more to the CPA profession than the people who are the subject of the cpaaway discussion ever see." When you go to a doctor, do you see the same doctor for toe fungus as you would astigmatism? When you choose an attorney don't you consider whether you need a trial attorney or a real-estate attorney?

There are tens of thousands of CPA's and Chartered Accountants who earn their living making tax returns and providing bookkeeping services. There are also thousands of CPA's and CA's who make their living performing audits and providing controllership services.

Personally, I'm happiest when I can help a client operate their business profitably now, plan for the future, comply with the various laws I am concerned with, and have time to enjoy his or her life. I dislike getting bogged down for too long in the 'historical accounting' side, and not having time to look ahead and help direct the future. But in a local practice that is part of it.

As a whole, doctors don't criticize their profession for being pre-occupied with tongue depressors because they accept that there are many _________ in/at which the services are provided. Fill in the blank, but don't use levels because that implies one is 'higher' than another. How about radii? How about sectors?

As a profession, CPA's have done themselves a disservice by pretending that we are all equal and that we all do the same thing. I've got a client who is contemplating an IPO, and had one previously who merged with a publicly held shell. In both these cases I have relinquished some of the work to CPA's that do SEC work. My client looks at me and says: "But you're a CPA too, aren't you?" Would that same person look at their podiatrist and ask them in the same tone why they won't prescribe for diabetes? We need to educate the public more intelligently.

My definition runs something like this: A professional is one who provides a service for the betterment of their client, and for society as a whole if possible. That service might be auditing, tax advisory, or financial planning.

In my earlier message it may have sounded like I said it doesn't matter what the New York City people do. It does matter. All I meant was that there is a great deal of honorable work to be done that doesn't come any where near the vicinity of derivatives, or interest rate swaps, or similar stuff.

To give credit where it is due: to get here, you've got to go through there first -or- to get there, you've got to go through here first. Without the background in accounting and financial reporting theory I received in unversity I certainly couldn't do what I do now. Neither could any other practicing CPA. And in the foreseeable future I don't see a diminished need for formal instruction and classical training.

But there will also continue to be a need for trained CPA's (whether they be accountant's, financial auditors, business advisors, or tax advisors) in all sectors of the economy. Unlike a balanced general ledger, adding to or taking away from one part of the profession doesn't necessarily mean that the other parts are affected at all or even in the same direction.

CPA McCullough, Officer & Company, LLC Springfield, Missouri

Message 3 from Scott Bonacker 

Without trying to decide what is meant by "change" I can say that some CPA's will change, and some won't. It's still OK to work in the "traditional" style because there are still quite a number of consumers who want only that from their CPA, so it's maybe not necessary for everyone to "change" at the same pace. Whatever that may mean.

One of the areas I like to work in is with solo professional practices. Usually this is dental practices but with find/replace it could easily be a lawyer, architect, MD, or anyone involved in a professional personal service activity. For the most part these people are educated, successful, and motivated to understand and improve whatever it is that affects them. If all I did was take the transaction records and then mail a financial report to them - they would do that themselves. My value added is to relieve them of the overhead of doing that, plus showing them how their productivity is reflected in the numbers / plan and prepare for income taxes / and monitor areas that need controlling.

The things I do aren't necessarily much different than what any other value added CPA has ever done. The greatest change has been in the tools that are used.

When I was in college I got my first accounting job in the monthly service department of a solo CPA office. The clients brought in paper sacks containing the basic documents - bank statements, checkstubs, register tapes, sales tickets, etc.. - and we would manually journalize them, post the general ledger then prepare a working trial balance. The CPA/owner would look things over, add adjustments, and then we would compile the statements.

Now instead of paper and pencil it's done on a keyboard. The hourly rate has gone up, turnaround is improved, productivity has gone up, and so has the capital investment.

The real product is the same, though. That is the usefulness of the reports to monitor progress towards a goal and to focus attention on areas that might need a little more oversight.

The 1) education in accounting theory, and 2) training in applying that knowledge, and 3) experience gained in practical applications that go into earning the designation are what sets the CPA apart. As far as that goes, there is no end in sight for the services that a person with the training and experience of a CPA can provide.

In Missouri, as in most states, there is only one act that the law reserves solely for licensed CPA's - issuing an audit report. The goofups in audits of publicly held companies that hit the news do register with local business people, but it's them city slickers doing that and reputations of the local CPAs don't suffer.

Now, when one of the big firms really screws up and the SEC feels compelled to issue a regulation defining when revenue is to be recognized, we do notice that. After all, we are trying to issue financial statements in accordance with GAAP whatever that is.

If they were to screw up so bad that the regulators felt they had to ban CPA's from issuing audit reports and create a new class of professional for that purpose, I bet we would notice that too. Maybe it would be better if there was a voluntary split off of CPA's involved in SEC work from everyone else. I think I would rather remain a CPA and let them pick out some other designation.

CPA McCullough, Officer & Company, LLC Springfield, Missouri

Andersen Consulting partners with Microsoft
The new vision and controversial partnerings and business operations of public accounting firms.  Richard Newmark pointed out the following news announcement about  Andersen Consulting's recent partnering with Microsoft:

Andersen Consulting and Microsoft Corp. on Monday said they had agreed to a $1 billion pact to form a joint venture and an expansion of their existing relationship to offer companies a range of services an technologies based on the Windows 2000 operating system.

Under the pact, New York-based Andersen and Redmond, Wash.-based Microsoft would create the joint venture, called Avanade, to offer Internet-specific and other services based on Windows 2000, the companies said.

The pact also calls for the two to create a new organisation within Andersen Consulting dedicated to designing and building fast and reliable business products, the companies said.

The new venture would target large Fortune 500 companies, new market entrants and Internet start-ups.

Under the deal, Microsoft will contribute $385 million in cash to support Avanade, as well technological development support and other intellectual capital. Andersen Consulting will provide intellectual capital, training, resources, solutions development and other services.,1087,3_96692_Ext,00.html 

InformationWeek Online disclosed the following on March 16, 2000:

 Ernst & Young Division Will Focus On B-To-C Market

Global professional services firm Ernst & Young stepped further into the field of E-services on Wednesday with the launch of DareStep, a division that will focus on strategy, technology, and integration within the business-to-consumer E-business market.

DareStep will promote ease of site navigation, design, and structure, and it will eventually translate its processes to the business-to-business and business-to-employee markets, according to Mark Rankin, DareStep's managing director.

DareStep opens for business with 150 employees, 100 of whom come directly from Ernst & Young. Rankin predicts the number of consultants within DareStep will reach 300 by the end of the year.

   Accounting in the Knowledge-Based Economy ---

Source:   Singapore Accountant, March/April 2000.
Country:   Singapore
Date:   06 March 2000
Contributor: Chan Kit Whye

The Mr Tan Boen Eng, President of the Institute of Certified Public Accountants of Singapore (ICPAS) said that many nations, Singapore included, are making the transition towards a knowledge-based economy (KBE). In a KBE, intellectual capital will become one of the most important intangible assets of companies, in particular knowledge-based companies.

This has implications for the accountancy profession particularly how one account for intellectual capital. In a related article by Paul Thompson, Visiting Lecturer in the Accountancy Department of Ngee Ann Polytechnic, Paul defines a knowledge-driven economy as one which the generation and the exploitation of knowledge has come to play the prominent part in the creation of wealth and intellectual capital as a catch-all term that encompansses everything from intellectual property rights to human resources. He said that in a KBE, the propensity of companies that hinges not so much on the efficient utilisation of real capital, but rather the harnessing of the knowledge of their employees and other intangibles poses a great threat,or challenge if you like, to accounting standard setting bodies around the world. The issue is how one may measure the value of knowledge for financial reporting purpose and account for intellectual capital through its recognition as an asset on a company's balance sheet.

The present accounting model does not measure the creation of value but rather its realisation.

Paul gave an example of Microsoft's CEO, Bill Gates, who claims his company's primary assets, which are software and software-development skills, do not show up on the balance sheet at all.

Although enlightening from a purely accounting point of view, it emphasises that financial reporting is losing touch with reality and relevance so long as it continues to shy away from the issue of recognising intangibles like intellectual capital.

It is often said that the most valuable part of a company is what walks in and out of the doors every day, accounting for intangibles or intellectual capital should enable companies to improve the management of their knowledge capital. Paul also suggest that adopting the IASC Framework for the Preparation and Presentation of Financial Statements would mean applying a similar methodology to the valuation of employees or knowledge involving discounting the future revenues from the products and/or services they help create, produce and market. He further added that unfortunately IAS 38 Intangibles Assets categorically refutes this approach stating that "intangible assets should be recognised initially at cost in the financial statements" and specifically prohibits the recognition as assets of internally generated intangibles. Hence human assets do not qualify for recognition on the balance sheet.

Both Tan Boen Eng and Paul Thompson have put this issue of accounting to the standard setters to consider and advise companies of the need to start thinking about the value of the intangible resources they have. Although the accounting world agrees that human assets are difficult to measure reliably, especially if the measurement basis is some value based on the future benefits from harnessing and exploiting their knowledge, the question is whether accountants are prepared to subscribe to the view that accounts without these intangibles are rendered of such little usefulness for decision making that reliability concerns be overridden and intangibles given a perch on the balance sheet. For indeed what we do not measure we can manage.

Compensation in the Form of Equity Shares in Holdings of Andersen Consulting

From InformationWeek Online on March 21, 2000
Andersen Consulting revealed plans Monday to use E-business as a weapon in the war to retain and attract consulting talent. The consulting firm plans to reward its employees for their loyalty and performance through a $200 million fund that provides bonus compensation in the form of investment holdings.

The investments will be made in companies in which Andersen has an equity stake, including Avanade, Covation, Blue Martini, ChemConnect, and Andersen Consulting Ventures, the consulting firm's venture-fund unit, will manage the investments, which are set to total $100 million per year.

Andersen Consulting will begin awarding the new compensation in September for loyalty and performance. Loyalty awards will go to all employees--consultants and support staff-- who've been with the firm for at least three years. Performance awards are available to consultants judged by a set of criteria that includes client service, skill, professional competence, and the ability to develop personnel.

"To be successful, we need to be nimble and execute on our plans. This means keeping talent," says managing partner Bob Gach. Andersen faces competition for talent from the high- tech industry, Wall Street, other large consulting firms, and the dot-com community.


Updates following the Enron Scandal

Bob Jensen's Threads on Accounting Fraud, Forensic Accounting, Securities Fraud, and White Collar Crime

Bob Jensen's Commentary on the Above Messages From the CEO of Andersen
     (The Most Difficult Message That I Have Perhaps Ever Written!) 

Suggested Reforms (Including those of Warren Buffet and the Andersen Accounting Firm) 

Bottom-Line Commentary of Bob Jensen:  Systemic Problems That Won't Go Away