Accounting Scandal Updates on August 30, 2002
Bob Jensen at Trinity University

Bob Jensen's main document on the Enron scandal and other accounting frauds is at 

Possible headlines on the Enron saga following the guilty plea of Michael J. Kopper:

These are Jensen originals, although I probably shouldn’t admit it.

Duncan Williamson added "Kopper, bottomed."

Bob Jensen's threads on Enron humor can be found at 

Reply by Tom Omer

Anthropologists speak of the Copper Age, the Bronze Age, and the Iron Age as steps or stages through which societies and cultures pass in the course of their advancement toward becoming true civilizations. It would appear we have entered the Kopper Age in accounting

Thomas C. Omer 
Associate Professor Department of Accounting 
University of Illinois At Chicago 
The Art of Discovery: Finding the forest in spite of the trees.

An Accounting Paradox:  When will accounting for an asset destroy the asset?

If you are following the accounting saga following the implosion of Enron and Andersen, I strongly recommend the Summer 2002, Volume 21, Number 2 of the Journal of Accounting and Public Policy --- 

Enron:  An Accounting Perspective

  • Reforming corporate governance post Enron: Shareholders' Board of Trustees and the auditor 97 -- 103 
    A.R. Abdel-khalik
  • Enron: what happened and what we can learn from it pp. 105 -- 127 
    G.J. Benston, A.L. Hartgraves
  • Enron et al.--a comment pp.129 -- 130 
    J.S. Demski
  • Where have all of Enron's intangibles gone? pp.131 -- 135 
    Baruch Lev
  • Enron: sad but inevitable pp.137 -- 145 
    L. Revsine
  • Regulatory competition for low cost-of-capital accounting rules pp.147 -- 149 
    S. Sunder

Regular Paper

  • How are loss contingency accruals affected by alternative reporting criteria and incentives? pp. 151 -- 167 
    V.B. Hoffman, J.M. Patton

Where were Enron's intangible assets?  In particular, what was its main intangible asset that has been overlooked in terms of accounting for intangibles?

Answer by Baruch Lev:

Baruch Lev Quote from Page 131 (from the reference above)

On December 31, 2000, Enron's market value was $75.2 billion, while its book value (balance sheet equity) was $11.5 billion.  The market-to-book gap of almost $64 billion, while not equal to the value of intangibles (it reflects, among other things, differences between current and historical-cost values of physical assets), appears to indicate that Enron had substantial intangibles just half a year before it started its quick slide to extinction.  This naturally raises the questions: Where are Enron's intangibles now?  And even more troubling: Why did not those intangibles--a hallmark of modern corporations--prevent the firm's implosion?  In intangibles are "so good", as many believe, why is Enron's situation "so bad"?

Baruch Lev Quite beginning on Page 133 (from the reference above)

So the answer to the question posed at the opening of this note--where have Enron's intangible gone?--is a simple one: Nowhere.  Enron did not have substantial intangibles, that is, if hype, glib, and earnings manipulation did not count as intangibles.  Which, of course, also answers the second question--why did not the intangibles prevent Enron's implosion.

Back to Greenspan's comment about the fragility of intangibles: "A physical asset, whether an office building or an automotive assembly plant, has the capability of producing goods even if the reputation of the managers of such facilities falls under a cloud.  The rapidity of Enron's decline is an effective illustration of the vulnerability of a firm whose market value largely rests on capitalized reputation."  Intangibles are indeed fragile, more on this later, but "true" intangibles are not totally dependent on managers' reputation.  IBMs management during the 1980s and early 1990s drove the company close to bankruptcy, and was completely discredited (though not ethically, as Enron's).  But IBMs intangibles--innovation capabilities and outstanding services personnel--were not seriously harmed.  Indeed, under Lou Gerster's management (commencing in 1993), IBM made an astounding comeback.  Hypothetically, would a tarnished reputation of Microsoft, Pfizer, or DuPont's management destroy the ability of these similarly innovative companies to continuously introduce new products and services and maintain dominant competitive positions?  Of course not.  Even when companies collapse, valuable patents, brands, R&D laboratories, trained employees, and unique information systems will find eager buyers.  Once more, Enron imploded, and its trading activities "acquired" for change not because its intangibles were tied to management's reputation, but partly, because it did not have any valuable intangibles--unique factors of production--that could be used by successor managers to resuscitate the company and create value.

Finally, to the fragility of intangibles.  As I elaborate elsewhere,3 along with the ability of intangible assets to create value and growth, comes vulnerability, which emanates from the unique attributes of these factors of production:

Partial excludability (spillover): The inability of owners of intangible assets to completely appropriate (prevent non-owners from enjoying) the benefits of the assets.  Patents can be "invented around", and ultimately expire; trained employees often move to competitors, and unique organizational structures (e.g., just-in-time production) are imitated by competitors.

Inherently high risk: Certain intangible investments (e.g., basic research, franchise building for new products) are riskier than most physical and financial assets.  The majority of drugs under development do not make it to the market, and most of the billions of dollars spent by the dotcoms in the late 1990s to build franchise (customer base) were essentially lost.

Nonmarketability: Market in intangibles are in infancy, and lack transparency (there are lots of patent licensing deals, for example, but no details released to the public).  Consequently, the valuation of intangible-intensive enterprises is very difficult (no "comparables"), and their management challenging.

Intangibles are indeed different than tangible assets, and in some sense more vulnerable, due to their unique attributes.  Their unusual ability to create value and growth comes at a cost, at both the corporate and macroeconomy level, as stated by Chairman Greenspan: "The difficulty of valuing firms that deal primarily with concepts and the growing size and importance of these firms may make our economy more susceptible to this type of contagion".  Indeed, intangible-intensive firms are "growing in size and importance", a fact that makes the study of the measurement, management, and reporting of intangible assets so relevant and exciting, irrespective of Enron the intangibles-challenged sorry affair.


Answer by Bob Jensen

I have to disagree with Professor Lev with respect his statement:  " Enron did not have substantial intangibles."  I think Enron, like many other large multinational corporations, invested in a type of intangible asset that has never been mentioned to my knowledge in the accounting literature.  Enron invested enormously in the intangible asset of political power and favors.  There are really two types of investments of this nature for U.S. based corporations:

  1. Investments in bribes and political contributions allowed under U.S. law, including the Foreign Corrupt Practices Act (FCPA)

  2. Investments in bribes and political contributions not allowed under U.S. law, including the Foreign Corrupt Practices Act (FCPA)

I contend that large corporate investment in political power is sometimes the main intangible asset of the company.  This varies by industry, but political favors are essential in agribusiness, pharmaceuticals, energy, and various other industries subject to government regulation and subsidies.  Enron took this type of investment to an extreme in both the U.S. and in many foreign nations.  Many of Enron's investments in political favors appear to violate the FCPA, but the FCPA is so poorly enforced that it seldom prevents huge bribes and other types of investments in political intangibles.

I provide you with several examples below.

Two Examples of Enron's Lost Millions in Political Intangibles
India and Mozambique:  Enron Invests in U.S. Government Threats to Cut Off  Foreign Aid

1995'S 10 WORST

by Russell Mokhiber and Andrew Wheat 


The module about Enron in 1995 reads as follows:

Enron's Political Profit Pipeline

In early 1995, the world's biggest natural gas company began clearing ground 100 miles south of Bombay, India for a $2.8 billion, gas-fired power plant -- the largest single foreign investment in India.

Villagers claimed that the power plant was overpriced and that its effluent would destroy their fisheries and coconut and mango trees. One villager opposing Enron put it succinctly, "Why not remove them before they remove us?"

As Pratap Chatterjee reported ["Enron Deal Blows a Fuse," Multinational Monitor, July/August 1995], hundreds of villagers stormed the site that was being prepared for Enron's 2,015-megawatt plant in May 1995, injuring numerous construction workers and three foreign advisers.

After winning Maharashtra state elections, the conservative nationalistic Bharatiya Janata Party canceled the deal, sending shock waves through Western businesses with investments in India.

Maharashtra officials said they acted to prevent the Houston, Texas-based company from making huge profits off "the backs of India's poor." New Delhi's Hindustan Times editorialized in June 1995, "It is time the West realized that India is not a banana republic which has to dance to the tune of multinationals."

Enron officials are not so sure. Hoping to convert the cancellation into a temporary setback, the company launched an all-out campaign to get the deal back on track. In late November 1995, the campaign was showing signs of success, although progress was taking a toll on the handsome rate of return that Enron landed in the first deal. In India, Enron is now being scrutinized by the public, which is demanding contracts reflecting market rates. But it's a big world.

In November 1995, the company announced that it has signed a $700 million deal to build a gas pipeline from Mozambique to South Africa. The pipeline will service Mozambique's Pande gas field, which will produce an estimated two trillion cubic feet of gas.

The deal, in which Enron beat out South Africa's state petroleum company Sasol, sparked controversy in Africa following reports that the Clinton administration, including the U.S. Agency for International Development, the U.S. Embassy and even National Security adviser Anthony Lake, lobbied Mozambique on behalf of Enron.

"There were outright threats to withhold development funds if we didn't sign, and sign soon," John Kachamila, Mozambique's natural resources minister, told the Houston Chronicle. Enron spokesperson Diane Bazelides declined to comment on the these allegations, but said that the U.S. government had been "helpful as it always is with American companies." Spokesperson Carol Hensley declined to respond to a hypothetical question about whether or not Enron would approve of U.S. government threats to cut off aid to a developing nation if the country did not sign an Enron deal.

Enron has been repeatedly criticized for relying on political clout rather than low bids to win contracts. Political heavyweights that Enron has engaged on its behalf include former U.S. Secretary of State James Baker, former U.S. Commerce Secretary Robert Mosbacher and retired General Thomas Kelly, U.S. chief of operations in the 1990 Gulf War. Enron's Board includes former Commodities Futures Trading Commission Chair Wendy Gramm (wife of presidential hopeful Senator Phil Gramm, R-Texas), former U.S. Deputy Treasury Secretary Charles Walker and John Wakeham, leader of the House of Lords and former U.K. Energy Secretary.


United States Deregulation of Energy That Needed a Change in the Law:  Enron's Investment in Wendy Gramm

Forwarded by Dick Haar on February 11, 2002

Senator Joseph Leiberman 
706 Hart Senate Office Building 
Washington, D.C. 20510

RE: Enron Investigation

Dear Senator Leiberman,

I watched your Sunday morning appearance on Face the Nation with intense interest. Inasmuch as I own a fair amount of Enron stock in my SEP/IRA, I'm sure you can understand my curiosity relative to your investigation.

Knowing you to be an honorable man, I feel secure that you will diligently pursue the below listed matters in an effort to determine what part, if any, these matters contributed to the collapse of Enron.

1. Government records reveal the awarding of seats to Enron executives and Ken Lay on four Energy Department trade missions and seven Commerce Department trade trips during the Clinton administration's eight years.

a. From January 13, 1995 through June 1996, Clinton Commerce Secretary Ron Brown and White House Counsel Mack McLarty assisted Ken Lay in closing a $3 billion dollar power plant deal with India. Four days before India gave final approval to the deal, Enron gave $100,000 to the DNC. Any quid pro quo?

b. Clinton National Security Advisor, Anthony Lake, threatened to withhold aid to Mozambique if it didn't approve an Enron pipeline project. Subsequent to Mr. Lake's threats, Mozambique approved the project, which resulted in a further $770 million dollar electric power contract with Enron. Perhaps, if NSA Advisor Lake had not been so busy strong-arming for Enron, he might have been focused on something obliquely related to national security like, say, Mr. Bin Laden? Could it be that a different, somewhat related, investigation is warranted?

c. In 1999, Clinton Energy Secretary Bill Richardson traveled to Nigeria and helped arrange a joint, varied, energy development program which resulted in $882 million in power contracts for Enron from Nigeria. Perhaps if Energy Scretary Richardson had been more focused on domestic energy, we might have avoided:

i. The severe loss of nuclear secrets to China and concurrently ii. developed more domestic sources of energy.

d. Subsequent to leaving Clinton White House employ, Enron hired Mack McLarty (White House Counsel), Betsy Moler (Deputy Energy Secretary) and Linda Robertson (Treasury Official). Even a person without a high school diploma (no disrespect to airline security screeners) can see that this looks like Enron paying off political favors with fat-cat corporate jobs, at the expense of stockholders and Enron pension employees.

e. Democratic Mayor Lee P. Brown of Houston (Enron headquarter city), received $250,000 just before Enron filed Chapter 11 bankruptcy. Isn't that an awful lot of money to throw away right before bankruptcy?

The Democratic National Committee was the recipient of hundreds of thousands of dollars from 1990 through 2000. The above matters appear to be very troubling and look like, smack of, reek of, political favors for campaign payoffs. I know you will find out.

2. Recently, former Clinton Treasury Secretary Robert Rubin called a top U. S. Treasury official, asking on Enron's behalf, for government help with credit agencies. As you well know, Rubin is the chairman of executive committee at Citigroup, which just coincidentally, is Enron's largest unsecured creditor at an estimated $3 billion dollars.

3. As you well know, Mr. Leiberman, Citigroup is Senator Tom Daschle's largest contributor ($50,000) in addition to being your single largest contributor ($112,546). This fact brings to mind some disturbing questions I feel you must answer.

a. Have you, any member of your staff, any Senate or House colleagues, any relatives or any friends of yours, been asked by Citigroup to intercede on their behalf, in an effort to recover part or all of Citigroup's $3 billion, at the expense of Enron's shareholders, employees and or Enron pensioners?

b. Did your largest contributor, Citigroup, have anything to do with the collapse of Enron?

c. Enron has tens of thousands of employees, stockholders and pensioners who have lost their life savings. How will you answer their most obvious question? Do you represent Citigroup, your largest contributor, or do you represent the Enron employees, et al, who stand to lose if Citigroup recovers any of its $3 billion?

During Sunday's Face the Nation, both you and Senator McCain praised Attorney General Ashcroft for recusing himself from the Justice Department investigation because he had once received a contribution from Enron. I know in my heart, that, being the honest gentleman you are, you will now recuse yourself because of the glaring conflict of interest described above. I also know that you will pass this letter to your successor for his or her attention.

Very truly yours,

Robert Theodore Knalur

Also see:  "Where Was Enron Getting a Return for Its Political Bribes?" at 

The extent to which Enron's investments and alleged investments in current and future political favors actually resulted in political favors will never be known.  Clearly, Enron invested in some enormous projects such as the $3 billion power plant in India knowing full well that the investment would be a total loss without Indian taxpayer subsidies.  Industry in India just could not pay the forward contract gas rates needed to run the plant.  

Enron executives intended that purchased political influence would make it one of the largest and most profitable companies in the world.  In the case of India, the power plant became a total loss, because the tragedy of the September 11 terror made the U.S. dependent upon India in its war against the Taliban.  Even if the White House leaders had been inclined to muscle the Indian government to subsidize power generated from the new Enron plant in India, the September 11 tragedy destroyed  Enron's investment in political intangibles and its hopes to fire up its $3 billion gas-fired power plant in India.  The White House had greater immediate need for India's full support in the war against the Taliban.

The point here is not whether Enron money spent for political favors did or did not actually result in favors.  The point is that to the extent that any company or wealthy employees invest heavily for future political favors, they have invested in an intangible asset and have taken on the intangible risk of loss of reputation and money if some of these investments become discovered and publicized in the media.  In fact, discovery and disclosure will set government officials scurrying to avoid being linked to political payoffs.

Enron is a prime example of a major corporation focused almost entirely upon turning political favors into revenues, especially in the areas of energy trading and foreign power plant construction.  As such, these investments are extremely high risk.  

It is doubtful that political intangibles will ever be disclosed or accounted for except in the case of bankruptcy or other media frenzies like the Enron media frenzies.  

Accountants and auditors face an enormous task of disclosing and accounting for political intangibles.

Because disclosures and accounting of political intangibles will likely destroy their value.  Generally, accounting for assets does not destroy those assets.  This is not the case for many types of political intangibles that cost millions upon millions of dollars in corporations.

August 28, 2002 reply from Craig Polhemus [Joedpo@AOL.COM

-----Original Message----- 
From: Craig Polhemus [mailto:Joedpo@AOL.COM]  
Sent: Wednesday, August 28, 2002 1:55 AM 
Subject: Re: An Accounting Paradox: When will accounting for an asset destroy the asset?

Bob Jensen writes:

<<Question: Accountants and auditors face an enormous task of disclosing and accounting for political intangibles.

Answer: Because disclosures and accounting of political intangibles will likely destroy their value. Generally, accounting for assets does not destroy those assets. This is not the case for many types of political intangibles that cost millions upon millions of dollars in corporations.>>

Interesting. There are many instances where the reverse is true -- the marketing value to a lobbying firm of having made large contributions to the winning candidates (of whatever party) is greatest where it is well known. This applies regardless whether the contributions came from individual partners or (at least in those states where it's legal for state and local elections) from the firm itself.

Even on a local level, if you're in a jurisdiction where judges are elected, would you prefer to go to a lawyer who contributed to the successful judge or to one who did not? I have a friend who asks this question directly whenever he's seeking local counsel. And if you're that lawyer, do you want that contribution to be secret or as public as possible? Maybe even exaggerated?

Dita Beard is a classic example -- her initial "puffery" [whether truthful, partially truthful, or entirely false] about getting the IT&T antitrust case dropped based on a pledge of IT&T funding to support moving the 1972 Republican National Convention to Miami was a marketing aid to her ONLY if she let it be known, at least to her clients and potential clients.

Similarly, Ed Rollins writes of a foreign "contributor" who apparently passed a million in cash to a middleman and thought it made it to the Reagan re-election campaign. Rollins believes the middleman (an unnamed Washington lawyer, by the way) held on to it all but the "contributor" felt he'd purchased access, and certainly the middleman benefited not just financially but also from the contributor's belief that the middleman had provided direct access to the campaign and hence the Administration.

I express no opinion on how such things should be recorded in financial statements -- I'm just pointing out that publicity about large political contributions to successful candidates (whether within or exceeding legal limits) can be positive for some businesses, such as lobbying firms.

Craig [Craig Polhemus, 
Association Vitality International]

August 28, 2002 reply from Bob Jensen

Great to hear from you Craig.

I agree that sometimes the accounting and/or media disclosure of investments in political favors may increase the value of those investments. Or it may have a neutral effect in some industries like agribusiness and oil where the public has come to expect that members of Congress and/or the Senate are heavily dependent upon those industries for election to office and maintenance of their power.

On the other hand, it is unlikely that accounting and media disclosure of the Enron investments in political favors, including the favors of linking foreign aid payments to Enron's business deals, would have either a positive or neutral impact upon the expected value of those political favors to Enron.

It is most certain that accounting and media disclosure political investments that are likely to violate the Foreign Corrupt Practices Act would deal a severe blow to the value of those intangible assets.


Bob Jensen

August 29, 2002 reply from Craig Polhemus [Joedpo@AOL.COM

Bob wrote:
<<On the other hand, it is unlikely that accounting and media disclosure of the Enron investments in political favors, including the favors of linking foreign aid payments to Enron's business deals, would have either a positive or neutral impact upon the expected value of those political favors to Enron.>>

I tend to disagree on this point. When a questionable campaign contribution is disclosed, the recipient politician (if not a lame duck) often seeks ways to publicly demonstrate independence by opposing the donor's desired legislative positions.

Term limits for elected officials can kill this positive effect of sunshine, however -- once you're a lame duck, there's little harm in doing favors for your friends, unless you intend to run for some other office. Similarly, I am concerned that mandatory rotation of auditors simply sets a clear time limit on when they need to "cash in" or to develop a "positive" [e.g., lenient] reputation among the future clients they're going to need (assuming they are not seeking only those clients who value high quality of earnings).

Let me emphasize that, as I was trained as an economist and lawyer, I am referring simply to the incentives built into the rotation/term limit system rather than to the expected behavior of auditors. (Also, applying the mandated rotation only to individuals rather than firms greatly mitigates this risk.)

I have great respect for the professionalism of real auditors, since in government I also had to deal with separately elected officials, almost invariably from the opposite political party, whose audits, usually timed for election years, often seemed to start with the draft press release and then seek "evidence" to back it up. ("If every county spent less than the median, then 10,000 more units of service could have been delivered" -- you don't need to gather ANY evidence to determine that you could buy more of anything if all costs were less than the current median! And the fact that they might be comparing fixed-route transportation in urban counties with door-to-door transportation for medical appointments for impaired clients only in rural counties didn't influence their conclusions -- after all, a "unit of service" is a "unit of service", isn't it?) In contrast, the federally mandated single state audits by CPA firms were substantive rather than political activities and we welcomed them accordingly


August 29, 2002 reply from Bob Jensen

Hi Craig,

I agree to a point. Certainly I think Phil Gramm, as a lame duck Senator, provided huge political favors through his wife Wendy, to Enron in various ways and most especially in the deregulation of energy markets such that Enron became the world's largest energy market trader. Whether or not he would have been so openly blatant if he were not a lame duck is an interesting question. I think the answer is yes, but you will probably argue no.

However, in the more numerous political favors sought by Enron in other countries, I don't think the lame duck thing is the issue. Mere disclosure of bribes to foreign officials subjects corporations to risk under the Foreign Corrupt Practices Act. Mere disclosure that foreign aid will be shut down and people will be allowed to starve if foreign governments to now provide huge favors to selected U.S. corporations will probably sink those political favors and make the government agencies disavow any link between themselves and deal making of corporations. Hence, corporations must operate in secret when resorting to these types of political favors such as those sought by Enron that are discussed at 

I still stand by my argument that accounting for investments in most political intangibles will destroy the value of those intangibles. Most political intangibles are like mushrooms that lose their value if they must grow in sunlight.


Bob Jensen

August 28 reply from 

I think companies have invested a great deal in political intangibles outside the arena of government. Consider the current discussions on the importance of expensing stock option expensing as an example. Views are strong and vary widely on the issue but clearly, these positions exist only to gain visibility and increase political pressure.

On the side that believes CPA stands for 'can't prove anything' we find the speech to the Stanford Director's College on June 3, 2002 by T. J. Rodgers, CEO of Cypress. Mr. Rodgers refers to expensing options as "...the next mistake..." and refers to "...accounting theology vs. business reality...." He opposes the Levin- McCain proposal and recounts the story you have on your website of the 1994 political storm in Silicon Valley when the FASB proposed expensing options. He believes that the free market will eliminate any abuse of option accounting. Contrast that with the opposition represented in the July 24, 2002 letter to CEOs from John Biggs at TIAA-CREF. Mr. Biggs also derides the profession by labeling APB 25 as an "...archaic method..." and that its use has the effect of “…eroding the quality of earnings…” by encouraging “…the use of one form of compensation.” Mr. Biggs completes his letter by equating option expensing to management credibility. Both of these men have made political investments with their comments, drawing lines in the sand. While the remarks were not made directly to any political body, and there is no tangible cost involved, this is still political pressure. It is also interesting both men focus on the accounting profession as the root cause rather than the value of the political intangibles that exist only in market capitalization.

Consider how companies build political intangibles with analysts, institutional shareholders and others. ADP had an extended string of increased quarterly earnings – over 100 consecutive quarters. The PE multiple for the stock has been high for some time, due in no small part to the consistency of this trend. ADP management reminded shareholders with every quarter how long they had provided shareholders with higher earnings. When that streak recently ended, the stock dropped like a stone. Closing price moved down from $41.35 on July 17, 2002 to $31.60 the next day. The volume associated with that change was almost nine times the July 16 trading volume. How would anyone explain this event other than a reversal of political intangibles that did not exist on the financial statements?

Power and politics are always with us. We just have to be smart enough to know which is for show and which is for $$$. (By the way, if you have a way to tell them apart, let me know.)

August 28 reply from E. Scribner [escribne@NMSU.EDU

Hi, Bob and Craig! 
You've discovered an accounting application of Heisenberg's uncertainty principle, which originated with the notion that to "see" an electron's position we have to "illuminate" it, which causes it to shift its position so it's not "there" any more. To quote from the American Institute of Physics ( ), "At the moment the light is diffracted by the electron into the microscope lens, the electron is thrust to the right."

When we "illuminate" political intangibles by disclosing them, they are not "there" any more.

Ed Scribner 
New Mexico State University
 Las Cruces, NM, USA ---

August 28, 2002 reply from Bob Jensen
Heisenberg's Theory Song
"My get up and go got up an went."  

August 28, 2002 reply from Richard C. Sansing [Richard.C.Sansing@DARTMOUTH.EDU

There is an extensive literature on the economics of information. The Analytics of Uncertainty and Information by Jack Hirshleifer and John Riley is a good survey. Chapters 6 (The economics of emergent public information) and 7 (Research and invention) address the issues of the value of private information and the effects of disclosure on its value.

Heisenberg's uncertainty principle both "originated" and (for practical purposes) terminated with the behavior of electrons and other sub-atomic particles. It applies to the joint indeterminacy of the position and momentum of electrons. It is only significant at the atomic level because Planck's constant is so small.

Richard C. Sansing 
Associate Professor of Business Administration 
Tuck School of Business at Dartmouth 

Richard Campbell forwarded this link to Heisenberg's uncertainty principle --- 

 August 29 reply from Craig Polhemus [Joedpo@AOL.COM

I love "popular" versions of quantum physics books. This started when, in my favorite Italian restaurant in Albany, I found the kitchen cleanup staff reading "In Search of Schrodinger's Cat" by John Gribbin. (If you're ever in Albany -- eh, Jagdish? -- check it out: Cafe Capriccio on Grand Street, run by the only Renaissance man I've ever known, Jim Rua -- perhaps this explains why he hired intellectual kitchen staff.) Anyway, I can't put my hands on that book just now but here are two quotes ("fair use," I hope) from Gribbin's sequel, "Schrodinger's Kittens and the Search for Reality":

A) About the "classical form of quantum theory" (an oxymoron if I ever heard one) -- "Heisenberg said: 'The Copenhagen Interpretation regards things and processes which are describable in terms of classical concepts, i.e. the actual, as the foundation of any physical interpretation.' In other words, the atoms of which everything in the classical world is made are somehow less real than the things atoms are made into! This struck many people as downright weird even in the 1930s; it is even harder to swallow now that atoms have been photographed."

B) About the Heisenberg principle itself: "This complimentary, or wave-particle duality [of light or other forms of electromagnetic radiation], is related to the famous uncertainty principle discovered by Heisenberg. The simplest version of this principle tells us that it is impossible to measure both the position and the momentum of a quantum object at the same time. Momentum is simply a measure of where such an object is going, and how fast. It is, in many ways, a wave property -- as a wave by nature is spread out, whereas a particle is confined in one place. We can make measurements which observe the position of an electron, or we can make measurements which tell us which way it is moving, and in either case we can make the measurements as accurate as we like. But trying to measure the position very accurately blurs the electron's momentum, by a quantifiable amount, and vice versa. "This is not, as some textbooks still mistakenly suggest, solely a result of the practical difficulty of making measurements. It is not simply because in measuring the position of the electron (perhaps by bouncing photons off it) we give it a kick, which changes its momentum. A quantum object DOES NOT HAVE a precisely defined momentum and a precisely defined position. The electron itself does not 'know' within certain limits where it is or where it is going. Exaggerating only slightly, if it knows exactly where it is, it doesn't know where it is going at all; if it knows exactly where it is going, it doesn't have the faintest idea where it is. Usually, though, a quantum object has an approximate idea of both where it is and where it is going. But the important word here is 'approximate'; hard though it is to understand from the 'common-sense' viewpoint of our everyday world, the quantum entity cannot be pinned down to a definite location, and there is always some uncertainty about where it is going. "This is crucially important, for example, in nuclear fusion reactions, where the quantum uncertainty allows nuclei that are not close enough to touch one another, according to the ideas of classical physics, to overlap with one another and combine. Some of these nuclear reactions are what keep stars hot. Without quantum uncertainty, the Sun would not shine the way it does."

In addition to Gribbin's two books, there are fascinating discussions of this concept in Stephen Hawking's famous book, "A Brief History of Time," and in Richard Feynman's classic "Lectures on Physics" [the popular version of which has just been re-released as a dual volume starting from one end as "Five Easy Pieces" and from the other as "Five Not So Easy Pieces"]. All of these are on my bookshelves somewhere, in case you need publication data, etc.

I have managed to trap both my sons into a similar fascination with these concepts, especially the eleven-year-old. (Once they outgrew Mobius strips and Klein bottles, quantum theory seemed the next best puzzle.) If the eleven-year-old were awake I'd ask for his version, which might be easier to understand than Gribbin's! (By the way, Gribbin also says, "the equations of relativity theory do not rule out the possibility of entities that travel backwards in time." But that's probably a topic for another listserve.)

Should we ask Yuji Ijiri if he uses quantum accounting theory in "Triple-Entry Bookkeeping and Income Momentum"?

Craig [Craig Polhemus, Association Vitality International]



Enron had 43 subsidiaries claiming Mauritius was their home base.  Where in the heck is Mauritius?

In the Enron and related scandals, all eyes are focused upon how investors got ripped off.  All along taxpayers were also getting ripped off in a number of ways, and especially this was the case of corporate income tax.  The corporate income tax as a proportion of total government revenues has been shrinking annually due to corporate lobbying efforts to build in loopholes.  One of the biggest loopholes is to move corporate headquarters offshore to places like Bermuda.  Enron found even a really obscure place to declare as headquarters for 43 subsidiary corporations.

"That's Outrageous:  Artful Dodgers," by Tucker Carlson, Reader's Digest, September 2002, pp. 47-48

When you think of Enron, you think of Houston.  You probably don't think of Mauritius, a tiny island republic off the east coast of Africa whose chief export is sugarcane.  But Enron was a major presence there, at least on paper.  By the beginning of 2000, the energy company had no fewer than 43 subsidiaries in Mauritius--quite a presence in a country with a population one-fifth that of metropolitan Houston.

Why was Enron doing so much business on an island in the Indian Ocean?  Taxes.  Avoiding them.  Enron may have failed as an energy company--it went spectacularly bankrupt earlier this year--but its accountants were masters at dodging the IRS.  Enron paid no federal income taxes for four out of the past five years.

How did Enron pull this off?  In part, by doing what many American companies have done: registering abroad.  Individuals pay income taxes on what they earn, no matter where they earn it.  Corporations play by different rules.  They pay federal income taxes only on money that enters the United States.  In other words, if your Mauritius-based company earns $10 million, and that money never comes back to the United States, you don't pay taxes on it.  It's a nifty deal if you're a corporation, infuriating if you're an ordinary taxpayer.  Over the next ten years, tax-dodging companies are expected to cost the U.S. Treasury $6 billion--money that will have to come out of your pocket and mine.

Don't be surprised if companies stiff Uncle Sam even worse. Countries that 15 years ago hosted far more cruise ships than corporations--Aruba, Barbados, the Bahamas, Bermuda--are now the legal home to a growing share of American industry.  The lightly taxed Cayman Islands have become so popular with American companies that it is now the fifth largest financial center in the world.

And it's no longer just about re-incorporating overseas.  Companies are also registering patents and trademarks in island hideaways, a clever way to keep royalties tax-free.

All this at a time when the United States is straining its treasury to fight a war against terrorism.  Republican Senator Chuck Grassley of Kansas calls foreign tax havens an example of "profit over patriotism."  He's right.  But it's worse than that.  Not only does offshore tax dodging hurt the United States, it often hurts the very shareholders it's supposed to benefit.

Consider the case of The Stanley Works corporation.  Earlier this year, Stanley's shareholders voted to relocate the company's headquarters to Bermuda, joining fellow toolmaker Cooper Industries, and a number of other established American companies that have done the same in recent years.  Shareholders made their decision largely on predictions by Stanley CEO John M. Trani, who said that a move to Bermuda would save the company $30 million in annual taxes and boost the stock price 11.5 percent during the first year alone.

Trani's projections may be right.  And for him, that would be good news.  His stock options alone would increase in value by $17.5 million in a single year.  Add a higher salary, bonuses, a retirement package, and Trani's profit from the relocation could eventually total $385 million.

Meanwhile, many investors would initially get the shaft, in the form of capital gains taxes they would pay when the company leaves the country.  The New York Times calculated that even if Stanley's stock price goes as high as Trani says it will, these shareholders "will barely break even after taxes."  As for the government, it would lose $240 million in corporate income taxes from Stanley over the next eight years.

Bottom line: Taxpayers lose, shareholders lose, the CEO makes $385 million.  You do the math.

In fact, many did.  Stanley's decision to leave the country caused such an uproar, the company put it on hold.  Its shareholders will vote again later this year.

The rest of America can vote too--not on whether to flee to the Caribbean, but on whether to change the laws in their own country.  That's the patriotic solution to dodging taxes.

Bob Jensen's threads on tax fraud and scandals can be found at

August 21 reply from Fred Salzer [fsalzer@SEMPRE.COM

I had never heard of it (Mauritius) before, either. Interesting info at:

August 21 reply from George Lan (University of Windsor) --- George Lan [glan@UWINDSOR.CA

I happen to be from Mauritius, a tropical island in the Indian Ocean (a couple of hundred miles off the big island of Madagascar). Mark Twain once said that "God created Mauritius first and made a copy for Paradise." Mauritius is also the land of the legend of Paul and Virginie (written in a book by Bernandin de Saint Pierre) and is famous for a rare English stamp. It's main claim to fame (up tro now) is that it was the land of the dodo bird. (It is extinct because it could not fly--the big birds did not have to fly because there were no humans on the island until the Dutch settlers came and started shooting them for fun). It seems that Enron has gone the way of the dodo!

George Lan 
Born in Port-Louis, Mauritius

August 28, 2001

A federal grand jury has indicted Scott Sullivan, WorldCom's former top finance executive, on charges of conspiring to commit securities fraud, securities fraud and making false filings with the SEC. Also indicted was Buford Yates, a former accounting executive.

For more information, see:,,SB1030552014176140875,00.html 

The Sarbanes-Oxley Act is complicated, confusing and open to interpretation. To help companies set priorities, experts point to four major changes that take effect this month. 

  1. CEO/CFO certification. Effective August 29, 2002, the chief executive officers and chief financial officers of all companies that are required to file periodic reports with the Securities and Exchange Commission (SEC) must personally certify that their quarterly and annual reports are both accurate and complete. The SEC issued a proposed rule that would cover this requirement.


  2. Loans to directors and officers. SEC registrants are prohibited from making many types of personal loans to their directors and executive officers. This ban was effective on enactment of the law. Loans made prior to that date were grandfathered, but these loans cannot be modified or renewed. It is not yet clear whether the ban applies to employee benefits that can be construed as loans, (e.g., broker-assisted loans used when executives exercise stock options). The SEC is expected to clarify the requirements in the coming weeks.


  3. Insider trading reports. Effective August 29, 2002, corporate insiders (directors, executive officers, and greater-than-10 percent beneficial owners) of U.S. public companies must file reports of transactions in the companies' securities by the second day after the execution of the transaction. The SEC issued supplemental information that clarifies this requirement.


  4. Whistle-blower protection. Effective on enactment, employees who provide information regarding conduct that the employee reasonably believes violates U.S. securities or anti-fraud laws are protected from retaliatory actions, including termination of employment. Companies may want to review their personnel policies to see if they need to be revised in light of the new law.

How are leading business schools changing course content and curricula in the wake of the recent accounting, finance, and corporate governance scandals?

Answer from Fortune Magazine
"Scandal 101: Lessons From Ken Lay:   Actual business school course excerpts and class highlights," by Julie Schlosser,  Fortune, September 2, 2002, Page 52 --- 

Business Ethics
Part 1: The Short Road From Unbelievable Success to Unmitigated Disaster
Part 2: Enron 101

"The class features a discussion of how Ken Lay became addicted to success. Students must write an ethical analysis of what went wrong at Enron using either an Aristotelian or a Kantian framework."

Ethics and Management
"[The class] does not attempt to convert sinners to saints, preach absolute truths, or deter the morally vulnerable."

Professional Responsibility
From a session called "Truth and Disclosure": "Exaggeration and bluffing are...part of the business game, but how much is too much?"

The Enron Case
"One of the classes will be a lecture by [Sherron Watkins]." The alumni network will be funding an overflow room.

Fraud: The Dark Side of Business
"Topics include legal aspects of fraud, Ponzi and pyramid schemes."

Ethics and Law for Executives
"For the past ten years, 2% of students attending the three-day course have quit their jobs within seven days, citing ethical reasons."

The Moral Leader
"This course relies heavily on works of fiction, including Macbeth, The Secret Sharer, The Last Tycoon, Remains of the Day, and I Come as a Thief, to examine in-depth the practical moral issues that managers face."

Management of Auditing and Control
One session has been titled "Executive Compensation: Is Jail Time Necessary?" Another session delves into Anatomy of Greed: The Unshredded Truth From an Enron Insider, which was penned by a University of Texas alum.

Business Ethics (Spring 2003)
"A visit to a federal prison provides a unique opportunity to speak with former-executives-turned-inmates about the serious consequences of compromising ethical standards."

"Financial Misdeeds Go From Boardroom to Classroom at California Universities," Smartpros, August 22, 2002 --- 

The Copeland Initiative ---,1029,sid=2283&cid=4173,00.html 

Recovery in Our Capital Markets Linked to Ethics and Trust, Says Deloitte & Touche CEO Copeland

Contact: Paul Marinaccio
Deloitte & Touche LLP
+1 212-492-3703

Cleveland, OH, August 16, 2002 - James E. Copeland, Jr., the chief executive of Deloitte & Touche and its global organization, Deloitte Touche Tohmatsu, today discussed the importance of assets such as individual integrity to rebuilding public confidence in the U.S. financial system.

In a speech today at The City Club of Cleveland, a leading forum for public debate and discussion, Copeland said everyone who leads institutions needs to find ways to influence and encourage ethical, competent behavior.

He also made public new Deloitte & Touche initiatives to build on internal practices that engender high professional standards, and reiterated his call for creation of a National Financial Review Board -- an independent body to probe the causes of corporate failures.

"All leaders in the capital markets have a responsibility to create a positive expectation -- an expectation of ethical and technical excellence -- within their organizations," said Copeland.  "Our profession and our firm must continually consider new ways that we can better protect the public interest.  When you see the pain associated with any audit failure, it's clear we must do better -- and we will."

"We cannot and should not accept risk that is the result of illegal activity, unethical behavior or gross incompetence," he said.  And while it is necessary to prosecute and otherwise condemn the misconduct of the few, Copeland stated it is equally necessary to demonstrate the incentives to act ethically and earn the trust of the market.

New Initiatives

The first measure announced by Copeland is the deployment of Deloitte & Touche corporate compliance and ethics services professionals to perform an extensive self-examination of the firm.  For more than 10 years, the firm has helped clients establish or improve their ethics programs and ensure better compliance.  "Now, we're going to become our own client," Copeland said.

Specifically, these professionals will assess the firm's opportunity to:

  • Improve the ability of its people to recognize behaviors and environmental characteristics that raise ethical issues, in client organizations and within Deloitte & Touche, and to respond consistently and properly every time.  
  • Structure ethical compliance programs to facilitate more timely and consistent responses to ethical concerns.  
  • Reexamine the content of its professional education curriculum to make certain ethics are sufficiently emphasized and our expectations properly communicated.

Second, in addition to rotating the lead audit partner every five years, as required by new legislation, Copeland said Deloitte & Touche will apply the five-year partner rotation policy to all audit partners who are responsible for auditing major international subsidiaries.

Similarly, he said Deloitte & Touche will enact a policy of applying rotation requirements to all professionals serving public audit clients in any capacity - even those below the partner level.

"Ethics, integrity and quality are the foundation of our culture," said Copeland   "We work very hard at applying those principles to the work we do on behalf of the investing public and on behalf of the clients who've placed their trust in us."

National Financial Review Board

During the speech, Copeland also shared his outline for the creation of an independent federal agency, modeled on the National Transportation Safety Board, to investigate major corporate failures.  Staffed with skilled professionals, the board would be tasked with performing reviews of each failure and issuing detailed public reports on the causes.

"The scope of the problems at Enron was first disclosed last October," he remarked.  "We are now nearing the end of the summer -- some 10 months later -- and we are still not sure exactly what caused the failure or how to prevent the next one."

To advance the concept, Deloitte & Touche assembled a team of professionals with deep knowledge of auditing, forensic accounting, risk management and public administration.  Under Copeland's direction, the group will explore specific potential models of how the agency could be structured, governed and financed.

"Investors are angry," he commented.  "Investors also expect to understand why so many business failures happened -- and what can be done to prevent similar failures from happening again."

The proposed board would not replace business investigatory roles performed by the Justice Department, Congress or the SEC, but would work in concert with these agencies and report to Congress on ways to avert future disasters.

The Fraud Advisory Panel in the United Kingdom --- 

The Panel's role is to alert the nation to the immense social and economic damage caused by fraud and help both public and private sectors to fight back. It is dedicated to a holistic approach and the long view. The Panel works to: 

Established in 1998 through a public spirited initiative by the Institute of Chartered Accountants in England and Wales, the Panel exists to challenge complacency and supply remedies.

The Panel is an independent body of volunteers drawn from the law and accountancy, banking, insurance, commerce, regulators, the police, government departments and public agencies. It is not restricted by seeing the problem from any single point of view but works to encourage a truly multi-disciplinary perspective. The Panel is given a serious hearing as a consequence and has contributed to the new, and more vigorous attitude in government towards fraud.

Bob Jensen's threads on fraud can be found at 

"Pro-Forma Earnings Reporting Persists," by Shaheen Pasha, Washington Post, August 16, 2002 --- 

While many on Wall Street are calling for an end to pro forma financial reporting given widespread jitters over corporate clarity, it's clear from second-quarter reports that the accounting practice is a hard habit to break.

Publicly traded companies are required to report their results according to generally accepted accounting principles, or GAAP, under which all types of business expenses are deducted to arrive at the bottom line of a company's earnings report.

But an ever-increasing number of companies in recent years has taken to also reporting earnings on a pro forma – or "as if" – basis under which they exclude various costs. Companies defend the practice, saying the inclusion of one-time events don't accurately reflect true performance.

There is no universal agreement on which expenses should be omitted from pro forma results, but pro forma figures typically boost results.

Indeed, as the second-quarter reporting season dwindles down with more than 90 percent of the Standard & Poor's 500 companies having reported, only Yahoo Inc., Compuware Corp. and Xilinx Inc. made the switch to reporting earnings under GAAP, according to Thomson First Call.

While a number of S&P 500 companies, including Computer Associates International Inc. and Corning Inc., made the switch to GAAP in the first quarter, that still brings the number to 11 companies in total that have given up on pro forma over the last two quarters.

"It's disappointing that at this stage we haven't seen more companies make the switch to GAAP earnings from pro forma," said Chuck Hill, director of research at Thomson First Call.

Continued at  

Bob Jensen's threads on pro forma reporting are at 

The James Bonds of This Century

Accountants Favored Over Lawyers in Dating Poll --- 

Accountants are still licking their wounds from the recent stream of corporate scandals and Arthur Andersen's collapse. Perhaps this will speed up the healing process ...

A recent poll conducted by, an online dating community, found that singles would prefer to date an accountant rather than go out with the perennial butt of sarcastic jokes, the trial lawyer.

Furthermore, to show just how far accountants remain from the bottom of the dating pool, they might be happy to learn they are preferred as dates by a better than four-to-one margin over the lowly house burglar.

We should point out that gave the survey participants just three choices of occupations: house burglar, trial lawyer and accountant.

Put into perspective, perhaps it's not such great news after all!

As was pointed out in a recent cartoon in The New Yorker, women/men are drawn to men/women who live on the edge of danger.  That explains the results in the above poll.

Bob Jensen's threads on the Enron/Andersen scandals are at 

Bob Jensen's SPE threads are at 

Bob Jensen's threads on accounting theory are at 


Bob Jensen's main document on the Enron scandal and other accounting frauds is at 


In March 2000, Forbes named as the Best Website on the Web ---
Some top accountancy links ---


For accounting news, I prefer AccountingWeb at 


Another leading accounting site is at 


Paul Pacter maintains the best international accounting standards and news Website at

How stuff works --- 


Bob Jensen's video helpers for MS Excel, MS Access, and other helper videos are at 
Accompanying documentation can be found at and 


Professor Robert E. Jensen (Bob)
Jesse H. Jones Distinguished Professor of Business Administration
Trinity University, San Antonio, TX 78212-7200
Voice: 210-999-7347 Fax: 210-999-8134  Email: