In 2017 my Website was migrated to the clouds and reduced in size.
Hence some links below are broken.
One thing to try if a “www” link is broken is to substitute “faculty” for “www”
For example a broken link
http://faculty.trinity.edu/rjensen/Pictures.htm
can be changed to corrected link
http://faculty.trinity.edu/rjensen/Pictures.htm
However in some cases files had to be removed to reduce the size of my Website
Contact me at 
rjensen@trinity.edu if you really need to file that is missing

 

New Bookmarks
Year 2016 Quarter 3:  July 1 - September 30 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

For earlier editions of New Bookmarks go to http://faculty.trinity.edu/rjensen/bookurl.htm 
Tidbits Directory --- http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm 

Click here to search Bob Jensen's web site if you have key words to enter --- Search Site.
For example if you want to know what Jensen documents have the term "Enron" enter the phrase Jensen AND Enron. Another search engine that covers Trinity and other universities is at http://www.searchedu.com/.

Bob Jensen's Threads --- http://faculty.trinity.edu/rjensen/threads.htm

574 Shields Against Validity Challenges in Plato's Cave ---
http://faculty.trinity.edu/rjensen/TheoryTAR.htm

 

 

Choose a Date Below for Additions to the Bookmarks File

2016  

September 2016

August 2016

July 2016

 

 

September 2016

 

Bob Jensen's New Additions to Bookmarks

September 2016 

Bob Jensen at Trinity University 


For earlier editions of Fraud Updates go to http://faculty.trinity.edu/rjensen/FraudUpdates.htm
For earlier editions of Tidbits go to http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm
For earlier editions of New Bookmarks go to http://faculty.trinity.edu/rjensen/bookurl.htm 
Bookmarks for the World's Library --- http://faculty.trinity.edu/rjensen/bookbob2.htm 

Click here to search Bob Jensen's web site if you have key words to enter --- Search Box in Upper Right Corner.
For example if you want to know what Jensen documents have the term "Enron" enter the phrase Jensen AND Enron. Another search engine that covers Trinity and other universities is at http://www.searchedu.com/

Bob Jensen's Blogs --- http://faculty.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called New Bookmarks --- http://faculty.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called Tidbits --- http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called Fraud Updates --- http://faculty.trinity.edu/rjensen/FraudUpdates.htm

 

Bob Jensen's Pictures and Stories
http://faculty.trinity.edu/rjensen/Pictures.htm

 

All my online pictures --- http://www.cs.trinity.edu/~rjensen/PictureHistory/

David Johnstone asked me to write a paper on the following:
"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics Science"
Bob Jensen
February 19, 2014
SSRN Download:  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2398296 

Scholarpedia (a cross between Wikipedia and Google Scholar) --- http://www.scholarpedia.org

Google Scholar --- https://scholar.google.com/

Wikipedia --- https://www.wikipedia.org/

Bob Jensen's search helpers --- http://faculty.trinity.edu/rjensen/searchh.htm

Bob Jensen's World Library --- http://faculty.trinity.edu/rjensen/Bookbob2.htm




Accounting History Corner
Richard Mattessich --- https://en.wikipedia.org/wiki/Richard_Mattessich

Jensen Comment
When I was a doctoral student UC Berkeley's Richard Mattessich occasionally visited Stanford to discuss his current research and writings. I always thought Mattessich was incapable of writing a working  paper with less than 150 pages. He spent much of his life studying history and philosophy, and when reading one of his papers it was easy to get bogged down in the verbiage and hundreds of references and endless quotations. I kept thinking "get to the point."

I never in my life, until now, associated Professor Mattessich with anything practical. But today I read where he's given credit for a practical idea in the "invention" of a spreadsheet.

MIT:  Why Big Companies Can't Invent ---
https://www.technologyreview.com/s/402693/why-big-companies-cant-invent/

Jensen Comment
A lot depends upon what we mean by "invent?" Companies are often very good at development and improvements that take a lot of "invention" for progress along this path. For example, Microsoft did not invent the spreadsheet but there are hundreds of subsequent Microsoft  inventions that allowed Excel to become a dominant force in spreadsheet software. Actually until I went to the following Wikipedia module this morning  I was not even aware that an acquaintance of mine (Richard Mattessich) years ago is given some credit in the spreadsheet "invention."_
https://en.wikipedia.org/wiki/Spreadsheet#Paper_spreadsheets
There were many "inventions" regarding spreadsheets in the years that followed, including all the inventions Microsoft kept adding to Excel. I'm absolutely certain that Richard Mattesich was incapable of developing Excel software even though he made a seminal contribution to the concept of a "spreadsheet."

The above article overlooks some major inventions and developments that were corporate-based. For example, note the inventions credited to Xerox Parc:

Xerox PARC has been the inventor and incubator of many elements of modern computing in the contemporary office work place:
  • Laser printers,
  • Computer-generated bitmap graphics
  • The graphical user interface, featuring windows and icons, operated with a mouse
  • The WYSIWYG text editor
  • Interpress, a resolution-independent graphical page-description language and the precursor to PostScript
  • Ethernet as a local-area computer network
  • Fully formed object-oriented programming in the Smalltalk programming language and integrated development environment.
  • Model–view–controller software architecture

The computer mouse was an enormous invention leading to development of Apple computers. However, the mouse was actually rooted in a "trackball" invention of the British Navy ---
https://en.wikipedia.org/wiki/PARC_(company)#Accomplishments

The developments of a spreadsheet and a computer mouse illustrate how difficult it is to pinpoint where invention takes place. Most inventions are rooted in other inventions that are rooted in other inventions. There may be something innovative about each "invention" but there's usually something borrowed as well.

Nobel prizes and patents are awarded for "seminal discoveries" that almost always had roots in earlier research and invention. For example, Watson and Crick got the Nobel Prize for the seminal discovery of DNA structure, but their discovery depended a lot on the earlier findings of such researchers as Pauling, Franklin, etc.

My point is that big companies often are not the source of primitive ideas and findings that led to corporate research projects. These companies do not usually focus on the most primitive findings upon which funded projects are later built. Universities are best suited for primitive research. This is mainly due to the freedom afforded by universities for faculty just to think and work on things that interest them (the faculty) rather than the university not motivated by a profit bottom line. Often the university is not even aware of what faculty are spending a lot of time thinking about and tinkering with in labs and in their wanderings through libraries and the Internet.

Companies are not as good at primitive level research because their employees are usually more directed in terms of what to think about.

Primitive discovery is usually the result of freedom and lack of employer control on how time is spent by workers. Companies do not usually allow the same freedoms afforded college faculty and the unemployed of the world.

Conclusion
Back in the 1960s professors were not held accountable for publication counts like they are today. They were expected to write and speak about what they were thinking, but Richard Mattessich could build a reputation on working papers without an annual journal hit list. In important  ways professors were more "free to be" in those days than today where the hit list of refereed journal articles makes or breaks scholarly reputations. In some ways it's sad that universities are no longer willing to give tenure for primitive thinking instead of research journal hit lists.

 


How much do you know about the next CPA exam?
http://www.journalofaccountancy.com/issues/2016/sep/new-cpa-exam-quiz.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=19Sep2016
Click on "Submit" to get to the next question.


Here's the list of K-Mart stores that will be closing ---
http://www.businessinsider.com/kmart-is-closing-64-stores-full-list-2016-9


Excel Errors in Science Papers ---
http://www.economist.com/blogs/graphicdetail/2016/09/daily-chart-3?fsrc=scn/fb/te/bl/ed/excelerrorsandsciencepapers

Jensen Comment
In the case of accounting research the software tends to be statistical packages like SAS or SPSS. Where errors arise is that most of the data comes from purchased databases like CRSP, Compustat, and AuditAnalytics. The sad news is that academic accounting research is almost never replicated. Even more sad news is that when replicated errors in the data are rarely discovered because both researchers and the replicators use the same databases. Checking for errors in purchased databases is almost unheard of among accounting researchers. This is why accounting research is almost always considered truth the instant it's published. We really don't want to find errors in academic accounting research because nobody cares if there are errors --- certainly not practitioners who have no interest in the fun and games of academic accounting research.

Bob Jensen's threads on the sad state of academic accounting research ---
http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm
Also see
http://faculty.trinity.edu/rjensen/theory01.htm#WhatWentWrong

PS
Excel errors are more apt to arise in accounting practice where Excel dominates many accounting tasks, especially in auditing.


IRS Warning:  New cyberattacks threaten tax professionals ---
http://www.journalofaccountancy.com/news/2016/sep/new-cyberattacks-threaten-tax-professionals-201615112.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=06Sep2016

Jensen Comment
This can also be a threat to customers of tax professional by putting their privacy information stored in tax professional firm databases at risk. For example, if your tax professional is attacked worry about your IRS Pin number and credit card information. If you are an employer using your tax professional for accounting services such as payrolls you my be putting your employees at risk. Not long ago, an enormous number of physician's in New England (including my doctor) had their privacy information stolen by what we think was a hack into hospital databases in New England.


If It Were Only True and Not Just Wishful Thinking on the Part of the Pathways Commission

The accounting scholars program claims that professional/practical experience is taking on greater importance ---
http://www.adsphd.org/?utm_source=mnl:cpald&utm_medium=email&utm_campaign=08Sep2016

Jensen Comment
If it were only true. In my opinion the most important criteria for admission into the very top doctoral programs as students or faculty is still exceptional demonstration of accountics skills in mathematics, statistics, and econometrics. Times may be changing in the lower-ranked programs.

Evidence is partly in the admission of foreign applicants to our top doctoral programs who have exceptional accountics backgrounds and virtually no professional accountancy credentials. And yes when they graduate from our most prestigious university accountancy doctoral programs there's very little that they can teach other than doctoral seminars.

In my opinion accounting doctoral programs and out top academic journals are still in a very sad state ---
http://faculty.trinity.edu/rjensen/Theory01.htm#DoctoralPrograms


Accounting History Corner

The Keepers Registry (back issues of journals in large libraries) --- http://thekeepers.org
For example search for "Accounting"


USA Income Taxes Are Very Progressive

Tax Policy Center's researchers and staff:  USA Taxes are Very Progressive ---
http://www.taxpolicycenter.org/taxvox/federal-taxes-are-very-progressive

The USA tax code is highly progressive with the top 50% of taxpayers paying 97.2% of the income tax collected in 2013 ---
http://taxfoundation.org/article/summary-latest-federal-income-tax-data-2015-update 

In 2013, the bottom 50 percent of taxpayers (those with AGIs below $36,841) earned 11.49 percent of total AGI. This group of taxpayers paid approximately $34 billion in taxes, or 2.78 percent of all income taxes in 2013.

What is really misleading is all of this is that an estimated $2 trillion (USA Today very rough estimate) unreported on tax returns from the underground economy, and much of that income goes to the low-end of income spectrum for house cleaners, child care workers, prostitutes, construction workers, landscapers, yard workers, farm hands, etc. Of course some high earners also share in the underground economy

Earned Income Tax Credit (EITC) ---
https://en.wikipedia.org/wiki/Earned_income_tax_credit#Households.27_average_taxes_and_income

And the lowest 40% of taxpayers do very well when Federal transfers are added to their incomes ---
https://en.wikipedia.org/wiki/Earned_income_tax_credit#Households.27_average_taxes_and_income 

At a cost of $56 billion in 2013, the EITC is the third-largest social welfare program in the United States after Medicaid ($275 billion federal and $127 billion state expenditures) and food stamps ($78 billion).[31] Almost 27 million American households received more than $56 billion in payments through the EITC in 2010. These EITC dollars had a significant impact on the lives and communities of the nation's lowest-paid working people largely repaying any payroll taxes they may have paid. The Census Bureau, using an alternative calculation of poverty, found that EITC lifted 5.4 million


Bloomberg:  Why They Did It: Madoff and Enron’s Fastow Explain the Biggest Frauds in U.S. History ---
http://www.bloomberg.com/news/articles/2016-08-29/why-they-did-it-madoff-and-enron-s-fastow-explain-the-biggest-frauds-in-u-s-history?cmpid=BBD082916_BIZ
Jensen Comment
When con artists explain why they committed fraud can you believe them?
Con artists are so convincing even when they are lying?

PS
Some public sector frauds were bigger than these private sector frauds
And some bigger frauds are joint public and private sector frauds (think Pentagon spending)

Bob Jensen's threads on Fastow and Enron ---
http://faculty.trinity.edu/rjensen/FraudEnron.htm
By the way Andy Fastow was only one of the many fraudsters among Enron's executives and not the only one to go to prison

What Andy does not confess is how, before the scandal broke, virtually all employees of Enron who knew him hated the "arrogant little bastard"
 "The confessions of Andy Fastow," by Peter Elkind, Fortune, July 1, 2013 ---
 http://features.blogs.fortune.cnn.com/2013/07/01/the-confessions-of-andy-fastow/

Bob Jensen's threads on Madoff ---
http://faculty.trinity.edu/rjensen/FraudRottenPart2.htm#Ponzi


Are high school counselors overselling careers in science?

Why ‘Alternative’ Careers in STEM Aren’t ‘Alternative’ ---
https://chroniclevitae.com/news/1549-why-alternative-careers-in-stem-aren-t-alternative?cid=at&utm_source=at&utm_medium=en&elqTrackId=ff777a5b693b4c9aa558e08b72af2aff&elq=045c6cfdcd26488389974e647a9b7107&elqaid=10791&elqat=1&elqCampaignId=4093#sthash.Rwl9pAxv.dpuf

Jensen Comment
I don't think I oversold careers in accounting. I did repeatedly caution many of my advisees early on that they may not get those sought-after offers from the multinational accounting firms.

However, I probably did oversell ultimate career alternatives for becoming an accounting professor. It was easy to show my masters students statistics on the excess of demand for tenure-track accounting professors versus supply. It was easy to point out the starting salary differences between an accounting Ph.D. versus a humanities Ph.D.

However, what I did not perhaps stress hard enough was the shortage of capacity in North American accounting Ph.D. programs accredited by the AACSB (which is the only route for a career in North American accounting academia). Whereas there are 27,000+ accounting masters degree graduates in the USA each year, there are fewer than 200 accounting Ph.D. graduates each year, significantly down from the 1980s. The reason is that the large accounting Ph.D. mills of the 1980s (e.g., Illinois, Texas, and some of the Big 10 universities) cut back greatly on the number of admissions to their Ph.D. programs. For example, Illinois and Texas graduating over 15 accounting Ph.Ds per year in the 1980s sometimes now graduate zero or one per year.

In the 1980s there were over 220 accounting Ph.D. graduates per year in the USA whereas in 2015 there were only 174 Ph.D. graduates in the USA ---
http://www.jrhasselback.com/AtgDoct/XDocChrt.pdf

Promising our masters students in accounting wonderful careers in academe is misleading with such low odds of getting into a program, especially amidst the increasing highest quality global competition (mathematics geniuses) from Asia trying to get into USA accounting doctoral programs.


David Giles's September Readings in Econometrics ---
http://davegiles.blogspot.com/2016/08/september-reading.html

Esquivel, M.L., P.P. Mota, & J.T. Mexia, 2016. On some statistical  models with a random number of observations. Journal of Statistical Theory and Practice, online.

Gorroochurn, P., 2015. On Galton's change from "reversion" to "regression". American Statistician, in press.

Kourtellos, A., T. Stengos, & C.M. Tan, 2016. Structural threshold regression. Econometric Theory, 32,827-860.

Jandhyala, V., S. Fotopoulos, I. MacNeill, & P. Liu, 2016. Inference for single and multiple change-points in time series. Journal of Time Series Analysis, in press.

Malloch, H., R. Philip, & S. Satchell, 2016. Decomposing the bias in time-series estimates of CAPM betas. Applied Economics, 28, 4291-4298.

Xu, J. & P. Perron, 2016. Forecasting in the presence of in and out of sample breaks. Mimeo.


529 Plan --- https://en.wikipedia.org/wiki/529_plan

New York Times:  How to Pay for College With Less Stress ---
http://www.nytimes.com/2016/09/24/your-money/paying-for-college/how-to-pay-for-college-with-less-stress.html?_r=0

Jensen Comment
College costs 10-20 years from now are a great unknown. Even today much varies with race, level of family income, and admission qualifications of an applicant.
Although there is greater value and inflation risks, you may want to consider a tax-exempt bond fund as opposed to a 529 plan having greater tax uncertainties (such as when it will not be used for college expenses) ---
https://en.wikipedia.org/wiki/529_plan#Disadvantages .
The great unknown is what inflation will be over the next 10-20 years. An advantage of a tax-exempt bond fund is that as inflation risks increase you can bail out of the tax-exempt fund at any time (usually) and invest the proceeds where they are more hedged for inflation.

Bob Jensen's Personal Finance Helpers ---
http://faculty.trinity.edu/rjensen/Bookbob1.htm#InvestmentHelpers

 


Early Labor Market and Debt Outcomes for Bachelor's Degree Recipients (PDF) ---
http://ccrc.tc.columbia.edu/media/k2/attachments/early-labor-market-debt-outcomes-bachelors-recipients.pdf

Thanks in large part to Obama policies, only 37% of student borrowers are paying down their student loans ---
http://www.wsj.com/articles/writing-off-student-loans-is-only-a-matter-of-time-1471303339?mod=djemMER


Inside the Secretive World of Tax Avoidance Experts (who protect the 1%) ---
http://taxprof.typepad.com/taxprof_blog/2016/09/capital-without-borders-wealth-managers-and-the-one-percent.html


Earnings Quality and IFRS Research in Africa: Recent Evidence, Issues and Future Direction
SSRN
August 31, 2016

Author

P. K. Ozili
Essex Business School (University of Essex)

Abstract

This paper review the recent empirical research on IFRS and earnings quality among African studies and show mixed conclusions regarding the impact of IFRS on earnings quality and financial reporting quality in the region. Also, some discussions on factors that led to the growth in the earnings quality African literature over the last decade as well as some challenges in the recent literature, are provided. Also, the study makes several observations regarding IFRS and earnings quality research in Africa and suggests potential directions for future research. The need to (i) understand the recent direction of earnings quality research in Africa, (ii) understand the interaction between policy and earnings quality research, if any, in the African region, and (iii) the need to maintain high-level rigour in earnings quality research while ensuring greater interaction between policy and research, makes this study important. Given the paucity of research on earnings quality in developing countries, this study contributes to the broader earnings quality literature by providing a review of the African earnings quality literature; hence, conclusions based on empirical studies in this review are not intended to be generalised to developed countries but only to developing countries. Finally, while insights in this paper may be informative to the reader, the intended objective is to stimulate debates that would improve the outputs of earnings quality research and the overall quality of accounting disclosure among firms in Africa.

Jensen Comment
I would rather this research focused on financial reporting quality than earning quality. I think earnings quality was pretty well destroyed when the IASB teamed up with the FASB to combine realized and unrelized revenues (from financial instrument value changes) ---
http://faculty.trinity.edu/rjensen/Theory02.htm#FairValueFails


Convergent Evolution in Accounting Conceptual Framework: Barker and Penman (2016) and ASBJ (2006)
SSRN, August 18, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2824845

Authors

Shizuki Saito University of Tokyo

Yoshitaka Fukui Aoyama Gakuin University

Abstract

Criticizing the IASB’s Conceptual Framework project based on the balance sheet approach, Barker and Penman (2016) have been advocating a mixed balance sheet and income statement approach. Although they do not seem to have noticed, their approach is quite similar to that of the Japanese accounting standard setter promulgated in ASBJ (2006). We will explicate the basic similarity as well as some differences between these two approaches.


Are Activist Investors Good or Bad for Business? Evidence from Capital Market Prices, Informed Traders, and Firm Fundamentals
SSRN, August 10, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2823067

Authors

Edward P. Swanson Texas A&M University - Mays Business School; Mays Business School, Texas A&M University

Glen Young Texas A&M University

Abstract

We provide new evidence on the important and contentious question of whether interventions by activist investors add value to the targeted companies. Our large sample covers two decades and includes interventions in which the five-percent-ownership threshold for filing SEC Schedule 13D requires too much capital. We find that short-window returns around the public announcement are significantly positive and do not reverse in the post-intervention period; analyst recommendations decline prior to the intervention but increase significantly afterward; and short interest declines significantly in the post-intervention period. These favorable reactions are supported by significant improvements in target firms’ accounting fundamentals. Finally, ownership by long-term (“dedicated”) institutional investors increases after the intervention, and ownership by short-term (“transient”) investors decreases. Taken together, actions by informed market participants and accounting fundamentals provide consistent, strong evidence that investor activism strengthens the prospects of target firms.

Jensen Comment
It's probably best to download this one before it gets accepted by a journal.


International Accounting Standards: Historical and Rational Perspectives
SSRN. 2005
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2826079
The Accountant’s Journal, 2005, 54(1), 23-30 

Author

Rufo R. Mendoza Asian Institute of Management

Abstract

This paper explores the historical development of international accounting standards (IAS) and the initiatives of the prominent organizations involved in international standard setting. It also explains why countries differ in national standards, why the process of harmonization of standards among countries has been slow, and why countries should now converge their accounting standards.

Many papers on IAS generally deal with the contents of the individual standards. This writer, however, believes that accountants, as social scientists, are also interested in tracing the development of social forms over time and comparing those developmental processes across cultures. Thus, this paper addresses the interest of accountants to learn how some contemporary events or institutions—like the IAS—came into being. In like manner, accountants are interested in finding out the varied reasons why the issue of coming up with a global set of accounting standards has taken a long while. Indeed, these are perspectives that substantially differ from those commonly presented in professional forum and scholarly exercises

Jensen Comment
This author is part of a growing trend of re-publishing older published abstracts to SSRN that are not current and may not be even updated. It seems to be a publicity stunt. Makes me wonder if this a way of getting old research onto current performance reports. However, in fairness I did not compare the older version of the paper with the new SSRN posting. In this case there may have been some updating since the current SSRN posting can be downloaded.

Jensen Comment
Although it's expensive Steve Zeff's 2001-2015 update is more detailed and up to date ---
Aiming for Global Accounting Standards: The International Accounting Standards Board, 2001-2011 ---
https://www.amazon.com/Aiming-Global-Accounting-Standards-International/dp/0199646317/ref=sr_1_1?s=books&ie=UTF8&qid=1473258970&sr=1-1&keywords=Stephen+Zeff
Perhaps your campus library has a copy.


Readings And Notes On Financial Accounting: Issues and Controversies, 1996
by Stephen A Zeff and Bala G Dharan

Jensen Comment
I just bought a copy of this book for a penny from Amazon (plus shipping).
Perhaps you might like to grab up one of these before it goes out of print.


Ranking Accounting-Education Authors from Four Countries: A 20-Year Study from 1993 Through 2012
SSRN, December 31, 2014
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2832979
Global Perspectives on Accounting Education, Volume 11, p. 65-76, 2014

Taylor L. Delande Roger Williams University

Richard A. Bernardi Roger Williams University - Gabelli School of Business

Kimberly M. Zamojcin Roger Williams University - Gabelli School of Business

Abstract

This paper ranks accounting education authors from Australia, New Zealand, the Republic of Ireland, and the United Kingdom. We include eight journals whose mission was to publish accounting-education papers. While prior studies provide rankings of authors in accounting-education, these rankings are limited to authors located in the United States and Canada. This research ranks the top-10 authors by country and ranks the top 50 authors for two periods – 1993 through 2012 and 2003 through 2012. For those authors who were not included in the top-50 rankings, we also provide a distribution of authors by the number of publications for benchmarking purposes.

Jensen Comment
These authors are part of a growing trend of re-publishing older published abstracts to SSRN that are not current and not updated since the papers themselves cannot be downloaded from SSRN. It seems to be a publicity stunt. Makes me wonder if this a way of getting old research onto current performance reports.


Trends in Accounting-Education Publications by Authors from the United States between 1966 and 2012
SSRN. December 31, 2013
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2832968

Authors

Richard A. Bernardi Roger Williams University - Gabelli School of Business

Kimberly M. Zamojcin Roger Williams University - Gabelli School of Business

Abstract

The purpose of this study is to chronicle the increased level of accounting research published in 14 accounting-education journals authored by accounting doctoral classes from 1966 through 2012. The data indicate that the increase in the number of graduates from our accounting doctoral programs positively associated with the growth in the number of accounting-education journals, the number of coauthor-adjusted accounting publications, the average number of coauthor-adjusted articles for each year group, and the level of coauthoring. We found that the increase in the number of AACSB accredited institutions positively associated with the increase in the number of authors who had an accounting education publication within 10 years after graduating. However, the increase in the number of AACSB accredited institutions negatively associated with the number of coauthor-adjusted articles over time and the average number of coauthor-adjusted articles for each year group. From a research perspective, these results challenge Fogarty and Markarian’s finding about the accounting-education profession being in a state of decline

Jensen Comment
These authors are part of a growing trend of re-publishing older published abstracts to SSRN that are not current and not updated since the papers themselves cannot be downloaded from SSRN. It seems to be a publicity stunt. Makes me wonder if this a way of getting old research onto current performance reports.


Enterprise Resource Planning (ERP software and systems) ---

Jensen Comment
One of the biggest deficiencies in Accounting Information Systems (AIS) curricula is often the lack of available experts to teach the complexities of ERP systems that is designed to integrate older information systems smokestacks (marketing, finance, accounting, production, etc.)  into integrated information systems across an entire enterprise ---
http://faculty.trinity.edu/rjensen/245glosap.htm

Implementing Enterprise Resource Planning Education in a Postgraduate Accounting Information Systems Course
SSRN, September 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2796792
Business Education & Accreditation, v. 8 (1) p. 27-37 (2016)

Author

Kishore Singh
Griffith University - Griffith Business School

Abstract

The importance of Enterprise Resource Planning (ERP) systems education, its inclusion and evaluation in a university teaching context are the subjects of this article. As the importance of ERP systems has increased in the corporate world, so too has its importance increased in education. Many universities have recognized this need and the potential for using ERP systems software to teach business concepts. In this paper, the approach adopted is to develop a course that integrates theoretical accounting and business concepts together with a hands-on practical component. The course aims to empower postgraduate accounting students with knowledge regarding the process of adopting and exploiting ERP systems software to develop and maintain competitive advantage for organizations in a global marketplace


Japanese Management Accounting: An Overview of Current Methods and Practices
SSRN, August 28, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2831068

Authors

Susumu Ueno Management and Accounting Research Institute, Japan; Konan University-Graduate School of Business and Accounting, Japan

D. Paul Scarbrough Goodman School of Business - Accounting

Abstract

This paper provides scholars and practicing accountants a comprehensive and objective picture of current Japanese management accounting methods and practices. The picture is comprised of discussions of three fields related to specific aspects of organizations (corporate-level management methods and practices, front-line management accounting methods and practices and management accounting methods and practices at small and medium-sized enterprises), as well as the pervasive changes to all organizations due to information and communication technology (ICT) and disclosure rule changes.

Firstly, we discuss the development and status of corporate-level management methods and practices used by large Japanese companies. Corporate-level management accounting methods and practices discussed include planning and budgeting, hoshin kanri, the balanced scorecard, performance management, and compensation management. Second, we move to topics of front-line management accounting methods and practices often observed in Japan. The topics include the relationship between management accounting and Cost Accounting Standards, JIT production and business continuity management (BCM) and quality control. Third, since a majority of companies in Japan are small and medium-sized enterprises (SMEs), we discuss current use of management accounting methods and practices at SMEs.

In the past decades, management accounting practices in Japan have changed markedly by adapting to innovations in information and communication technology (ICT). More recently, revised disclosure rules also caused significant changes to Japanese management accounting practices. Thus, throughout this paper, we examine the impacts of ICT and new disclosure rules to Japanese management accounting practices.

The knowledge and analysis in this study provide an insightful basis for the improvement and development of managerial accounting methods and practices.


St. Petersburg Paradox --- https://en.wikipedia.org/wiki/St._Petersburg_paradox

Does the Shadow of the St. Petersburg Paradox Fall Upon Poverty Indices?
SSRN, August 27, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2830945

Author

Rajaram Gana Georgetown University - School of Medicine

Abstract

The lessons I (Gana 2014) have learned from the vivid contrast between the mean and median fair values (Hayden and Platt 2009) of the game (Bernoulli 1738) underlying the St. Petersburg Paradox (SPP) are applied, by implicating the median, to modify two unidimensional poverty indices: the Sen (1976, 1979) index and the Palma (2011) ratio. By implicating the median in economic analysis when necessary, the SPP urges us to consider the economic and ethical consequences of our interpretation of the complex idea called “probability” (Ergodos 2014) in the pursuit of the political end which Aristotle (circa 350 BC), at the very beginning of his Nicomachean Ethics, defined as the “good for man”.

The seminal Sen index, as modified by Shorrocks (1995) and decomposed by Osberg and Xu (2000), is S_P = H_poor × |P| × (1 plus G_poor), where H_poor is the proportion of the population (the “poor”) with incomes below a poverty line, P is the average income gap ratio (< 0) of the poor relative to the poverty line, and G_poor is the Gini (1912, 1921) coefficient of the censored poverty gap ratios for the population. Analogously, S_R = H_rich × R × (1 plus G_rich), where H_rich is the proportion of the population (the “rich”) with incomes above a wealth line, R is the average income gap ratio (> 0) of the rich relative to the wealth line, and G_rich is the Gini coefficient of the censored wealth gap ratios for the population. S_P and S_R are modified, to S_P* and S_R*, respectively, by replacing |P| and R by P* ≡ |min {P, P_med}| and R* ≡ min {R, R_med}, respectively; where P_med and R_med are the median poverty and wealth gap ratios, respectively. The modified indices are used to modify the Palma ratio to S_R* / S_P*. Economic policies targeting these modified indices may benefit the “missing poor” living in the shadows of society incompletely touched by indices that only take mean values as inputs. That is, only accounting for mean poverty gaps may well benefit the “richer” among the poor at the expense of the “poorer” among the poor. Furthermore, because it is better to be rich than poor (S_R* / S_P* > 1), alleviation of poverty may well dependent on also targeting the contrast between the rich and the poor. Using the modified indices to alleviate poverty will be a bit more in line with the critically important moral heuristics, and demands, of Rawls (1971, 2001) and Sen (1992), because the modifications give greater weight to the poorest of the poor.


EY:  FASB aims to more clearly portray entities’ hedging activities in the financial statements ---
http://www.ey.com/Publication/vwLUAssetsAL/TothePoint_02783-161US_Hedging_8September2016/$FILE/TothePoint_02783-161US_Hedging_8September2016.pdf

What you need to know

• The FASB proposed a number of targeted amendments to its hedge accounting guidance aimed at more clearly portraying the economics of an entity’s risk management activities in its financial statements.

 • The proposal would eliminate the need to separately measure and report hedge ineffectiveness and generally require the entire change in fair value of a hedging instrument to be presented in the same income statement line as the hedged item.

• The proposal would permit entities to hedge contractually specified risk components in cash flow hedges of variable-rate financial instruments and forecasted transactions involving nonfinancial items.

• Certain documentation and assessment requirements would be relaxed and aspects of the long-haul method for fair value hedges of interest rate risk would be simplified.

• Comments are due by 22 November 2016.


Hedge Ineffectiveness --- Scroll down at http://faculty.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#I-Terms
The ineffective portion of a hedge is the part that is financial speculation instead of hedging.

Hedge Effectiveness Under Required Disclosures: A Study of the Impact of Hedging on Capital Investment of Derivatives Users
SSRN.June 30, 2016 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2830632 

Author

Hong V. Nguyen University of Scranton

Abstract

The purpose of this paper is to study the impact of hedging on corporate capital expenditures by utilizing the changes in hedge effectiveness following the disclosure requirements of the Statement of Financial Accounting Standards 133 (SFAS 133). The standard requires firms to recognize and report the use of derivatives in their financial statements, including the purpose of use and the extent of hedge effectiveness. The greater transparency that comes with the standard is expected to incentivize firms toward demonstrating greater effectiveness in their hedging activities. Since effective hedging, by reducing risk exposure, can lower the costs of financial distress, it can raise the level of capital investment. The literature on the real consequences of hedging is limited despite the prevalence of corporate use of derivatives for hedging. The research in this paper contributes to this literature by examining the impact of hedging on capital investment. It also provides evidence on the relation between risk exposure and capital investment when a link can be established between hedge effectiveness and risk exposure, as it is the case under required disclosures.


EY:  How the new revenue recognition standard will affect homebuilders ---
http://www.ey.com/Publication/vwLUAssetsAL/TechnicalLine_02740-161US_RevRecHomebuilding_7September2016/$FILE/TechnicalLine_02740-161US_RevRecHomebuilding_7September2016.pdf

What you need to know

• Homebuilders will apply the new revenue recognition standard to revenue from sales of completed homes and residential units to customers. The standard will supersede today’s guidance in ASC 360-20, Real Estate Sales.

• Homebuilders will need to consider a number of changes in the new standard, including how they identify the customer in an arrangement, evaluate collectability of the transaction price, determine how and when revenue should be recognized, recognize costs incurred to obtain a contract and provide certain new disclosures.

• We don’t anticipate further significant changes to the recognition and measurement principles in the new standard, so homebuilders should focus on implementation. Many entities are finding that implementation requires significantly more effort than they expected.

 


Crude Inventory Accounting and Speculation in the Physical Oil Market
SSRN, August 25, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2829420

Authors

Ivan Diaz-Rainey University of Otago - School of Business

Helen Roberts University of Otago

David H. Lont University of Otago - Department of Accountancy and Finance

Abstract

This paper uses inventory data from financial accounts to explore whether companies involved in the physical oil market were speculating in the run-up to 2008. Using quarterly inventory data over the period 1990Q4 to 2012Q1 and a sample of 15 of the largest listed oil companies in the world, we derive an Index of Scaled Physical Inventories (ISPI). We find declining ISPI up to the early 2000s is consistent with firms minimizing inventory for efficiency sake; then ISPI starts to increase, suggesting physical inventories could have contributed to the run-up in oil prices between 2003 and 2008. Highlighting heterogeneity in inventory behaviors amongst the large oil companies, the structural break test on the ratio of inventory to sales and the days to sales for individual companies shows that five companies had positive structural breaks during the speculation period, while the other companies had no or negative structural breaks. Contrary to declining inventory expectations due to a tightening oil market, the positive structural breaks suggest speculative behavior. We also examine the relationship between changes in profitability and changes in oil inventory over the pre-speculation and speculation period. Though some coefficients for inventory do switch from negative to positive over the two periods as hypothesized, they are only significant in a few cases. However, aggregate measures of inventory do switch and are significant, suggesting that, on average, inventory holdings negatively affected profitability in the pre-speculation period and positively affected profitability in the speculation


What is Your EPS? Issues in Computing and Interpreting Earnings Per Share
SSRN, August 15, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2827796

Authors

Jeffrey Jay Jewell and Jeffrey A. Mankin
Lipscomb University and Lipscomb University - Department of Accounting, Finance & Economics

Abstract

This paper examines several problematic issues in the presentation of information related to earnings per share (EPS) that are common to college textbooks and popular investment websites. U.S. generally accepted accounting principles (GAAP) require disclosure of EPS for all publicly listed firms. In fact, EPS is the only financial ratio required by GAAP and it is the only financial ratio with a formula specified by GAAP. Despite these facts, many college textbooks and investment websites present incorrect formulas for the computation of EPS. Furthermore, many textbooks and investment websites either explicitly or implicitly encourage students and investors to interpret EPS incorrectly. This paper discusses these issues and contrasts proper EPS computation and interpretation with the most common errors in computation and interpretation.

Jensen Comment
EPS is usually computed so it can be compared with itself over time and/or with other companies. An enormous problem is that neither the IASB nor the FASB can define earnings. A second huge problem when compairing it with itself over time is that the rules of accounting often change regarding its underlying components. For example in the USA under the FASB and internationally under the IASB the rules have changed significantly on how to book revenues.

Do you think financial analysts and investors are going to make measurement adjustments for pre-2016 revenue recognition rules versus post 2015 revenue recongnition rules? Dream on. Mostly they will just compare apples with oranges when examining EPS trend lines by assuming they are all peaches and cream.


Obtaining Informationally Consistent Decisions When Computing Costs with Limited Information
SSRN, August 18, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2827089

Authors

Vic Anand Emory University - Goizueta Business School

Ramji Balakrishnan University of Iowa - Department of Accounting

Eva Labro University of North Carolina Kenan-Flagler Business School

Abstract

We demonstrate the need to view in a dynamic context any decision based on limited information. We focus on the use of product costs in selecting the product portfolio. We show how ex post data regarding the actual costs from implementing the decision leads to updating of product cost estimates and potentially trigger a revision of the initial decision. We model this updating process as a discrete dynamical system (DDS). We define a decision as informationally consistent if it is a fixed-point solution to the DDS. We employ numerical analysis to characterize the existence and properties of such solutions. We find that fixed points are rare, but that simple heuristics find them often and quickly. We demonstrate the usefulness and robustness of our methodology by examining the interaction of limited information with multiple decision rules (heuristics) and problem features (size of product portfolio, profitability of product markets). We discuss implications for research on cost systems.

Jensen Comment
Given the inevitable arbitrariness of estimating product costs questions are often raised about why accountants are so obsessed with measuring product costs. Actually it's their bosses (all the way to the CEO level) who are obsessed with needing product costs to set or justify pricing. The controversy is in the media a lot lately regarding pricing by the pharmaceutical industry.


Activity Based Management and Costing --- http://maaw.info/ABMMain.htm

Jensen Comment
Business executives seem to be less and less interested in ABC Costing after its rise to fame in the 1990s. Cost/Managerial accounting teachers seeking more current examples may find the following study useful in forthcoming classes. Most textbooks seem to have at least one chapter left on ABC costing.

An Application of Activity-Based Costing to Intercollegiate Athletics: A Response to the Call for Accounting Reform
SSRN, August 15, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2823936

Authors

E. Ann Gabriel Ohio University - School of Accountancy

Heather Jane Lawrence Ohio University - College of Business, Department of Sports Administration

Elizabeth A Wanless Ball State University

Abstract

Data on financial challenges in intercollegiate athletics consistently show that expenses are outpacing new revenues. Since 2004, National Collegiate Athletic Association (NCAA) Football Bowl Subdivision (FBS) institutions’ median revenues increased 94 percent while expenses increased 120 percent during the same time period (Fulks, 2015). As such, institutions face tough decisions about the possible elimination of sport teams to control costs. Current accounting methods in intercollegiate athletics, however, make it difficult for leaders to deliver informed decisions concerning sport sponsorship, Title IX compliance, and overall program operations. Institutional leaders, the NCAA, reform groups such as the Knight Commission, and the federal government, are calling for athletic departments to report more consistent and accurate financial data. The purpose of this paper is to respond to the call for accounting reform in intercollegiate athletics; specifically, to create a better representation of the costs associated with each sport and to show how accurate costing provides insight for Title IX compliance. By applying activity-based costing (ABC) to a budget from one NCAA FBS university, this research revealed the accurate cost of sport sponsorship varied greatly in comparison with institutional reporting. ABC application eliminated the expense category of unallocated (i.e., marketing, compliance, general administration, etc.) and distributed expenses back to each sport. Results showed women’s sports increased from 24 percent of total costs to 32 percent of total costs within the activity-based costing application (data relevant to prong three of Title IX). Institutional leaders should be encouraged to use ABC to better understand department operational costs.

September 5, 2016 reply from Steve Markoff

Bob: Good that you point out the increasing irrelevance of ABC. Despite that, instructors continue to follow along chapter by chapter from the books, which make it seem as though ABC is some kind of mega-critical study topic that is commonly used in practice. Fact is - it's not.

The textbooks mostly want to make you believe that companies are using activity-based costing as their primary manner for applying overhead and various other product-costing related areas. Page after page of problems and exercises follow in the books that all start with something like this: "Jensen Corporation is considering converting to Activity-Based Costing for their manufacturing operations" and then the student goes on and on with determining activity cost pools, drivers, activity rates, etc etc. Sorry - but this aint happening. Many reasons for this, not the least of which is that companies have found that numerous other multi-pool costing methods can give them similar results.

In fact, the biggest benefit of ABC is not from the costing itself, but rather, the activity study that is undertaken to determine drivers... but seriously, you don't need to be doing activity-based costing to get this. Any company that is seriously trying to value engineer will find itself determining costs and their causes anyway, but I digress.

I teach only Managerial and Cost. Last research I saw - and it could be different now - was I think like 2009 -- and it confirmed that only about 15% of companies use ABC for anything related to product costing period. The most significant applications are 1)allocation of shared costs and, 2) customer costing. Also, supplier costing is an area too, but I think that would be part of the 15% of product costing. That's it.

Do I cover it? Yes ...in Cost. But we DON'T sit there running through all kinds of problems on manufacturing overhead. We look at the more common applications that they might face -- Allocation of Shared or Common Costs, and Customer Profitability Analysis.

Steve

September 6, 2016 reply from David Johnstone

I used to teach ABC and did many exec programs in Asia when it was at its zenith in about 1990. I remember being astonished with how the ABC zealots wanted to treat fixed costs as variable, even for decision making purposes, thus contradicting all the emphasis that there had long been in Management Acctg on “relevant” or incremental costs.

It struck me that this was a fad driven by consultants who were making lots of money out of pretence. I seem to remember phrases like “broken cost systems are sending America broke”. I also remember how in teaching people from corporations about ABC, but in being less than a believer (for reasons well put in Steve’s message), the corporate types in the exec classes were very hostile (I suspected at the time they wanted ABC “skills” and language to give them a big say and a lot of importance back in their companies).

DJ


AccountingWeb's Senior Client Issues: Catastrophic Medical Expenses
http://www.accountingweb.com/practice/clients/senior-client-issues-catastrophic-medical-expenses?source=pe090916

Jensen Comment
Medicare does not cover all the bills even with supplemental Medicare insurance. The big worry is devastating cost of extended care outside the hospital. Hospitals are required to dump patients rather quickly to medical facilities not covered by Medicare. Don't just think that you or a loved one will pull the plug. For one thing after a stroke you may be to gaga to help end your own helpless life.

All too often Medicaid ends up with your enormous tab.


Taxing Tattoos and Other Fine Arts ---
http://www.bna.com/sales-tax-slice-b73014447392/

Jensen Comment
I'll resist commenting further on a tattoo of one's cat (mentioned in the article)
I guess that beats making a tattoo of one's significant other who could become insignificant most any time.
Accountants might consider a forehead tattoo of a green eyeshade.
But that might lead to lonely times in singles bars.

I think I'll get a tattoo that reads "Test Checker for Your Inventory"

Any better suggestions?


FASB Looks to Amend Amortization Period for Callable Debt Securities ---
http://www.accountingweb.com/aa/standards/fasb-looks-to-amend-amortization-period-for-callable-debt-securities?source=ei092816


An interesting illustration where the IRS loses one in Tax Court ---
http://rothcpa.com/2016/09/tax-roundup-92716-99-owner-made-off-with-5-million-madoff-deduction-also-lots-of-debate-links-today-and-more/


Transfer Mispricing As an Argument for Corporate Social Responsibility
SSRN, August 31, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2832655

Authors

Simplice A. Asongu African Governance and Development Institute

Jacinta C Nwachukwu Coventry University

Abstract

This article presents a case for transfer mispricing as an argument for Corporate Social Responsibility (CSR). The argument builds on the position that in order to compensate for potential loss of brand image and reputation, Multinational Companies (MNCs) would be more socially responsible when they are operating in countries where the legislation and laws in place are not effective at identifying and sanctioning transfer mispricing. We first discuss the dark side of transfer pricing (TP), next we present the nexus between TP and poverty and finally we advance arguments for CSR in transfer mispricing. While acknowledging that TP is a legal accounting practice, we argue that in view of its poverty and underdevelopment externalities, the practice per se should be a solid justification for CSR because it is also associated with schemes that deprive developing countries of capital essential for investments in health, education and development programmes. Therefore CSR owing to TP cannot be limited to a strategic management approach, but should also be considered as some kind of social justice because of associated transfer mispricing practices. We further argue that, CSR by multinational corporations could incite domestic companies to comply more willingly with their tax obligations and/or engage in similar activities. Whereas, traditional advocates of CSR have employed concepts such as reputation, licence-to-operate, sustainability, moral obligation and innovation to make the case for CSR, the present inquiry extends this stream of literature by arguing that TP and its externalities are genuine justifications for CSR. We consolidate our arguments with a case study of Glencore and the mining industry in the Democratic Republic of Congo.


Transfer Pricing Challenges in the Cloud ---
http://taxprof.typepad.com/taxprof_blog/2016/09/mazur-transfer-pricing-challenges-in-the-cloud.html

Jensen Comment
This is probably a good topic wherever transfer pricing is taught in accounting courses.


Pamplin Definitions for use with AACSB 2013 Faculty Classifications ---
http://www.pamplin.vt.edu/wp-content/uploads/2016/02/415-Faculty-Definitions-for-use-with-AACSB-2013-Faculty-Classifications.pdf

September 13, 2016 reply from Barbara Scofield

AACSB emphasizes that the definitions are institution-specific, so different institutions will have different definitions that fit its mission.

I doubt that size of CPA firm would be a factor. Instead the emphasis is on the degree of responsibility in the professional practice. Thus a smaller firm could easily provide deeper, more strategic planning experience than a larger firm.

Generally, the responsibility would need to be full-time or equivalent to count for PA at my institution, which is hard for a full-time academic to meet. However, one could imagine another institution designating a partnership or equivalent position that is more than half-time as meeting the practice requirements for a PA.

The idea is that "SA" is more to be desired, so that someone who begins working at a school upon retirement and holds a PhD will be PA for the 5 years that his or her prior experience counts. During that time the faculty member is expected to begin producing research and his or her category will switch to SA and stay at SA due to continued research productivity.

Moving in the opposite direction is not really expected. An academic who produces no research because he or she is involved in practice is probably not working at a high enough level for long enough while he or she is teaching. So when the faculty member's qualifications as SA runs out due to lack of research productivity, it is unusual for the person to qualify as PA.

 


Why is St Louis such a great place to start an entrepreneurship?
http://fivethirtyeight.com/features/st-louis-is-the-new-startup-frontier/

Jensen Comment
Given all the racial turmoil in and around St Louis this is both surprising and good news.
This proves that it takes more than no sales tax and no income tax to attract startups.

It could be that real estate (renting and purchasing) is just too high priced in competing cities like San Francisco, NYC, Boston, Seattle, Miami, Atlanta, and LA.
But it takes more than cheap real estate --- New England has half empty former mill towns that are going nowhere.

I doubt that St. Louis is competing on the basis of quality public schools. Here San Francisco would have an edge.


2016 Regulatory Trends: Revenue recognition, disclosure effectiveness, internal control over financial reporting, and lease accounting ---
https://info.workiva.com/advertisement-2016-regulatory-trends-white-paper-SEC.html?publication=0830-accountingweb&utm_campaign=20160830-advertisement-sec-pu-2016-regulatory-trends-whitepaper&utm_medium=email&utm_source=accounting-web


IRS issues 2016–2017 special per-diem rates for travel ---
 http://www.journalofaccountancy.com/news/2016/sep/irs-per-diem-rates-travel-2016-2017-201615260.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=28Sep2016#sthash.GUY2KmzI.dpuf


SEC's Relatively New Whistleblowing Rewards Program is a Game Changer

The Securities and Exchange Commission's 5-year-old whistleblower program has obtained more than 14,000 tips, including nearly 4,000 in 2015. Officials call the program a game changer that has had a "transformative impact" on how the SEC pursues misconduct.
Peter J. Henning, New York Times, September 6, 2016
http://www.nytimes.com/2016/09/07/business/dealbook/whistle-blowing-insiders-game-changer-for-the-sec.html?_r=0

Jensen Comment
External auditors are not very good at detecting frauds. Typically insiders expose frauds, although whistle blowing is controversial and often more damaging to the whistleblower than rewarding ---
http://faculty.trinity.edu/rjensen/FraudConclusion.htm#WhistleBlowing

"SEC Probes Companies’ Treatment of Whistleblowers:  Agency Officials Concerned About Corporate Backlash Against Whistleblowers," by Rachel Louise Ensign, The Wall Street Journal, February 25, 2015 ---
http://www.wsj.com/articles/sec-probes-companies-treatment-of-whistleblowers-1424916002?tesla=y

The Securities and Exchange Commission is probing whether companies are muzzling corporate whistleblowers.

In recent weeks the agency has sent letters to a number of companies asking for years of nondisclosure agreements, employment contracts and other documents, according to people familiar with the matter and an agency letter viewed by The Wall Street Journal. The inquiries come as SEC officials have expressed concern about a possible corporate backlash against whistleblowers.

Some of these types of documents sometimes include clauses that impede employees from telling the government about wrongdoing at the company or other potential securities-law violations, according to lawyers who handle whistleblower cases and some members of Congress. In some cases, the firms require employees to agree to forgo any benefits from government probes, effectively removing the financial incentive for participating in the SEC program.

In a separate January letter to Rep. Maxine Waters (D., Calif.) that was reviewed by the Journal, SEC Chairman Mary Jo White said she was concerned about the agreements.

The SEC has made a push to bring more whistleblower cases since the 2010 passage of the Dodd-Frank financial-reform bill, which created the agency’s whistleblower program.

Whistleblowers have flocked to the SEC program, with the number of tips increasing each year. The agency fielded 3,620 tips on potential securities-law violations in the 2014 fiscal year, up 21% from two years before.

As part of the program, tipsters can get between 10% and 30% of the sum of penalties collected if their information leads to an SEC enforcement action with sanctions of more than $1 million. The program handed out an award for more than $30 million last year to an undisclosed foreign tipster, which was its largest ever.

Dodd-Frank regulations prohibit companies from interfering with employees reporting potential securities-law violations to the agency.

An SEC spokesman declined to comment.

Continued in article

From the CFO Journal's Morning Ledger on February 20, 2015

A whistleblower’s horror story
Recent exposés of less than proprietary behavior in government and in business has led 
Rolling Stone Magazine  to call this era the age of the whistleblower. As Matt Taibbi writes, “whistleblowers are becoming to this decade what rock stars were to the Sixties — pop culture icons, global countercultural heroes.” But today’s whistleblowers tend to partake in little of the spoils and almost none of the glamour. In fact their lives are very often almost destroyed in the process.

Bob Jensen's threads on other whistleblower horror stories ---
http://faculty.trinity.edu/rjensen/FraudConclusion.htm#WhistleBlowing


Six executives are on trial for a small business scam that cost Halifax Bank of Scotland  Ł245 million ---
http://www.businessinsider.com/trial-over-hbos-fraud-dispute-starts-in-london-2016-9

Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm


Canadian Mint employee accused of smuggling $180K of gold in his rectum ---
http://ottawacitizen.com/news/local-news/egan-170k-in-mint-gold-allegedly-smuggled-in-body-cavity-judge-hears

Jensen Comment
This is the one and only time it might be very interesting to be a proctologist.

Johnny Cash's Cadillac could not top this one ---
https://www.youtube.com/watch?v=rWHniL8MyMM&list=RDrWHniL8MyMM


Tim Duncan --- https://en.wikipedia.org/wiki/Tim_Duncan

Tim Duncan's Former Financial Advisor Who Hoodwinked Him Out Of Millions Is Getting Indicted ---
https://www.yahoo.com/news/tim-duncans-former-financial-advisor-132519302.html

Jensen Comment
Tim's 2013 divorce was quite messy with most of the sympathy pointed toward nice-guy Tim ---
http://deadspin.com/tim-duncan-is-in-the-middle-of-a-remarkably-messy-divor-510172889

Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm

 


A massive pay-to-play scheme involving alleged bid rigging of state contracts involving hundreds of millions of dollars in taxpayer money was outlined by federal prosecutors Thursday in a case that targets longtime advisers and major donors of Gov. Andrew M. Cuomo ---
http://politicsnow.buffalonews.com/2016/09/22/nine-charged-bombshell-state-corruption-case/
September 23, 2016

Not Long Ago Another Scandal
Top-level orruption in NY State. Former NY Senate Speaker Sheldon Silver sentenced to 12 yeas in prison. Another dozen state lawmakers have plead guilty ---
http://www.nytimes.com/2015/12/01/nyregion/sheldon-silver-guilty-corruption-trial.html?_r=0


Second Circuit Affirms Paul Daugerdas' Conviction And Sentence For Tax Shelter Fraud ---
http://taxprof.typepad.com/taxprof_blog/2016/09/second-circuit-affirms-paul-daugerdas-conviction-and-sentence-for-tax-shelter-fraud.html
Jensen Comment
Daugerdas was an Andersen Partner who sold illegal tax shelters. It's too bad he's in Club Fed rather than a state penitentiary.


Miami Accounting Vice (the title is a takeoff on the popular TV show Miami Vice)---
http://www.wsj.com/articles/miami-accounting-vice-1474329195?mod=djemMER

 Sen. Elizabeth Warren is still angry that more financiers weren’t thrown in prison after the 2008 financial crisis. Last Thursday—the eighth anniversary of the collapse of Lehman Brothers—the Massachusetts Democrat wrote to FBI Director James Comey and Justice Department Inspector General Michael Horowitz to demand an accounting. But instead of urging Justice to revisit its cold-case files on banksters, perhaps she should focus on the disturbing news on financial fraud in municipal government.

Last Wednesday a federal jury found that the city of Miami defrauded bond investors by misleading them about the city’s declining financial condition. Specifically, Miami moved funds earmarked for specific purposes into its General Fund to hide fiscal deficits and pretend the city was maintaining robust reserves. The scheme allowed the city to gain favorable grades from credit-ratings firms, which later downgraded Miami after an auditor forced the city to reverse the illegal fund transfers.

Wednesday’s loss in a civil case brought by the Securities and Exchange Commission wasn’t the first time Miami has been caught cooking the books. In 2003 the SEC instituted a cease-and-desist order against the sunny paradise for violating anti-fraud provisions of federal law in a 1995 bond issuance. And it’s more than a Miami problem. The Journal reports that last month the SEC settled civil cases with no fewer than 71 municipal issuers. Yet we haven’t heard a peep from the progressive left about jailing government officials who mislead investors.

As for Ms. Warren, we have to give her credit for including abuses by government-backed Fannie Mae and Freddie Mac in her list of crisis-era outrages she sent to the Justice IG on Thursday. And if she’s looking for potential areas of investigation, we suggest she spend even more time examining government disclosures.

Continued in article

 Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm


H&R Block: The H Stands for “Inaccurate” (Deep Undercover Part 3) ---
https://thriveal.com/2016/09/12/hr-block-the-h-stands-for-inaccurate-deep-undercover-part-3/

Jensen Comment
No H&R stands for Horrible and Regrettable


Archival documents reveal how the sugar industry secretly funded heart disease research by Harvard professors
How the Sugar Lobby Skewed Health Research ---
http://time.com/4485710/sugar-industry-heart-disease-research/

Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm


Wells Fargo Fined $185 Million for Creating Fake Accounts ---
http://time.com/money/4484208/wells-fargo-fined-cfpb-185-million/?xid=newsletter-brief

Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm


Austin IRS facility to close; union says 2,400 jobs at stake ---
http://www.mystatesman.com/news/business/austin-irs-facility-to-close-union-says-2400-jobs-/nsZSC/

Jensen Comment
This will almost certainly cause delays in refunds for taxpayers who do not file electronically. For those who shift from paper to electronic filing the risk of ID theft is much greater. I will never file electronically again as long as paper filing is an alternative.


How to stop expense reimbursement fraud ---
http://www.cgma.org/Magazine/News/Pages/how-to-stop-expense-reimbursement-fraud-201614675.aspx?utm_source=mnl:cpald&utm_medium=email&utm_campaign=30Aug2016

Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm


GASB proposal seeks uniformity in accounting for early debt extinguishment ---
http://www.journalofaccountancy.com/news/2016/aug/gasb-accounting-early-debt-extinguishment-201615098.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=30Aug2016#sthash.ClKWAGbf.dpuf


The next frontier in data analytics ---
http://www.journalofaccountancy.com/issues/2016/aug/data-analytics-skills.html?utm_source=mnl:globalcpa&utm_medium=email&utm_campaign=31Aug2016
Note the Four Types of Data Analytics

Jensen Comment
I remember the that Andersen's audits became more and more disreputable as they replaced detailed test checking with what was then called "analytical review." For example, after the collapse of WorldCom (which was when Andersen perhaps conducted the worst audit in the history of the world) the Purchasing Department purportedly had not seen an Andersen auditor in years. Every respectable audit firm knows the that detailed test checking is extremely important in inventory auditing and purchasing department auditing (where kickbacks from suppliers are the juiciest).

Perhaps the most common complaint in PCAOB inspections of audit firms is the cutting back of detailed test checking in favor of lower cost analytical reviews.


On Application of Accounting Data Analytics in the Accounting Curriculum
SSRN, June 28, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2840455

Authors

Saeed J. Roohani, Bryant University

Ariel J. Markelevich, Suffolk University

Abstract

There is a debate as to where should be the focus of analytics in accounting curriculum. While some emphasize mastery of certain tools and propriety data set, others suggest focusing on statistical tools and data crunching. We believe in accounting we have a vast resource of company data to use to improve analytical thinking of students in various accounting courses by encouraging students to ask “interesting” questions now that we have all the data and tools. As there is limited history of applying accounting big data analytics in the accounting curriculum, this paper reports on some experiences of authors using analytics in accounting courses. We utilized publicly available accounting data products/services in the classroom and developed a series of questions for students that require accounting big data analytics. These questions are carefully designed to relate to the course subject matter, and require quick responses, given data services/tools available in class. Overall such products/services seem to help students to apply classroom learning to the real world, and therefore make learning more effective. Too often the entire focus on textbook materials could get boring without any “action” or live data analytics demonstration regarding the topic of interest. We have not collected objective data on incremental benefits of the use of accounting big data and analytics; as such there has not been a formal survey of students on this topic and tools utilized. However, the anecdotal evidence suggests that accounting could be more interesting if students in the classroom can quickly analyze a scenario and come up with potential answers. We have developed and explained in this paper various scenarios for different accounting courses that use data services/tools freely available to academics.


What is the relative priority of auditing services to Deloitte?

September 7, 2016 Quotation from Caleb Newquist ---
http://goingconcern.com/post/accounting-news-roundup-deloittes-revenue-and-apples-tax-returns-090716

. . .

That's not to say that there isn't telling information about the firm's priorities. Here's a good selection:

Deloitte's ability to deliver value for clients across all geographies and service areas led to growth in each of its five core businesses—Audit, Consulting, Financial Advisory, Risk Advisory and Tax & Legal. All advisory businesses posted double-digit growth globally. Highlights include:

Risk Advisory grew the most at 22.5 percent, driven by high demand for cyber and regulatory services.

Consulting grew at 10.8 percent, fueled by increasing demand for integrated services supporting large-scale digital transformation, systems implementation, human resources and strategy projects.

Deloitte Tax & Legal grew at 10.0 percent in FY2016, the highest growth since FY2008. Growth was boosted in part by the sixth consecutive year of double-digit growth in Deloitte Legal.

I love that legal services got a shoutout. Meanwhile, audit, the service that Punit Renjen says is "central to who were are and will remain central to who we are, period," is mentioned a grand total of two times.

 


AICPA:  Continued rise projected for accountants’ starting salaries in 2017 ---
http://www.journalofaccountancy.com/news/2016/aug/accounting-starting-salaries-2017-201615093.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=31Aug2016#sthash.bhgB3hbt.dpuf

Accounting Again Leads as Most Profitable Industry ---
http://www.accountingweb.com/practice/growth/accounting-tops-list-of-most-profitable-industries

Jensen Comment
This may be one of those ways to mislead with statistics.
For example, I think an orthopedics surgeon corporation down the road in our Alpine Clinic has a much higher percentage of return to owners than any accounting firm in the State of New Hampshire. This is probably true for most every MD specialty corporation in the State.
Much depends upon what you call an "industry."

One thing that helps accounting firms have high returns is relatively cheap labor. For example, we have a granddaughter who graduated in pharmacy and then interned with the Veterans Administration in Boston. She's now returning to Maine (Portland) for her first real job at a starting salary of $125,000 plus fringe benefits. Are there any accounting firms in New England with starting salaries of entry level graduates of $125,000? There might be some who specialize in computer and IT services, but I doubt that this salary is offered to accounting graduates.

Having said this, I still recommend in many instances going to work for an accounting firm at less than half this starting pharmacist salary. The reason is that accountancy offers so many alternative tracks for advancement into much higher paying careers. And believe it or not I think an auditor traveling from client to client has more interesting and varied work. I watch those high paid pharmacists in our Wal-Mart pharmacy working intently day-to-day and year-to-year and thank my lucky stars that I never became a Wal-Mart pharmacist.


Seeking Your Input
COSO Enterprise Risk Management — Aligning Risk with Strategy and Performance ---
http://erm.coso.org/Pages/default.aspx


How much has Vanguard saved investors? Over a trillion dollars
https://www.bloomberg.com/view/articles/2016-08-30/how-much-has-vanguard-saved-investors-try-1-trillion

Jensen Comment
Aside from my six TIAA lifetime annuities, all my savings are invested through Vanguard. I have a checkbook and can write a check anytime I need liquidity for such things as buying a car or paying property taxes. My returns are automatically invested. However, I also have a checking account with a local bank.


Updates on the Journal of Accounting and Economics
From MAAW's Blog Compiled by Jim Martin

Journal of Accounting and Economics 2016 http://maaw.info/JournalofAccountingandEconomics2016.htm 

Journal of Accounting and Economics 1979 - August 2016 http://maaw.info/JournalofAccountingandEconomics.htm

 

Updates on the journal Contemporary Accounting Research (a Canadian Academic Accounting Association journal and is the Canadian equivalent to the AAA's TAR)
From MAAW's Blog Compiled by Jim Martin

Contemporary Accounting Research 2016 --- http://maaw.info/ContemporaryAccountingResearch2016.htm 

Contemporary Accounting Research 1984-1992 and 2010-2016 --- http://maaw.info/ContemporaryAccountingResearch.htm

 

Updates on the journal Decision Sciences
From MAAW's Blog Compiled by Jim Martin

Decision Sciences Volume 47(1) - 47(4) 2016 http://maaw.info/ManagementJournals/DecisionSciences2016.htm 

Decision Sciences Volume 1(1) 1970 - Volume 6(4) 1975 and Volumes 41(1) 2010 - 47(4) 2016 http://maaw.info/ManagementJournals/DecisionSciences.htm

 

Updates on the journal Advances in Management Accounting
From MAAW's Blog Compiled by Jim Martin

Advances in Management Accounting Volume (26) 2016 http://maaw.info/AdvancesinManageAcc2016.htm 

Advances in Management Accounting Volumes (1) 1992 - (26) 2016 http://maaw.info/AdvancesinManageAcc.htm


SysTrust and SAS 70 --- https://en.wikipedia.org/wiki/American_Institute_of_Certified_Public_Accountants#WebTrust.2C_SysTrust_and_SAS_70

Are these old SysTrust dream wines in new dream wine bottles?

New path proposed for CPAs in cyber risk management ----
http://www.journalofaccountancy.com/news/2016/sep/cyber-risk-management-201615199.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=19Sep2016#sthash.gHU9wRUs.dpuf

Blast from the Past on the AECM

PwC:  Re-Branding the Accounting Profession ---
http://www.pwc.ch/en/video.html?objects.mid=362&navigationid=3856

September 20, 2010 message from Bob Jensen

Hi Denny,

Yes, I could access the PwC re-branding video directly without having to log in:
http://www.pwc.ch/en/video.html?objects.mid=362&navigationid=3856

I do have a PwC Direct password, but I really doubt that the Switzerland link is using a cookie.

In any case the home page of PwC does not require any login --- http://www.pwc.com/
The video is now on this home page.

This takes me back to the days when Bob Eliott, eventually as President of the AICPA, was proposing great changes in the profession, including SysTrust, WebTrust, Eldercare Assurance, etc. For years I used Bob’s AICPA/KPMG videos as starting points for discussion in my accounting theory course. Bob relied heavily on the analogy of why the railroads that did not adapt to innovations in transportation such as Interstate Highways and Jet Airliners went downhill and not uphill. The railroads simply gave up new opportunities to startup professions rather than adapt from railroading to transportation.

Bob’s underlying assumption was that CPA firms could extend assurance services to non-traditional areas (where they were not experts but could hire new kinds of experts) by leveraging the public image of accountants as having high integrity and professional responsibility. That public image was destroyed by the many auditing scandals, notably Enron and the implosion of Andersen, that surfaced in the late 1990s and beyond ---
http://faculty.trinity.edu/rjensen/Fraud001.htm

This is a 1998 lecture given by Bob Eliott before his world (the lofty public perception of CPA firm integrity) collapsed ---
http://newman.baruch.cuny.edu/digital/saxe/saxe_1998/elliott_98.ht

The AICPA commenced initiatives on such things as Systrust. To my knowledge most of these initiatives bit the dust, although some CPA firms might be making money by assuring Eldercare services.

The counter argument to Bob Elliot’s initiatives is that CPA firms had no comparative advantages in expertise in their new ventures just as railroads had few comparative advantages in trucking and airline transportation industries, although the concept of piggy backing of truck trailers eventually caught on.

I still have copies of Bob’s great VCR tapes, but I doubt that these have ever been digitized. Bob could sell refrigerators to Eskimos.

September 21, 2010 reply from Roger Debreceny [roger@DEBRECENY.COM]

Isn't interesting that the pwc video has nothing at all to say about protection of the investor or maintenance of the public interest. It is all about value for the client. The client gets mentioned at least a dozen times -- investors and the public, zero times.

If these are truly the internalized values of the firm, we're sure to have more audit failures in coming years.

<sigh>

Roger

September 22, 2010 reply from Bob Jensen

Hi Roger,

 In 1998, Bob Elliott argued that financial audits were destined in the 21st Century to be money losing assurance services ---
http://www.baruch.cuny.edu/library/alumni/online_exhibits/digital/saxe/saxe_1998/elliott_98.htm
This is a great lecture that can be debated in various accounting courses, notably AIS, Ethics, and Auditing courses.

Sarbox (Sarbanes, SOX) revived the profitability of financial audits but possibly not for long as worldwide lawsuits commence to take their toll on the auditing firms.
http://faculty.trinity.edu/rjensen/Fraud001.htm

A key point made by Bob Elliott is that expansion of assurance services (e.g., SysTrust and Eldercare) is levered on the public image of CPA firms’ high integrity and professional responsibility. After this shining public image of CPA firms’ integrity and professional responsibility was tarnished since the turn of the Century, the question becomes what comparative advantages do CPA firms have that gives them comparative advantage. If you believe Francine, there’s not much left for the largest auditing firms aside from an existing global network of offices, infrastructures, vast teams of lawyers, and whatever is left of a once-shining public image

Bob Jensen

September 22, 2010 reply from Francine McKenna re: The Auditors Blog [retheauditors@GMAIL.COM]

Bob, it's all about branding. If you look at what Deloitte now says on their new boilerplate legal language- they recently converted from Swiss Verein to UK private firm structure - you'll see that brand is king. "Deloitte is a brand..." It begins.

Deloitte has a consulting firm they never shed, PwC wants one bad and is counting on it to grow to pull the rest if the firm up. KPMG is trying to get back in. They were advertising their presence at Oracle Open World user conf. EY seems the only one laying low, but then again I predicted that. Time and money is being spent on lots of litigation and they have the whopper of the day-Lehman. Yes, we are back pre-2000 and no one is doing anything to stop it. In the UK the regulators and media are rattling sabers but in the US nada but me and a few others like Jim Peterson. The PCAOB has no powers to stop acquisitions like BearingPoint and Diamond by PwC that distract them and waste resources that should be spent on training and quality assurance.

Francine

 

Bob Jensen's threads on auditor independence and professional responsibility ---
http://faculty.trinity.edu/rjensen/Fraud001.htm#Professionalism

Bob Jensen's threads on auditor independence and professional responsibility ---
http://faculty.trinity.edu/rjensen/Fraud001.htm#Professionalism

 


PwC has another $1 billion stumbling block to litigate or settle out of court (for less)---
PwC Fights FDIC’s Damages Claims
https://www.fwdforensics.com/accounting/pwc-fights-fdic-damages/

PwC Reaches Settlement in Taylor Bean Case $5.5 Billion Lawsuit ---
http://www.accountingtoday.com/news/audit-accounting/pwc-reaches-settlement-in-taylor-bean-lawsuit-79077-1.html

Jensen Comment
The settlement amount is confidential, but given the timing of the settlement I would guess that PwC is quite happy.
The good news is that PwC is still in business, contrary to one of the scenarios laid out by Jim Peterson to sell his new (overpriced) book.


From Scott Bonacker on March 31, 2016

Every once in a while, a dog catches a car. Then what to do (other than call the lawyer in) – these articles discuss tax reporting after catching an embezzler:
http://web.nacva.com/JFIA/Issues/JFIA-2013-1_4.pdf 

http://www.plantemoran.com/services/business-advisory-services/forensic-accounting/documents/fvs-navigating-aftermath-of-embezzlement.pdf 

http://www.journalofaccountancy.com/issues/1999/aug/accountingforstickyfingers.html


Insulin --- https://en.wikipedia.org/wiki/Insulin

There's something odd about the way insulin prices change (read that as meaning competition does not restrain price gouging including Medicare and Medicaid gouging) ---
http://www.businessinsider.com/rising-insulin-prices-track-competitors-closely-2016-9

Insulin prices are rising — increases that mean some people are spending as much on monthly diabetes-related expenses as their mortgage payment.

But what makes the rise in insulin prices different than many other old drugs that have drawn scrutiny over prices, is that there is competition for insulin.

In most industries, competition drives down prices. In this case, the competitors appear to increase prices side-by-side — something that's been referred to as "shadow pricing."

At least three companies — Eli Lilly & Co., Novo Nordisk, and Sanofi Aventis — make and sell insulin.

Despite this competition, prices have steadily climbed over the past decade, taking single or double-digit list price increases in a year. A 10 milliliter vial of Sanofi's long-acting insulin, Lantus, first hit the US market at $34.81 a vial in 2001, according to data from Truven Health Analytics.

Since 2014, the last time Sanofi raised the price, it has been $248.51.

During the period in which Lantus's price rose 600%, a rival product from Novo Nordisk appeared. In 2006, the new drug, called Levemir, hit the market at $66.96 (close to what Sanofi's drug cost at the time). These days Levemir costs about $269.

In other words, the competition seems to have done nothing to push prices down. In fact, when charted side by side, the price increases seem to be in synch.


Time Magazine:  2016 Ig Nobel Prize Winning Quirky Research ---
http://time.com/4505383/ig-nobel-awards-2016-spoof-prize-quirky-science/?xid=newsletter-brief

Home Page and Archives ---
http://www.improbable.com/ig/


Internet --- https://en.wikipedia.org/wiki/Internet

Another Obama Broken Promise
An Internet Giveaway to the U.N.:  If the U.S. abdicates internet stewardship (on Sept. 30), the United Nations might take control
---
http://www.wsj.com/articles/an-internet-giveaway-to-the-u-n-1472421165?mod=djemMER

When the Obama administration announced its plan to give up U.S. protection of the internet, it promised the United Nations would never take control. But because of the administration’s naiveté or arrogance, U.N. control is the likely result if the U.S. gives up internet stewardship as planned at midnight on Sept. 30.

On Friday Americans for Limited Government received a response to its Freedom of Information Act request for “all records relating to legal and policy analysis . . . concerning antitrust issues for the Internet Corporation for Assigned Names and Numbers” if the U.S. gives up oversight. The administration replied it had “conducted a thorough search for responsive records within its possession and control and found no records responsive to your request.”

It’s shocking the administration admits it has no plan for how Icann retains its antitrust exemption. The reason Icann can operate the entire World Wide Web root zone is that it has the status of a legal monopolist, stemming from its contract with the Commerce Department that makes Icann an “instrumentality” of government.

Antitrust rules don’t apply to governments or organizations operating under government control. In a 1999 case, the Second U.S. Circuit Court of Appeals upheld the monopoly on internet domains because the Commerce Department had set “explicit terms” of the contract relating to the “government’s policies regarding the proper administration” of the domain system.

Without the U.S. contract, Icann would seek to be overseen by another governmental group so as to keep its antitrust exemption. Authoritarian regimes have already proposed Icann become part of the U.N. to make it easier for them to censor the internet globally. So much for the Obama pledge that the U.S. would never be replaced by a “government-led or an inter-governmental organization solution.”

Rick Manning, president of Americans for Limited Government, called it “simply stunning” that the “politically blinded Obama administration missed the obvious point that Icann loses its antitrust shield should the government relinquish control.”

The administration might not have considered the antitrust issue, which would have been naive. Or perhaps in its arrogance the administration knew all along Icann would lose its antitrust immunity and look to the U.N. as an alternative. Congress could have voted to give Icann an antitrust exemption, but the internet giveaway plan is too flawed for legislative approval.

As the administration spent the past two years preparing to give up the contract with Icann, it also stopped actively overseeing the group. That allowed Icann to abuse its monopoly over internet domains, which earns it hundreds of millions of dollars a year.

Earlier this month, an independent review within Icann called the organization “simply not credible” in how it handled the application for the .inc, .llc and .llp domains. The independent review found Icann staffers were “intimately involved” in evaluating their own work. A company called Dot Registry had worked with officials of U.S. states to create a system ensuring anyone using these Web addresses was a legitimate registered company. Icann rejected Dot Registry’s application as a community, which would have resulted in lowered fees to Icann.

Delaware’s secretary of state objected: “Legitimate policy concerns have been systematically brushed to the curb by Icann staffers well-skilled at manufacturing bureaucratic processes to disguise pre-determined decisions.” Dot Registry’s lawyer, Arif Ali of the Dechert firm, told me last week his experience made clear “Icann is not ready to govern itself.”

Icann also refuses to award the .gay domain to community groups representing gay people around the world. Icann’s ombudsman recently urged his group to “put an end to this long and difficult issue” by granting the domain. Icann prefers to earn larger fees by putting the .gay domain up for auction among for-profit domain companies.

And Icann rejects the community application for the .cpa domain made by the American Institute of CPAs, which along with other accounting groups argues consumers should expect the .cpa address only to be used by legitimate accountants, not by the highest bidder. An AICPA spokesman told me he has a pile of paperwork three feet high on the five-year quest for the .cpa domain. The professional group objected in a recent appeal: “The process seems skewed toward a financial outcome that benefits Icann itself.”

Continued in article


Anti-Trust Lawsuit Outcome:  Killing Off Hundreds of Thousands of American Cows to Keep Milk Prices High ---
https://www.bloomberg.com/news/articles/2016-09-08/cow-killing-and-price-fixing-in-your-supermarket-dairy-aisle?cmpid=BBD090816_BIZ


Your Textbook May be Out of Date:  Revised SSARS No. 21 ---
http://www.aicpa.org/interestareas/frc/reviewcompilationpreparation/pages/resources-for-ssars21.aspx?utm_source=mnl:cpald&utm_medium=email&utm_campaign=16Sep2016

Your Updated Textbook May Be Out of Date Already
FASB proposes additional revenue recognition corrections ---
http://www.journalofaccountancy.com/news/2016/sep/fasb-revenue-recognition-corrections-201615215.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=20Sep2016#sthash.qiUkvfAq.dpuf


Consumers Are Getting Plucked:  Why America Pays 50% More for Chicken  ---
http://www.bloomberg.com/news/articles/2016-09-28/is-there-a-vast-conspiracy-to-overcharge-you-for-chicken?cmpid=BBD092816_BIZ


From the CFO Journal's Morning Ledger on September 29, 2016

UBS to pay $15 million over sales practices
UBS Group AG has agreed to pay more than $15 million to settle SEC charges that its failure to properly train brokers led to customers buying hundreds of millions of dollars of unsuitable securities. According to Reuters, the SEC said on Wednesday that UBS from 2011 to 2014 sold about $548 million of derivatives tied to individual stocks to relatively inexperienced retail customers.

Jensen Comment
If you believe that improper training of brokers in selling derivatives was the cause of these frauds then Tom Selling will negotiate a price with you for his ocean front home in Phoenix. The problem is that UBS brokers were overly trained in screwing derivatives customers. Sometimes I've got to agree with Senator Elizabeth Warren.

Bob Jensen's threads on the history of derivatives marketing frauds ---
http://faculty.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds


From the CFO Journal's Morning Ledger on September 29, 2016

Why the $600 EpiPen costs $69 in Britain
The EpiPen allergy shot costs less than its leather case in Britain, Bloomberg reports. The price of an EpiPen two-pack has surged to more than $600 in the U.S., sparking a political outcry. While the manufacturer, Mylan NV, says it takes home about $274, in the U.K. a similar pair of injectors costs the state-funded National Health Service $69. The numbers highlight the stark differences in the way drugs are priced in the U.S. and Britain, where the government negotiates with pharmaceutical companies to limit costs.

Jensen Comment
Such pricing would never work worldwide because somebody has to pay for Mylan's corporate jets and conferences in Ritz hotels around the world. "Cost Plus" pricing all depends upon what outlays are included in what you call "cost." Accountants are notoriously creative when it comes to "measuring" cost.

From The Wall Street Journal on September 27, 2016
"Mylan Clarifies EpiPen's Profit"

. . .

Testifying before a congressional committee last week, CEO Heather Bresch said Mylan's profit was $100 for a two-pack of injectors, despite a $608 price in the USA (versus $69 in the U.K.)

Continued in article

Jensen Comment
As usual USA prices include all the allocations of corporate jets, conferences in luxury hotels, factory depreciation, equipment depreciation, R&D, etc. Screwing USA customers and third parties (think Blue Cross, Medicare, and Medicaid) is the name of the game in the USA.


Sustainability Accounting --- https://en.wikipedia.org/wiki/Sustainability_accounting

From the CFO Journal's Morning Ledger on September 23, 2016

Sustainability disclosures unstustainable
Investors are asking companies to beef up the information that appears in company filings regarding sustainability efforts, Tatyana Shumsky writes. Many companies issue corporate-social-responsibility reports, but both the standardization of reported metrics and third-party oversight are lacking, an investment officer for the California State Teachers’ Retirement System said on Monday.

 


PBGC is a Synonym for Santa Claus

Pension Benefit Guarantee Corporation --- https://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corporation

From the CFO Journal's Morning Ledger on September 23, 2016

PBGC feels your pain
The Pension Benefit Guaranty Corp. wants companies struggling with overburdened pension deficits to know it understands the struggle. That’s why, on Thursday, it eased late-payment fees, Vipal Monga reports. The director of the PBGC, Tom Reeder, said employers are ditching defined benefit plans “at an alarming rate.” Premium-payment penalties will be halved, and for those with a good payment history the penalty could be cut by another 80% of that amount.

Jensen Comment

Relax. It's not really taxpayer money at stake here. One day the PRGC obligation for pensions will be so huge that the Federal Government will make it simple by printing enough money to pay all the public and private pension obligations in the USA. Why is everybody so concerned about entitlements since the simple answer is in the money printing processes? Economists on edge about entitlements make it seem overly complicated when Zimbabwe had the answers all along.

Bob Jensen's threads on $100+ in unbooked entitlements that USA politicians forget about during election campaigns ---
http://faculty.trinity.edu/rjensen/entitlements.htm


 

Yahoo revealed that upwards of half a billion user’s data was compromised

From the CFO Journal's Morning Ledger on September 23, 2016

If you think your personal data is safe online, you may be a yahoo. That’s the message from Yahoo Inc., which revealed that upwards of half a billion user’s data was compromised – in 2014, by the way – by what it called “state-sponsored” hackers. While anybody with a Yahoo email or fantasy sports account is rightfully worried, the massive breach throws into question the Marissa Mayer-led company’s oversight and disclosure, especially amid the sale of its core businesses to Verizon Communications Inc.

The hack, and the timing of the disclosure, could affect the Verizon merger, Vipal Monga and Ryan Knutson report. The question is whether potentially the biggest hack on record, and the lag-time in noticing it, could constitute a material adverse change to Yahoo’s business. Courts haven’t been kind to takeover parties’ attempts to use such deal clauses to wriggle out of a soured merger, but the legalese might allow Verizon some leverage if it wants to rework the pact. As Tatyana Shumsky notes, determining tthe impact is a sticky wicket and most companies are reticent to disclose any breaches if materiality isn’t a foregone conclusion

 


From the CFO Journal's Morning Ledger on September 22, 2016

U.S. drug company hiked price of acne cream by 3,900%
Another U.S. drug company has increased the price of an acne cream by more than 3,900% in less than 18 months in the latest example of what some label price gouging, which has enraged the American public and become a central topic of debate in the presidential election campaign, the Guardian reports. Novum Pharma LLC, a recently formed privately held Chicago-based company, bought the rights to drug Aloquin in May 2015. Novum almost immediately increased the price by 1,100%, and hiked the price higher still in January 2016.

 


From the CFO Journal's Morning Ledger on September 22, 2016

AICPA steps up cyberfraud fight
The American Institute of CPAs this week unveiled three measures aimed at advancing the battle for cybersecurity, Tatyana Shumsky reports. The accounting industry group on Wednesday published a fraud report designed to better equip accountants fight off “executive impersonation” cyberattacks. The scam involves an email sent from an executive imposter to a subordinate asking for a wire transfer or payment to a new bank. Finance chiefs and their staff are particularly popular targets for this type of attack, because of their access to company accounts.


From the CFO Journal's Morning Ledger on September 21, 2016

Microsoft plans $40 billion stock buyback and raises dividend
Microsoft Corp. announced plans to buy back up to $40 billion in stock and boost its dividend by 8%, the latest in a series of moves by the software giant to share a steady flood of cash with shareholders. The latest repurchase target is the same size as a buyback plan announced in 2013, which the company said Tuesday it expects to complete by the end of this year.

Jensen Comment
When teaching elementary accounting students how to journalize the above transactions these may good examples of why companies pay dividends and why they buyback shares. Of course there are various possible reasons in each instance.


From the CFO Journal's Morning Ledger on September 20, 2016

E&Y fined $9 million for improper auditor relationships
Big companies and their outside auditors often have close professional relationships. But now, for the first time, U.S. regulators have taken enforcement action over relationships that became a little too close: it has fined professional services firm Ernst & Young LLP $9.3 million for failures including an auditor’s romantic involvement with a client, the Financial Times reports.

Bob Jensen's archives on E&Y's legal woes ---
http://faculty.trinity.edu/rjensen/fraud001.htm

Bob Jensen's threads on professionalism in auditing ---
http://faculty.trinity.edu/rjensen/fraud001c.htm


From the CFO Journal's Morning Ledger on September 20, 2016

Wells Fargo CEO ‘deeply sorry.’
Wells Fargo & Co.
Chief Executive John Stumpf will tell U.S. senators on Tuesday that he is “deeply sorry” for selling customers unauthorized bank accounts and credit cards and that he would take “full responsibility” for the unethical activity, the New York Times reports. Mr. Stumpf will strike a contrite tone in a testimony over the fake accounts at a Senate Banking Committee hearing on Tuesday morning, the New York Times said, citing a copy of his prepared remarks.

Jensen Question
Where have we heard this before in front of the US Senate?

Bankers, the IRS, and on and on and on.


From the CFO Journal's Morning Ledger on September 19, 2016

PCAOB levies sanctions, gets first ever admissions (of guilt)
The Public Company Accounting Oversight Board imposed sanctions on three, smaller audit firms, along with engagement partners at two of the firms, for violating independence requirements while auditing broker-dealer clients. Two of the firms and two engagement partners admitted to the violations, a first for the PCAOB, Accounting Today reports.

 


Paperless Office? Yeah Right!

From the CFO Journal's Morning Ledger on September 19, 2016

The future is finally now? 
Every year, America’s office workers print out or photocopy about one trillion pieces of paper, Christopher Mims writes. If you add in all the other paper businesses produce, the utility bills and invoices and bank statements and the like, the figure rises to 1.6 trillion. This is why HP Inc.’s acquisition of Samsung Electronics Co.’s printing and copying business last week makes sense.


If you teach a module on "Rent vs. Buy" you may want to make the following point

From the CFO Journal's Morning Ledger on September 19, 2016

Renting machines to weather slump
Used machinery is flooding the secondhand market, piling more pain on equipment makers battling slack demand from any customer that mines, moves or refines commodities amid a global slump in the value of everything from coal to corn. Many construction firms and other equipment users are renting or entering longer-term leases for machines to expand their fleets or replace worn out equipment, dealers and analysts say.

 


Low Interest Rates Driving Investors to Real Estate Investment Trusts

From the CFO Journal's Morning Ledger on September 19, 2016

In a sign of shifting trading and tax strategies, along with ever-changing market conditions, real-estate-investment trusts will become the new, 11th stock grouping among S&P 500 companies. It is the first time in roughly two decades, since the technology boom, that the index is gaining a new sector.

Real-estate investment trusts own real estate and pay steady dividends, which have been attractive to investors with interest rates so low. More than a net $62 billion had flowed into U.S. real-estate funds since 2001 through the end of 2015, according to Morningstar data. Since 2001, 129 real-estate investment trusts have gone public in the U.S., raising more than $38 billion. After it breaks away from banks, insurers and other financial companies, the real-estate sector will make up roughly 3% of the market capitalization of the S&P 500.

 


From the CFO Journal's Morning Ledger on September 16, 2016

Exxon gets New York accounting probe
New York Attorney General Eric Schneiderman is investigating why Exxon Mobil Corp. hasn’t written down the value of its assets, two years into a pronounced crash in oil prices. Mr. Schneiderman’s office, which has been probing Exxon’s past knowledge of the impact of climate change and how it could affect its future business, is also examining the company’s accounting practices, according to people familiar with the matter.

How GAAP, IFRS differ on asset write-downs
"For U.S. firms, figuring out GAAP is not the only challenge," by Nina Trentmann, The Wall Street Journal, September 19, 2016 ---
http://blogs.wsj.com/cfo/2016/09/19/for-u-s-firms-figuring-out-gaap-is-not-the-only-challenge/ 

A U.S. investigation into the lack of write-downs at Exxon Mobil Corp. despite the slump in oil-prices has brought to light the challenge of assessing impairments under U.S. Generally Accepted Accounting Principles (GAAP).

But, for international companies and U.S. firms with foreign operations, figuring out GAAP is not the only contest, as there is second set of rules.

International Financial Reporting Standards (IFRS) are a single set of accounting standards that are now mandated for use by more than 100 countries, including the EU and more than ⅔ of the G20.

U.S. companies with overseas operations keep two sets of books, as they have to convert their IFRS results into GAAP. International firms that are stocklisted in the U.S. are exempt from this rule, they file in IFRS.

According to its latest earnings report, Exxon consolidates in GAAP.

Both in GAAP and in IFRS, the goal is to ensure that assets are not reported above their so-called fair value, or the amount that can be recovered from liquidating the asset, said Emmanuel De George, assistant professor of accounting at London Business School.

Once it is determined that an asset requires a write-down, reporting entries and disclosure are similar between IFRS and GAAP, the professor said.

However, there are substantial distinctions between IFRS and GAAP. “The key difference arises in the determination of whether or not an asset requires a write-down,” Mr. De George said.

Exxon said it hasn’t needed to record a write-down since oil-prices came falling 2014. Last year, a trade publication quoted Exxon Chief Executive Rex Tillerson with saying “we don’t do write-downs.”

It is much harder to write down assets under GAAP than under IFRS, Mr. De George said.

This is because under IFRS impairment losses can be reversed if economic conditions change and value is restored, whereas under GAAP reversals are prohibited, once a write-down has taken place, even if economic conditions improve.

“Under GAAP, a write-down is triggered if the sum of the undiscounted expected future cash flows from the asset fall below the net book value,” said Mr. De George.

This means that over time changes to the value of the asset, for example due to currency fluctuations, are not taken into consideration when calculating the expected future cash flow that is generated by the asset.

For the write-down itself, however, companies don’t reference undiscounted expected future cash flows, but the discounted expected future cash flow.

This is also described as “fair value,” the “price that would be expected upon sale of the asset,” said Mr. De George.

Under IFRS, there’s a difference in testing whether there needs to be a write-down. IFRS starts with the discounted future expected cash flows, thus directly accounting for over time changes to the value of the asset.

The second step, the write-down, follows the same route as GAAP.

In addition there is another major difference between GAAP and IFRS. IFRS does not permit a method called last-in-first-out (LIFO) which shows a lower cost of sales and higher gains during periods of declining oil prices, said Karthik Balakrishnan, assistant professor of accounting at London Business School.

“This is what Exxon and most U.S. oil companies use,” said Mr. Balakrishnan.

Because of the difference in assessing write-downs and LIFO, IFRS will produce more conservative numbers for earnings during periods of declining prices, said Mr. Balakrishnan.

In the case of Exxon, the experts warn against simply accrediting the lack of write-downs to the differences in accounting standards between the U.S. and other parts of the world.

“That would be an unfair comparison, given that the threshold for impairment testing is higher under GAAP,” said Mr. De George.

Exxon tends to be more conservative when capitalizing the costs of their fields which lead to lower book values to begin with, Mr. George said. “That further reduces the probability that they will trigger an impairment event,” he said.

Continued in article

Bob Jensen's threads on FASB versus IASB standards ---
http://faculty.trinity.edu/rjensen/Theory01.htm#MethodsForSetting


Macroeconomics --- https://en.wikipedia.org/wiki/Macroeconomics

For more than three decades, macroeconomics has gone backward.
"The state of macroeconomics is not good. by Daniel Drezner, The Washington Post, September 15, 2016 ---
https://www.washingtonpost.com/posteverything/wp/2016/09/15/the-state-of-macroeconomics-is-not-good/?utm_term=.5f06c2cc0186

Yesterday’s post about the stale quality of international relations theory provoked some pushback from international relations scholars. It also probably generated some bemusement by economists.

This is mostly because economists are close to insufferable when they opine about the other. Indeed, inEconomics Rules,” an otherwise critical book of his discipline, Dani Rodrik offers up numerous asides about how economics is more rigorous than the rest of the social sciences, such as, “economics is by and large the only social science that remains almost entirely impenetrable to those who have not undertaken the requisite apprenticeship in graduate school,” which allows him to conclude that, “because economists share a language and a method, they are prone to disregard, or deprecate, noneconomists’ point of view.” And this is empirically true: Other academic disciplines cite economists frequently, but they do not return the favor nearly as often.

This has mostly worked out gangbusters for economists. In a 2015 paper that examined how well economists have thrived in the world compared with the other social sciences, sociologist Marion Fourcade and two colleagues conclude:

Most economists feel quite secure about their value-added. They are comforted in this feeling by the fairly unified disciplinary framework behind them, higher salaries that many of them believe reflect some true fundamental value, and a whole institutional structure — from newspapers to congressional committees to international policy circles — looking up to them for answers, especially in hard times.

Most economists are perfectly content with this status quo, believing it to be fair and just. And I’d just like to take this opportunity to tell economists that this is a complete and total crock.

One could argue that the two subfields of economics that have had the largest real-world policy influence have been in finance and macroeconomics. The problem is that this influence has mostly been catastrophic. In the arena of finance, University of Chicago economist Luigi Zingales has lambasted his own subfield, acknowledging that “our view of the benefits of finance is inflated.”  Stanford University professor Paul Pfleiderer accuses finance scholars of using models as chameleons, engaging in “theoretical cherry-picking” to advance ideas that are not necessarily grounded in reality. Other economists acknowledge that a narrow focus on financial variables caused them to miss political sources of the crisis and its aftermath.

If you think that’s bad, though, let’s talk about macroeconomics for a minute. One could argue that the most high-profile contribution by macroeconomists to the post-2008 global economy has been an emphasis on fiscal austerity as a solution to stagnation. That prescription has been, well, pretty much disastrous.

I bring all of this up because Paul Romer has a lulu of a paper entitled The Trouble with Macroeconomics” that rocketed around the social media of the social sciences. If you think the title implies criticism, read the abstract:

For more than three decades, macroeconomics has gone backward. The treatment of identification now is no more credible than in the early 1970s but escapes challenge because it is so much more opaque. Macroeconomic theorists dismiss mere facts by feigning an obtuse ignorance about such simple assertions as “tight monetary policy can cause a recession.” Their models attribute fluctuations in aggregate variables to imaginary causal forces that are not influenced by the action that any person takes. A parallel with string theory from physics hints at a general failure mode of science that is triggered when respect for highly regarded leaders evolves into a deference to authority that displaces objective fact from its position as the ultimate determinant of scientific truth.

It gets more brutal from there, as Romer mocks the logic of real business cycles (a core component behind much of modern macro) and relabels its key explanatory variable as “phlogiston.” In history of science circles, that is a sick burn.

 Continued in article

 


The U.S. Justice Department proposed that Deutsche Bank pay $14 billion to settle a set of high-profile mortgage-securities probes
From the CFO Journal's Morning Ledger on September 16, 2016

Deutsche Bank AG wilnot go gently into that goodnight. The U.S. Justice Department proposed that Deutsche Bank pay $14 billion to settle a set of high-profile mortgage-securities probes stemming from the financial crisis, according to people familiar with the matter, a number that would rank among the largest payments by banks to resolve similar claims and is well above what investors have been expecting. The figure is described by people close to the negotiations between Deutsche Bank and the government as preliminary, and they said it came up in discussions between the bank and government lawyers in recent days.

For its part, Deutsche Bank says it “has no intent to settle these potential civil claims anywhere near the number cited.” It said the outcome should reflect those that have settled before and expects a settlement at “materially lower amounts.” Privately, Deutsche Bank lawyers have suggested that the bank views between $2 billion and $3 billion as a reasonable cost to close out the Justice Department’s mortgage-related probe quickly, according to people familiar with internal bank discussions and signals communicated to investors

 


From the CFO Journal's Morning Ledger on September 15, 2016

Health-care costs no joke
The average cost of health coverage offered by employers pushed above $18,000 for a family plan this year, though the growth was slowed by the accelerating shift into high-deductible plans, according to a major survey. Annual premium cost rose 3% to $18,142 for an employer family plan in 2016, according to the annual poll of employers performed by the nonprofit Kaiser Family Foundation along with the Health Research & Educational Trust.

From the CFO Journal's Morning Ledger on August 17, 2016

Health care a sticky wicket
Many companies are cutting jobs in response to rising health-care costs spurred by the Affordable Care Act, according to a new survey by the Federal Reserve Bank of New York. Roughly one-fifth of service sector and manufacturing company executives said they are reducing the number of workers in response to provisions in the health-care law, Vipal Monga reports. The results add to a bevy of bad news related to the Obama administration’s signature health-care law.

 

Obamacare:  More and more limited access to doctors and hospitals
From the CFO Journal's Morning Ledger on September 1, 2016

Why put off until January what you can do today? Under intense pressure to curb costs that have led to losses on the Affordable Care Act exchangesinsurers are accelerating their move toward plans that offer limited choices of doctors and hospitals. A new McKinsey & Co. analysis of regulatory filings for 18 states and the District of Columbia found that 75% of the offerings on their exchanges in 2017 will likely be health-maintenance organizations or a similar plan design known as an exclusive provider organization, or EPO. Both typically require consumers to use an often-narrow network of health-care providers – in some cases, just one large hospital system and its affiliated facilities and doctors.

Only a quarter of the exchange plans next year would still be broader designs such as preferred-provider organizations, or PPOs, which generally offer larger selections of doctors and hospitals and include out-of-network coverage, the McKinsey analysis found. Across the states McKinsey examined, about 15% of exchange-eligible consumers are expected to have no PPOs to choose from. A spokesman for the Department of Health and Human Services said that many surveys have shown that exchange enrollees are satisfied with the array of health-care providers in their plans, and insurers are adjusting their offerings based on consumer demand. Offering a smaller selection of health-care providers holds down costs, in part because hospitals and specialists with the highest reimbursement rates can be cut out.

Bob Jensen's universal health care messaging --- http://faculty.trinity.edu/rjensen/Health.htm 


Regulation:  The intent is no longer to regulate. The intent is to raise government revenues.

From the CFO Journal's Morning Ledger on September 15, 2016

A cross-border merger, one of the larger deals in history, a ton of debt financing, genetically modified crops, German law, regulatory oversight and a the future of a 115-year old brand name: What’s not to love? After months of haggling Monsanto Co. agreed to sell itself to Bayer AG in a $57 billion deal that would create an agricultural powerhouse and end the independence of one of the most successful and controversial companies in the U.S. Because of the two companies’ far-flung operations and markets, the pact would require approval from about 30 regulatory agencies around the world, including antitrust enforcers already examining deals between some of the companies’ main rivals in the roughly $100 billion global market for crop seeds and pesticides.

The two businesses don’t overlap much, though seeds could be an issue, but perhaps more importantly there may not be much appetite for further consolidation among farm suppliers as the global farming industry struggles and fertilizer companies are also racing into one another’ arms. The venerable Monsanto brand could also disappear, and the resulting company will face a world that, scientifically justified or not, is increasingly skeptical of GMO crops, and its farmers question the higher prices for such seeds. Bayer will finance the deal chiefly with debt, which under German law will allow it to circumvent a shareholder vote, CFO Journal reports. In a deal with a greater equity component, Bayer would have needed to get three out of four investors to say yes.

Jensen Comment
Many are predicting that there are so many regulating agencies that this deal will never materialize. I think it will fly due to those regulatory agencies catching on the the EU strategy of allowing something (tax deals, merger, etc.) and then suing later for billions. The intent is no longer to regulate. The intent is to raise government revenues.


From the CFO Journal's Morning Ledger on September 14, 2016

Former AIG boss set to go on trial
Former AIG Inc. boss Hank Greenberg went to trial in New York on Tuesday over a decade after civil charges were filed, the FT reports. He is accused of engineering bogus transactions to hide the insurance giant's financial difficulties. The charges were filed in 2005, but Mr. Greenberg has said they have no merit.

 


From the CFO Journal's Morning Ledger on September 13, 2016

U.K. pension deficits mount
The gap between reserves set aside by U.K. companies and their obligations to retirees continues to grow, Nina Trentmann reports in today’s Big Number. The combined deficit of defined-benefit pension plans at U.K. public companies rose by Ł50 billion to Ł189 billion ($250.8 billion) at the end of August, according to Mercer, a benefits consulting firm. Although the deficit has been building up for over a decade, more recent developments such as the U.K.’s vote to leave the European Union and low interest rates have accelerated the downward trend.

Yale Law Journal:  USA's State Pension Deficits, the Recession, and a Modern View of the Contracts Clause ---
http://www.yalelawjournal.org/comment/state-pension-deficits-the-recession-and-a-modern-view-of-the-contracts-clause-


This $19 Billion Claim Could Be the Largest in UK History

From the CFO Journal's Morning Ledger on September 9, 2016

MasterCard charged
In 2014, the European Court of Justice ruled that regulators were right to condemn the cost of its interchange fees - the fees retailers pay banks to process card payments, the BBC reports. MasterCard lowered its fees but now faces a claim for damages for 16 years of charging from 1992 to 2008. As the Journal reports, the claim is nearly $19 billion, and could be the biggest in U.K. history


From the CFO Journal's Morning Ledger on September 8, 2016

Apache strikes black gold
Apache Corp. said it has discovered the equivalent of at least two billion barrels of oil in a new West Texas field that has the promise to become one of the biggest energy finds of the past decade. The discovery, which Apache is calling “Alpine High,” is in an area near the Davis Mountains that had been overlooked by geologists and engineers, who believed it would be a poor fit for hydraulic fracturing.

Jensen Comment
That should keep high school football going in West Texas for a few more decades.


The SEC Racket of Defending Companies You Previously Investigated

From the CFO Journal's Morning Ledger on September 6, 2016

Government parachute
The former head of the Securities and Exchange Commission’s whistleblower program is joining a law firm that represents those same tipsters—an unusual turn of the revolving door that highlights the potential profitability of legal work that didn’t even exist a few years ago. Government officials typically go into private practice to defend the companies they previously might have investigated. Sean McKessy, who left his post as the first chief of the SEC’s Office of the Whistleblower in July, is taking the riskier path of the plaintiffs’ bar by joining Washington-based Phillips & Cohen LLP.

Jensen Comment
The Regulator to Regulated racket is not confined to the SEC. Is there a government agency where the top regulators don't become employees of the companies they regulated?
Exhibits A, B, and C are attorney generals, military generals, and health regulators in the FDA, NIH, etc.


From the CFO Journal's Morning Ledger on September 6, 2016

Junk is called junk for a reason
High-yield corporate bonds have been a hot investment in 2016. Now, some investors are fretting that the debt may have gotten too popular. Drawn by higher yields than on safer bonds and lower valuations than on stocks, portfolio managers and individuals alike have poured money into junk bonds this year.


From the CFO Journal's Morning Ledger on September 2, 2016

Whistleblowing, career safety at odds
In a perfect world, whistleblowing would be celebrated universally, but this ain’t a perfect world. That’s the message David Mayer, a professor of management and organizations at the University of Michigan business school. Those who speak out about wrongdoing in organizations often suffer retaliation, he writes for Harvard Business Review, both at their current organization and in their attempt to find future employment

Bob Jensen's threads on whistle blowing ---
http://faculty.trinity.edu/rjensen/Fraudconclusion.htm#WhistleBlowing


Wharton:  The Real Losers in the European Commission’s Apple Tax Ruling ---
http://knowledge.wharton.upenn.edu/article/the-european-commissions-apple-tax-ruling-who-are-the-real-losers/

Apple: You can have $14.5 billion or jobs, not both ---
http://www.businessinsider.com/apple-eu-tax-ruling-profound-harmful-effect-investment-job-creation-2016-8
The EU does not have the last laugh in it's quest to rip off USA companies
Apple makes a lot of computers Ireland, but there are other choice sites in the world wanting those jobs

From the CFO Journal's Morning Ledger on August 31, 2016

Apple faces EU peeler
The European Union’s antitrust regulator announced Tuesday a ruling that Apple Inc.’s tax arrangements with Ireland have breached the bloc’s state-aid rules, saying Ireland must recoup about €13 billion ($14.5 billion) in unpaid taxes from the tech giant. The EU’s decision is likely to aggravate trans-Atlantic tensions over the investigations into tax deals brokered between U.S. multinational corporations and individual European countries.

Also see
http://www.bloomberg.com/news/articles/2016-08-30/apple-s-14-5-billion-eu-tax-ruling-what-you-need-to-know?cmpid=BBD083016_BIZ

From the CFO Journal's Morning Ledger on August 31, 2016

The European Union’s ruling against Apple Inc.’s tax situation in Ireland could have global implications. It might affect everything from our domestic tax code to our relationship with foreign countries. The size of the tax demand, which came in a formal decision issued Tuesday, risks further unsettling multinational companies, which face a broader international effort to curb aggressive tax avoidance. But the commission’s decision shows companies could be on the hook for past behavior and potentially be handed big bills for allegedly unpaid back taxes. The sum is the highest ever demanded under the EU’s longstanding rules that forbid companies from gaining advantages over competitors because of government help.

To the Treasury and members of Congress, EU regulators represent a threat partly because companies could get U.S. tax credits if they pay more abroad, reducing future U.S. tax collections. The U.S. is trying to protect its claim to the foreign income even though it hasn’t figured out how to tax it, Richard Rubin writes. The EU move underscores the difficulty American regulators have had to deal with as they try to appropriately tax U.S. multinationals..

A bright side?
The $14.5 billion Apple is being asked to pay to Ireland in back taxes could potentially help offset its tab with the Internal R brigevenue Service, Kimberly S. Johnson and Tatyana Shumsky report. When an American company pays taxes on profits in foreign countries, it owes Uncle Sam only the difference between the taxes paid and the U.S. tax rate. So in the case of Apple, recording a large foreign tax charge could “set the stage for a foreign tax credit,” said tax consultant Robert Willens.

A silver lining?  
But the EU’s move could force the hand of Congress, which has been arguing and dithering over an overhaul to the U.S. corporate-tax code. The U.S. levies nearly the highest corporate rates in the world. Ray Wiacek, senior tax partner at international law firm Jones Day in Washington, told Richard Teitelbaum that the ruling “may be the straw that broke the camel’s back.” With the rest of the developed world moving toward lower corporate rates, the EU ruling may provide the impetus for the U.S. Congress to address the chasm between the U.S. tax code and that of other nations. We’ll likely need to wait until November to know more.


New IRS restrictions foreign tax credit splitter arrangements ---
http://www.journalofaccountancy.com/news/2016/sep/irs-restricts-foreign-tax-credit-splitter-arrangements-201615196.html?mod=djemCFO_h#sthash.N5pMfgxH.dpuf


New Audit Deficiencies Disclosed in PCAOB Inspection Reports:  Do the big auditing firms simply ignore deficiencies uncovered by the PCAOB?
From the CFO Journal's Morning Ledger on August 31, 2016

It’s that time of year again
The government’s audit regulator found deficiencies in 13 audits conducted by Deloitte & Touche LLP and 12 audits conducted by PricewaterhouseCoopers LLP in its latest annual inspections of the Big Four accounting firms. The 13 deficient audits found by the Public Company Accounting Oversight Board represent 24% of the 55 audits and partial audits reviewed by the board in its 2015 inspection of Deloitte, issued Tuesday. That is up slightly from the previous year’s report.

Jensen Comment
Someday law firms will discover how to use these deficiencies to milk the auditing firms
Maybe they do already and I just don't know about it.


From the CFO Journal's Morning Ledger on August 30, 2016

Public companies are minding the GAAP again, now that the Securities and Exchange Commission is having a close look, Tatyana Shumsky reports in today’s Business & Tech. section. After March quarterly earnings reports in which nearly half of S&P 500 companies led with adjusted numbers that didn’t adhere to generally accepted accounting principles, the SEC in May told businesses to play non-GAAP numbers down. When second-quarter numbers were released, more than 80% of companies gave GAAP results top billing, according to an Audit Analytics study for The Wall Street Journal.

Companies that have made the transition include Halliburton Co., Walgreens Boots Alliance Inc. and videogame maker Electronic Arts Inc. The guidance leaves little room for flexibility, and most companies aren’t taking any chances. If a paragraph or table contains standard and adjusted figures, companies must make sure sentences or columns with the standard, or GAAP, information precede everything else. Numbers must be also be presented in the same style, meaning customized metrics can’t be bolded or printed in a larger-size font, nor can they be described as “record” or “exceptional” unless GAAP results are characterized in a similar way.

 


From the CFO Journal's Morning Ledger on August 29, 2016

FASB issues cash-flows standard
The Financial Accounting Standards Board on Friday issued a new standard for reporting cash-flow statements, in an effort to streamline reporting and clarify aspects of generally accepted accounting principles that are unclear or absent, the Journal of Accountancy reports.

Also see
http://www.journalofaccountancy.com/news/2016/aug/fasb-addresses-cash-flow-issues-201615068.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=29Aug2016

Which is More Value-Relevant: Earnings or Cash Flows?
http://faculty.trinity.edu/rjensen/theory02.htm#CashVsAccrualAcctg 
 


From the CFO Journal's Morning Ledger on August 29, 2016

Exxon bailing on Alaska project
Exxon Mobil Corp.
 has decided not to invest in the next stage of a proposed natural gas export terminal in Alaska and said it would work with its partners to sell its interest in the project to the state government. The company’s decision comes amid a global glut of natural gas that has depressed prices and follows the release of a Wood McKenzie report last week concluding the Alaskan project “is one of the least competitive” of proposed liquefied natural gas plants worldwide

Jensen Comment
Meanwhile Alaska's budget is in desparate shape due to the plunge in oil prices. It will probably enact it's first state income tax in 2019 ---
http://www.wsj.com/articles/alaskas-folly-politicians-contemplate-a-state-income-tax-1461966849

Alaska has the nation's worst prospects for solar energy due to so many days of darkness. Also batteries for renewable energy storage don't work well in cold climates.


From the CFO Journal's Morning Ledger on August 29, 2016

Strapped IRS ends program
The Internal Revenue Service, lacking sufficient budget, is halting a program that lets large companies resolve tax issues before filing returns, Accounting Today reports. No new taxpayers will be accepted into the Compliance Assurance Process program for the 2017 application season, which starts next month.


Credit Derivative --- https://en.wikipedia.org/wiki/Credit_derivative

Credit Default Swap --- https://en.wikipedia.org/wiki/Credit_default_swap

"Credit Derivatives and Analyst Behavior," by George Eli Batta, Jiaping Qiu, and Fan Yu, The Accounting Review, September 2016, Vol. 91, No. 5, pp. 1315-1343
http://aaajournals.org/doi/full/10.2308/accr-51381
This is not a free download

This paper presents a comprehensive analysis of the role of credit default swaps (CDS) in information production surrounding earnings announcements. First, we demonstrate that the strength of CDS price discovery prior to earnings announcements is related to the presence of private information and the illiquidity of the underlying corporate bonds, consistent with the CDS market being a preferred venue for informed trading. Next, we ask how the information revealed through CDS trading influences the output of equity and credit rating analysts. We find that post-CDS trading, the dispersion and error of earnings per share forecasts are generally reduced, and downgrades by both types of analysts become more frequent and more timely before large negative earnings surprises, suggesting that the CDS market conveys information valuable to financial analysts.

Jensen Comment

Collateralized debt obligations (CDOs) used with credit default swaps led to the demise of Bear Sterns and the need to bail out Goldman Sachs following the 2007 economic collapse ---
https://en.wikipedia.org/wiki/Credit_default_swap#Regulatory_concerns_over_CDS
Much of the problem was with the poisoned CDOs sold to large investors who had protected themselves with credit derivatives.

WMD = Weapon of Mass Destruction
Financial WMDs (Credit Derivatives) on Sixty Minutes (CBS) on August 30, 2009
---
http://www.cbsnews.com/video/watch/?id=5274961n&tag=contentBody;housing
The free download will only be available for a short while. I downloaded this video (a little over 5 Mbs) using a free updated version of RealMedia --- Click Here
http://www.real.com/dmm/superpass?pcode=cj&ocode=cj&cpath=aff&rsrc=1275588_10303897_SPLP

 

Steve Kroft examines the complicated financial instruments known as credit default swaps and the central role they are playing in the unfolding economic crisis. The interview features my hero Frank Partnoy. I don't know of anybody who knows derivative securities contracts and frauds better than Frank Partnoy, who once sold these derivatives in bucket shops. You can find links to Partnoy's books and many, many quotations at http://faculty.trinity.edu/rjensen/FraudRotten.htm#DerivativesFrauds

From The Wall Street Journal Accounting Educators' Review on April 3, 2003

TITLE: Lending Less, "Protecting" More: Desperate for Better Returns, Banks Turn to Credit-Default Swaps 
REPORTER: Henny Sender and Marcus Walker 
DATE: Apr 01, 2003 
PAGE: C13 
LINK: http://online.wsj.com/article/0,,SB104924410648100900,00.html  
TOPICS: Advanced Financial Accounting, Banking, Fair Value Accounting, Financial Analysis, Insurance Industry

SUMMARY: This article describes the implications of banks selling credit-default swap derivatives. Firtch Ratings has concluded in a recent report that banks are adding to their own risk as they use these derivatives to sell insurance agains default by their borrower clients.

QUESTIONS: 1.) Define the term "derivative security" and describe the particular derivative, credit-default swaps, that are discussed in this article.

2.) Why are banks entering into derivatives known as credit-default swaps? Who is buying these derivatives that the bank is selling?

3.) In general, how should these derivative securities be accounted for in the banks' financial statements? What finanicial statement disclosures are required? How have these disclosures provided evidence about the general trends in the banking industry that are discussed in this article?

4.) Explain the following quote from Frank Accetta, an executive director at Morgan Stanley: "Banks are realizing that you can take on the same risk [as the risk associated with making a loan] at more attractive prices by selling protection."

5.) Why do you think the article equates the sale of credit-default swaps with the business of selling insurance? What do you think are the likely pitfalls of a bank undertaking such a transaction as opposed to an insurance company doing so?

6.) What impact have these derivatives had on loan pricing at Deutsche Bank AG? What is a term that is used to describe the types of costs Deutsche Bank is now considering when it decides on a lending rate for a particular borrower?

"Banks' Increasing Use of Swaps May Boost Credit-Risk Exposure, by Henny Sender and Marcus Walker, The Wall Street Journal, April 1, 2003 --- http://online.wsj.com/article/0,,SB104924410648100900,00.html 

When companies default on their debt, banks in the U.S. and Europe increasingly will have to pick up the tab.

That is the conclusion of Fitch Ratings, the credit-rating concern. Desperate for better returns, more banks are turning to the "credit default" markets, a sphere once dominated by insurers. In a recent report, Fitch says the banks -- as they use these derivatives to sell insurance against default by their borrowers -- are adding to their credit risk.

The trend toward selling protection, rather than lending, could well raise borrowing costs for many companies. It also may mean greater risk for banks that increasingly are attracted to the business of selling protection, potentially weakening the financial system as a whole if credit quality remains troubled. One Canadian bank, for example, lent a large sum to WorldCom Inc., which filed for Chapter 11 bankruptcy protection last year. Rather than hedging its loan to the distressed telecom company by buying protection, it increased its exposure by selling protection. The premium it earned by selling insurance, though, fell far short of what it both lost on the loan and had to pay out to the bank on the other side of the credit default swap.

"The whole DNA of banks is changing. The act of lending used to be part of the organic face of the bank," says Frank Accetta, an executive director at Morgan Stanley who works in the loan-portfolio management department. "Nobody used to sit down and calculate the cost of lending. Now banks are realizing that you can take on the same risk at more attractive prices by selling protection."

Despite its youth, the unregulated, informal credit-default swap market has grown sharply to total almost $2 trillion in face value of outstanding contracts, according to estimates from the British Bankers Association, which does the most comprehensive global study of the market. That is up from less than $900 billion just two years ago. (The BBA says the estimate contains a good amount of double counting, but it uses the same method over time and thus its estimates are considered a good measuring stick of relative change in the credit-default swap market.) Usually, banks have primarily bought protection to hedge their lending exposure, while insurers have sold protection. But Fitch's study, as well as banks' own financial statements and anecdotal evidence, shows that banks are becoming more active sellers of protection, thereby altering their risk profiles.

The shift toward selling more protection comes as European and American banks trumpet their reduced credit risk. And it is true that such banks have cut the size of their loan exposures, either by taking smaller slices of loans or selling such loans to other banks. They also have diversified their sources of profit by trying to snare more lucrative investment-banking business and other fee-based activity.

Whether banks lend money or sell insurance protection, the downside is generally similar: The bank takes a hit if a company defaults, cushioned by whatever amount can eventually be recovered. (Though lenders are first in line in bankruptcy court; sellers of such protection are further back in the queue.)

But the upside differs substantially between lenders and sellers of protection. Banks don't generally charge their corporate borrowers much when they make a loan because they hope to get other, more lucrative assignments from the relationship. So if a bank extends $100 million to an industrial client, the bank may pocket $100,000 annually over the life of the loan. By contrast, the credit-default swap market prices corporate risk far more systematically, devoid of relationship issues. So if banks sell $100 million of insurance to protect another party against a default by that same company, the bank can receive, say, $3 million annually in the equivalent of insurance premiums (depending on the company's creditworthiness).

All this comes as the traditional lending business is becoming less lucrative. The credit-derivatives market highlights the degree to which bankers underprice corporate loans, and, as a result, bankers expect the price of such loans to rise.

"We see a change over time in the way loans are priced and structured," says Michael Pohly, head of credit derivatives at Morgan Stanley. "The lending market is becoming more aligned with the rest of the capital markets." In one possible sign of the trend away from traditional lending, the average bank syndicate has dropped from 30 lenders in 1995 to about 17 now, according to data from Loan Pricing Corp.

Some of the biggest players in the market, such as J.P. Morgan Chase & Co., are net sellers of such insurance, according to J.P. Morgan's financial statements. In its annual report, J.P. Morgan notes that the mismatch between its bought and sold positions can be explained by the fact that, while it doesn't always hedge, "the risk positions are largely matched." A spokesman declined to comment.

But smaller German banks, some of them backed by regional governments, are also active sellers, according to Fitch. "Low margins in the domestic market have compelled many German state-guaranteed banks to search for alternative sources of higher yielding assets, such as credit derivatives," the report notes. These include the regional banks Westdeutsche Landesbank, Bayerische Landesbank, Bankgesellschaft Berlin and Landesbank Hessen-Thueringen, according to market participants. The state-owned Landesbanken in particular have been searching for ways to improve their meager profits in time for 2005, when they are due to lose their government support under pressure from the European Union.

Deutsche Bank AG is one of biggest players in the market. It is also among the furthest along in introducing more-rational pricing to reflect the implicit subsidy in making loans. At Deutsche Bank, "loan approvals now are scrutinized for economic shortfall" between what the bank could earn selling protection and what it makes on the loan, says Rajeev Misra, the London-based head of global credit trading.

 

A credit default swap is a form of insurance against default by means of a swap. See Paragraphs 190 and 411d of FAS 133. See Risks.

Somewhat confusing is Paragraph 29e on Page 20 of FAS 133 that requires any cash flow hedge to be on prices or interest rates rather than credit worthiness.  For example, a forecasted sale of a specific asset at a specific price can be hedged for spot price changes under Paragraph 29e.  The forecasted sale's cash flows may not be hedged for the credit worthiness of the intended buyer or buyers.  Example 24 in Paragraph 190 on Page 99 of FAS 133 discusses a credit-sensitive bond.  Because the bond's coupon payments were indexed to credit rating rather than interest rates, the embedded derivative could not be isolated and accounted for as a cash flow hedge.

One of my students wrote the following case just prior to the issuance of FAS 133:.  John D. Payne's case and case solution entitled A Case Study of Accounting for an Interest Rate Swap and a Credit Derivative appear at http://www.resnet.trinity.edu/users/jpayne/coverpag.htm .  He states the following:

The objective of this case is to provide students with an in-depth examination of a vanilla swap and to introduce students to the accounting for a unique hedging device--a credit derivative. The case is designed to induce students to become familiar with FASB Exposure Draft 162-B and to prepare students to account for a given derivative transaction from the perspective of all parties involved. In 1991, Vandalay Industries borrowed $500,000 from Putty Chemical Bank and simultaneously engaged in an interest rate swap with a counterparty. The goal of the swap was to hedge away the risk that variable rates would increase by agreeing to a fixed-payable, variable-receivable swap, thus hopefully obtaining a lower borrowing cost than if variable rates were used through the life of the loan. In 1992, Putty Chemical Bank entered into a credit derivative with Mr. Pitt Co. in order to eliminate the credit risk that Vandalay would default on repayment of its loan principal to Putty.

Greg Gupton's site is a major convergence point of research on credit risk and credit derivatives --- http://www.credit-deriv.com/crelink.htm 

A good site on credit risk is at http://www.numa.com/ref/volatili.htm   

Example 24 in Paragraph 190 on Page 99 of FAS 133 discusses a credit-sensitive bond.

Misuses of Credit Derivatives
JP Morgan – whose lawyers must be working overtime – is refuting any wrongdoing over credit default swaps it sold on Argentine sovereign debt to three hedge funds. But the bank failed to win immediate payment of $965 million from the 11 insurers it is suing for outstanding surety bonds.
Christopher Jeffery Editor, March 2, 2002, RiskNews http://www.risknews.net 
Note from Bob Jensen:  The above quotation seems to be Year 2002 Déjŕ Vu  in terms of all the bad ways investment bankers cheated investors in the 1980s and 1990s.  Read passage from Partnoy's book quoted at http://faculty.trinity.edu/rjensen/book02q1.htm#022502 

Enron was its own investment bank on many deals, especially in credit derivatives. You can read the following at http://faculty.trinity.edu/rjensen/fraud.htm 

Selected quotations from "Why Enron Went Bust: Start with arrogance. Add greed, deceit, and financial chicanery. What do you get? A company that wasn't what it was cracked up to be." by Benthany McLean, Fortune Magazine, December 24, 2001, pp. 58-68.

Why Enron Went Bust: Start with arrogance. Add greed, deceit, and financial chicanery. What do you get? A company that wasn't what it was cracked up to be."

In fact , it's next to impossible to find someone outside Enron who agrees with Fasto's contention (that Enron was an energy provider rather than an energy trading company). "They were not an energy company that used trading as part of their strategy, but a company that traded for trading's sake," says Austin Ramzy, research director of Principal Capital Income Investors. "Enron is dominated by pure trading," says one competitor. Indeed, Enron had a reputation for taking more risk than other companies, especially in longer-term contracts, in which there is far less liquidity. "Enron swung for the fences," says another trader. And it's not secret that among non-investment banks, Enron was an active and extremely aggressive player in complex financial instruments such as credi8t derivatives. Because Enron didn't have as strong a balance sheet as the investment banks that dominate that world, it had to offer better prices to get business. "Funky" is a word that is used to describe its trades.

I was particularly impressed, as were all people who phoned in, by the testimony of Scott Cleland (see Tuesday, January 15) and then click on the following link to read his opening remarks to a Senate Committee on December 18. If you think the public accounting profession has an "independence problem," that problem is miniscule relative to an enormous independence problem among financial analysts and investment bankers --- two professions that are literally rotten to the core. Go to http://www.c-span.org/enron/scomm_1218.asp#open 

A portion of Mr. Cleland's testimony is quoted below:

Four, it's common for analysts to have a financial stake in the companies they're covering. That's just like, essentially, allowing athletes to bet on the outcome of the game that they're playing in.

Five, most payments for investment research is routinely commingled in the process with more profitable investment banking and proprietary trading. The problem with this is it effectively means that most research analysts work for the companies and don't work for investors.

Six, credit agencies may have conflicts of interest.

Seven, analysts seeking investment banking tend to be more tolerant of pro-forma accounting and the conflict there is, essentially, the system is allowing companies to tell -- you know, to make up their own accounting. To describe their own financial performance, that no one then can compare objectively with other companies.

Eight, surprise, surprise, companies routinely beat the expectations of a consensus of research analysts that are seeking their investment banking business.

See how banks use/misuse credit derivatives with  tranches.

A Bankers Primer on Credit Derivatives --- http://www.citissb.com/home/Creddriv.pdf 

What are Credit Derivatives?

Credit derivatives have three basic structures: credit default swaps, total return swaps and credit spread options. In a credit default swap, a buyer pays a seller a fixed fee in return for indemnification against losses should a credit event occur. Credit default swaps are used for risk management, capital management and investment management. Buyers of protection reduce credit concentrations or open up credit lines. Buyers may also obtain capital relief, redeploying the capital in more profitable business lines or buying back stock.

Primus Financial Services offers credit derivatives --- http://www.tfibcm.com/news/story/default.asp?734 

Kicking off what analysts are calling a small trend, New York-based Primus Financial Products recently became the first company structured solely to be a swap counterparty, selling protection via credit default swaps. "We're not a dealer, we're not a CDO, and we're not an insurance company," said Chief Executive Officer Tom Jasper. "What we are is a credit derivatives company."

As derivatives are becoming a more and more widely accepted method of transferring risk, it is not surprising that at least two additional companies - both at different stages of development - are following suit. The two are said to be familiar names in the asset-backed market, and the first will likely launch in mid-summer, according to Moody's Investors Service, which, along with Standard & Poor's, has awarded Primus a triple-A counterparty rating. Primus will begin trading in the next few weeks, Jasper said. In the first year of trading, Primus is planning to build a portfolio of about $5.5 billion in single name investment-grade corporate and sovereign credits.

"The plan is to take advantage of what we believe is a pretty efficient capital model and cost model, and to become a very efficient investor in investment-grade risk, using, as the transfer vehicle, the credit default swap," Jasper said. "So we're transferring risk synthetically versus a cash instrument."

Though many of its clients, which could include CDOs, insurance company portfolio managers, hedge funds, banks and other cash investors, might be using PFP to establish hedges, Primus is not incorporating a hedging strategy for its own portfolio, and, only in special situations, will buy credit protection for its exposures. Its triple-A counterparty rating is based primarily on its capital levels, or other resources, being sized to match the expected loss (Moody's) of its referenced obligations.

Also, contrary to some players' initial impressions of the company, Primus doesn't plan to launch any CDOs from its portfolio.

"It's not contemplated that we would securitize the risk that we will take on," Jasper said. "We're very happy to hold the risk to maturity."

March 2002 - Former dealers from Salomon Smith Barney and Bank of America yesterday set up what they claimed to be the first boutique focusing purely on default swap credit derivatives.

Question:
When does a hedge become a speculation?  

Answer:
There are essentially two answers.  Answer 1 is that a speculation arises when the hedge is not perfectly effective in covering that which is hedged such as the current value (fair alue hedge) of the hedged item or the hedged cash flow (cash flow hedge).  Testing for hedge ineffectiveness under FAS 133 and IAS 39 rules is very difficult for auditors.  Answer 2 is that a speculation arises when unsuspected credit risk arises from the settlements themselves such as when dealers who brokered hedge derivatives cannot back the defaults all parties contracted under the derivatives themselves.  Hedges may no longer be hedges!  Answer 2 is even more problematic in this particular down economy.

There is a lot of complaining around the world about need for and technicalities of the U.S. FAS 133 and the international IAS 39 standards on Accounting for Financial Instruments Derivatives and Hedging Activities.  But recent scandals adding to the pile of enormous scandals in derivatives over the past two decades suggest an increased  need for more stringent rather than weakened standards for accounting for derivatives.  The main problem lies in valuation of these derivatives coupled with the possibility that what is a safe hedge is really a risky speculation.  A case in point is Newmont Mining Corporation's Yandal Project in Australia as reported by Steve Maich in "Newmont's Hedge Book Bites Back," on  Page IN1 of the March 4, 2003 edition of Canada's Financial Post --- http://www.financialpost.com/ 

Even by the gold industry's relatively aggressive standards, Yandal's derivatives exposure is stunning.  The unit has 3.4 million ounces of gold committed through hedging contracts that had a market value of negative US$288-million at the end of 2002.

That would be a problem for any major producer, but the situation is particularly dire for Yandal because the development's total proven and provable gold reserves are just 2.1 million ounces.  In other words, the project has, through its hedging contracts, committed to sell 60% more gold than it actually has in the ground.

Making matters worse, the mine's counterparties can require Yandal to settle the contracts in cash, before they come due.  In all, about 2.8 million ounces are subject to these cash termination agreements by 2005, which could cost the company US$223.7-million at current market prices.

With insufficient gold to meet its obligations, and just US$58-million in cash to make up the difference, bankruptcy may be the only option available to Yandal, analysts said.

Comparing Yandal's reserves to its hedging liabilities "suggests that the Yandal assets may be worth more dead than alive," CIBC World Markets analyst Barry Cooper said in a report to clients.

All this is raising even bigger questions about the impact that the Yandal situation might have on the industry's other major hedgers.  Companies such as Canada's Barrick Gold Corp. and Placer Dome Ltd. have lagged the sector's strong rally of the past year, largely because many investors and analysts distrust the companies' derivative portfolios.

One thing that is not stressed hard enough in FAS 133 is the credit risk of the dealers themselves.  The FAS 133 standard and its international IAS 39 counterpart implicitly assume that when speculating or hedging with derivatives, the dealers who broker these contracts are highly credit worthy.  For example, in the case of interest rate swaps it is assumed that the dealer that brokers the swap will stand behind the swapping party and counterparty default risks.  There are now some doubts about this in the present weak economy.

"Derivatives Market a 'Time Bomb':  Buffet," Financial Post, March 4, 2003, Page IN1 --- http://www.financialpost.com/ 
Berkshire chairman warns of risks in shareholder letter --- http://www.berkshirehathaway.com/letters/letters.html 
(The above link is not yet updated for the Year 2002 forthcoming annual Shareholder Letter.)

Billionaire investor Warren Buffett calls derivative contracts "financial weapons of mass destruction, carrying dangers that while now latent are potentially lethal," according to excerpts from his forthcoming annual letter to Berkshire Hathaway Inc. shareholders.

Mr. Buffett, whose company is now seeking to divest of derivatives business tied to its General Re purchase, also worries that substantial credit risk has become concentrated "in the hands of relatively few derivatives dealers."

"Divided on Derivatives Greenspan:  Buffett at Odds on Risks of the Financial Instruments," by John M. Berry, The Washington Post, March 6, 2003, Page E01 --- http://www.washingtonpost.com/wp-dyn/articles/A48287-2003Mar5.html 

The use of derivatives has grown exponentially in recent years. The total value of all unregulated derivatives is estimated to be $127 trillion -- up from $3 trillion 1990. J.P. Morgan Chase & Co. is the world's largest derivatives trader, with contracts on its books totaling more than $27 trillion. Most of those contracts are designed to offset each other, so the actual amount of bank capital at risk is supposed to be a small fraction of that amount.

Previous efforts to increase federal oversight of the derivatives market have failed, including one during the Clinton administration when the industry, with support from Greenspan and other regulators, beat back an effort by Brooksley Born, the chief futures contracts' regulator. Sen. Dianne Feinstein (D-Calif.) has introduced a bill to regulate energy derivatives because of her belief that Enron used them to manipulate prices during the California energy crisis, but no immediate congressional action is expected.

Randall Dodd, director of the Derivatives Study Center, a Washington think tank, said both Buffett and Greenspan are right -- unregulated derivatives are essential tools, but also potentially very risky. Dodd believes more oversight is needed to reduce that inherent risk.

"It's a double-edged sword," he said. "Derivatives are extremely useful for risk management, but they also create a host of new risks that expose the entire economy to potential financial market disruptions."

Buffett has no problem with simpler derivatives, such as futures contracts in commodities that are traded on organized exchanges, which are regulated. For instance, a farmer growing corn can protect himself against a drop in prices before he sells his crop by buying a futures contract that would pay off if the price fell. In essence, derivatives are used to spread the risk of loss to someone else who is willing to take it on -- at a price.

Buffett's concern about more complex derivatives has increased since Berkshire Hathaway purchased General Re Corp., a reinsurance company, with a subsidiary that is a derivatives dealer. Buffett and his partner, Charles T. Munger, judged that business "to be too dangerous."

Because many of the subsidiary's derivatives involve long-term commitments, "it will be a great many years before we are totally out of this operation," Buffett wrote in the letter, which was excerpted on the Fortune magazine Web site. The full text of the letter will be available on Berkshire Hathaway's Web site on Saturday. "In fact, the reinsurance and derivatives businesses are similar: Like Hell, both are easy to enter and almost impossible to exit."

One derivatives expert said several of General Re's contracts probably involved credit risk swaps with lenders in which General Re had agreed to pay off a loan if a borrower -- perhaps a telecommunications company -- were to default. In testimony last year, Greenspan singled out the case of telecom companies, which had defaulted on a significant portion of about $1 trillion in loans. The defaults, the Fed chairman said, had strained financial markets, but because much of the risk had been "swapped" to others -- such as insurance companies, hedge funds and pension funds -- the defaults did not cause a wave of financial-institution bankruptcies.

"Many people argue that derivatives reduce systemic problems, in that participants who can't bear certain risks are able to transfer them to stronger hands," Buffett acknowledged. "These people believe that derivatives act to stabilize the economy, facilitate trade and eliminate bumps for individual participants. And, on a micro level, what they say is often true. Indeed, at Berkshire, I sometimes engage in large-scale derivatives transactions in order to facilitate certain investment strategies."

But then Buffett added: "The macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one another. The troubles of one could quickly infect the others. On top of that, these dealers are owed huge amounts by nondealer counterparties," some of whom are linked in such a way that many of them could run into problems simultaneously and set off a cascade of defaults.

March 7, 2003 message from Risk Waters Group [RiskWaters@lb.bcentral.com

Alan Greenspan, chairman of the US Federal Reserve, today once again defended the use of derivatives as hedging tools, especially credit derivatives. His comments come in the wake of Warren Buffett's criticism of derivatives as "time bombs" and Peter Carr - recipient of Risk's 2003 quant of the year award this week - saying that in a [hypothetical] argument between quants convinced of the infallibility of their models and derivatives sceptics such as Buffett, he would probably side with Buffett.

But Greenspan, speaking at the Banque de France's symposium on monetary policy, economic cycle and financial dynamics in Paris, said derivatives have become indispensable risk management tools for many of the largest corporations. He said the marriage of derivatives and securitisation techniques in the form of synthetic collateralised debt obligations has broadened the range of investors willing to provide credit protection by pooling and unbundling credit risk through the creation of securities that best fit their preferences for risk and return.

This probably explains why credit derivatives employees reap the highest salaries, with an Asian-based managing director in synthetic structuring at a bulge-bracket firm earning an average basic plus bonus of Ł1.35 million last year. These were the findings of a first-of-its-kind survey conducted by City of London executive search company Napier Scott. The survey found that most managing directors working in credit derivatives at the top investment banks earn more than Ł1 million, with synthetic structurers commanding the highest salary levels. Asia-based staff earn 12-15% more than their US counterparts, with UK-based staff not far behind their Asia-based counterparts. Even credit derivatives associates with one or two years' experience earn in excess of Ł150,000 a year on average at a tier-1 bank.

In more people news, Merrill Lynch has hired four ex-Goldman Sachs bankers for its corporate risk management group focused on Europe, the Middle East and Africa. Roberto Centeno was hired as a director with responsibility for Iberia. Andrea Anselmetti and Luca Pietrangeli, both directors, and Ernesto Mercadente, an associate, will focus on expanding the corporate risk management and foreign exchange business in the Italian region. The corporate risk management group focuses on providing advice and execution for corporate clients, covering all risk management issues, including foreign exchange, interest rate risk and credit risk. All four will report to Patrick Bauné, co-head of Merrill Lynch's global foreign exchange issuer client group, and Damian Chunilal, head of the EMEA issuer client group, and are expected to join within the next two weeks. Merrill also hired Scott Giardina as a director in credit derivatives trading, based in London. He will report to Jon Pliner, managing director of credit trading EMEA, and Neil Walker, managing director of structured credit trading, EMEA. Giardina also joins from Goldman Sachs.

Christopher Jeffery
Editor, RiskNews

www.risknews.net
cjeffery@riskwaters.com

Bob Jensen's threads on credit derivatives ---
http://faculty.trinity.edu/rjensen/acct5341/speakers/133glosf.htm
Click on the letter "C" and scroll down

 

 


"Questioning Claims That Are Too Good to Be True," by Karen Firestone, Harvard Business Review Blog, September 7, 2016 ---
https://hbr.org/2016/09/questioning-claims-that-are-too-good-to-be-true?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Jensen Comment
The real challenge in financial auditing is often discoveries of falsehoods that lie outside the scope of the audit and what the auditors assert in the audit report to financial statements. What is their professional and ethical obligation to not ignore falsehoods that legally are "none of their business?"

This also seems to have been the dilemma of the FBI's investigation of the Clinton emails.

The FBI admits it “didn’t pursue evidence of potential false statements, obstruction of justice and destruction of evidence,”
WSJ Editorial Board
http://www.wsj.com/articles/the-fbis-blind-clinton-trust-1473289804?mod=djemMER

Jensen Comment
In some ways FBI pursuit of false statements is unjust if there is not also FBI pursuit of Trump false statements.

My point here is that questioning falsehoods is not as simple as what we read in ethics cases and textbooks and learn in law schools and accounting schools and journalism schools.




Teaching Case

The Controversial Way Wealthy Americans Are Lowering Their Estate Taxes
by: Laura Saunders
Aug 20, 2016
Click here to view the full article on WSJ.com

TOPICS: Asset Valuation, Business Valuation, Discounting, Estate Tax, Gift Tax, Valuation Discount

SUMMARY: Regulations proposed by the Treasury Department and Internal Revenue Service apply to tax-saving moves known as "valuation discounts." They allow people with assets greater than the current exemption of $5.45 million per person ($10.9 million for a couple) to lower the value of their assets that are subject to gift and estate taxes. To get the lower valuations, the owner of assets typically puts them into a holding company or other entity that isn't traded and gives pieces of the company to family members and perhaps a charity. As a result, the assets' value drops because control of the entity is dispersed and the assets would be harder to sell. The combined discounts generally range from 30% to 50% of the assets' value, and can be even higher. These moves are controversial because the courts have allowed taxpayers to use them to get sizable tax breaks on traded securities and even cash. Thus a wealthy taxpayer could reduce the taxable value of $10 million of blue-chip stocks to $6 million and cut his estate tax by $1.6 million.

CLASSROOM APPLICATION: This article is a useful update for an estate and gift tax class and for any classes covering business valuations.

QUESTIONS: 
1. (Advanced) What is a valuation discount? What are the current tax rules regarding valuation discounts? Why has this been effective? What benefits does it offer? Who benefits?

2. (Introductory) What has the Treasury Department and Internal Revenue Service proposed regarding valuation discounts?

3. (Advanced) Why did the government make this proposal? How will the change affect taxpayers?

4. (Advanced) What are the liquidity issues associated with a partial interest in a closely held business? Are there control issues? Are there situations with legitimate reasons for a discount in fair market value? Why or why not?

5. (Advanced) What actions do some taxpayers take that shows the purpose of the holding company is for tax avoidance only?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
U.S. Aims to Clamp Down on Tactic to Avoid Estate Tax
by Richard Rubin
Aug 03, 2016
Online Exclusive

IRS Loses a Gift-Tax Battle
by Laura Saunders
Sep 17, 2011
Online Exclusive

 

"The Controversial Way Wealthy Americans Are Lowering Their Estate Taxes," by Laura Saunders," The Wall Street Journal, August 20, 2016
http://www.wsj.com/articles/the-controversial-way-wealthy-americans-are-lowering-their-estate-taxes-1471614809?mod=djem_jiewr_AC_domainid

Proposed new rules apply to moves known as ‘valuation discounts’

New rules are coming that will likely limit techniques used by the wealthy to lower their estate and gift taxes.

The proposed regulations, issued by the Treasury Department and Internal Revenue Service in early August, apply to moves known as “valuation discounts.” They allow people with assets greater than the current exemption of $5.45 million per person ($10.9 million for a couple) to lower the value of their assets that are subject to gift and estate taxes. The top tax rate on amounts above the exemption is currently 40%, so the savings can be substantial.

To get the lower valuations, the owner of assets typically puts them into a holding company or other entity that isn’t traded and gives pieces of the company to family members and perhaps a charity. As a result, the assets’ value drops because control of the entity is dispersed and the assets would be harder to sell. The combined discounts generally range from 30% to 50% of the assets’ value, and can be even higher.

These moves are controversial because the courts have allowed taxpayers to use them to get sizable tax breaks on traded securities and even cash. Thus a wealthy taxpayer could reduce the taxable value of $10 million of blue-chip stocks to $6 million and cut his estate tax by $1.6 million.

Ronald Aucutt, an estate-tax lawyer with McGuireWoods LLP in Washington, says that in some cases families simply wait until three years after the original owner’s estate-tax return is filed and the statute of limitations for an audit expires. Then they dissolve the holding company and divide up the assets, having bypassed tax on a large chunk of market value. “This drives the IRS crazy,” he says.

The proposed changes in the rules would allow the IRS to ignore many discounts in entities where they currently apply and collect far more estate or gift tax. In addition, the IRS could disallow even more discounts if a taxpayer dies within three years after making certain gifts. Mr. Aucutt thinks the Treasury Department and IRS have the authority to make such changes.

Critics of the changes call them far too broad. “This is an example of Treasury overstepping its bounds,” says John Porter, an attorney with Baker Botts in Houston, who has won landmark court cases involving discounts.

Mr. Porter points out that the proposed changes apply to nearly all family-controlled entities, even those holding operating businesses. “If these rules go through in current form, business owners are going to be taxed on value they may not have, or have access to,” he says. He expects a court challenge unless there are substantial revisions to the rules.

Continued in article


Teaching Case

FASB Updates Accounting Rules For Not-for-Profits
by: Maxwell Murphy
Aug 19, 2016
Click here to view the full article on WSJ.com

TOPICS: FASB, Financial Reporting, Nonprofit Accounting

SUMMARY: The Financial Accounting Standards Board's updated rules aim to make it simpler for nonprofits to classify and report their assets. The new rules also make it easier for donors, creditors and other interested parties to see how a nonprofit's funds are being used. Non-profits will now report two classes of assets, instead of three, which should reduce some of the burden of deciding which charitable assets can be used, and when. The simplification will also come with more stringent standards to more fully explain in footnotes any restrictions on when and how donations and assets can be used.

CLASSROOM APPLICATION: This article offers a good update for nonprofit accounting classes.

QUESTIONS: 
1. (Introductory) What is the FASB? What is its purpose? What is its area of authority?

2. (Advanced) What are the updates to nonprofit accounting rules? What areas are affected?

3. (Advanced) Why did the FASB make these changes? How is financial reporting improved for users of the financial statements as a result of these changes?

4. (Advanced) How will nonprofit entities be affected by these changes? Are the changes substantial?

Reviewed By: Linda Christiansen, Indiana University Southeast

 

"FASB Updates Accounting Rules For Not-for-Profits," by Maxwell Murphy," The Wall Street Journal, August 20, 2016
http://blogs.wsj.com/cfo/2016/08/19/fasb-updates-accounting-rules-for-not-for-profits/?mod=djem_jiewr_AC_domainid

The Financial Accounting Standards Board’s updated rules aim to make it simpler for nonprofits to classify and report their assets. The new rules also make it easier for donors, creditors and other interested parties to see how a nonprofit’s funds are being used.

“More transparent information about an organization’s available resources and financial performance” was the goal, FASB member Lawrence Smith said in a statement to CFO Journal.

Non-profits will now report two classes of assets, instead of three, which should reduce some of the burden of deciding which charitable assets can be used, and when. The amendments in the standard are effective for annual financial statements issued for fiscal years after December 15, 2017.

The new reporting will separate cash that is available now from cash that may have time contingencies or other strings attached. Currently these companies must classify cash that isn’t immediately available into two categories, in addition to a third category for cash they’re able to use now.

That simplification will also come with more stringent standards to more fully explain in footnotes any restrictions on when and how donations and assets can be used. FASB said the changes will make financial reports easier to complete and understand.

“Stakeholders expressed concerns about the complexity, insufficient transparency, and limited usefulness of certain aspects of the model,” FASB Chairman Russell Golden said in a press release announcing the changes. Not-for-profits will benefit from reduced costs and complexities in reporting their financial position, while contributors will receive enhanced disclosures in footnotes, the standards setter said.

Continued in article


Teaching Case

Transforming the Tax Function into a Strategic Business Partner
by: Deloitte CFO Jounral Editor
Aug 18, 2016
Click here to view the full article on WSJ.com

TOPICS: Strategy, Tax Function, Taxation

SUMMARY: As globalization accelerates, tax issues often become more complex and relevant to an organization's business strategies. Increasingly, executives face demands by tax authorities for more information faster-sometimes in real time. They also face a growing number of IT challenges as commercial tax applications evolve to satisfy regulatory mandates. In response, some leading companies have made a fundamental shift in the way they operate tax departments, transforming the tax function into a strategic business partner across the enterprise.

CLASSROOM APPLICATION: This article would be appropriate for tax classes. It helps us show students the importance of tax knowledge and the tax issues facing businesses. Tax implications should be considered in most strategic decisions.

QUESTIONS: 
1. (Introductory) What does the tax function of a business include?

2. (Advanced) What does that article say about why the tax function should be a part of a business's strategy process? What parts could it play?

3. (Advanced) How can a tax function be integrated into a business's strategic process? In what areas would it be integrated? What steps does that article offer?

4. (Advanced) What are some reasons why some companies have not considered the tax function to be an important part of business strategy? Have conditions changed over time?

Reviewed By: Linda Christiansen, Indiana University Southeast

 

"Transforming the Tax Function into a Strategic Business Partner," by Deloitte CFO Jounral Editor," The Wall Street Journal, August 18, 2016
http://deloitte.wsj.com/cfo/2016/08/18/transforming-the-tax-function-into-a-strategic-business-partner-2/?mod=djem_jiewr_AC_domainid

As globalization accelerates, tax issues often become more complex and relevant to an organization’s business strategies. Increasingly, executives face demands by tax authorities for more information faster—sometimes in real time. They also face a growing number of IT challenges as commercial tax applications evolve to satisfy regulatory mandates.

In response, some leading companies have made a fundamental shift in the way they operate tax departments, transforming the tax function into a strategic business partner across the enterprise.

“Because the implications of tax affect the financial and strategic decisions of many organizations, tax issues are capturing the attention of C-suite executives and boards,” said Carl Allegretti, chairman and CEO, Deloitte Tax LLP, during a Deloitte webcast. “Tax transformation activities should be closely aligned with the business strategy,” he added.

When webcast participants were asked “What is the biggest advantage to transforming the corporate tax department,” 26% of the 2,182 respondents indicated “having an enhanced ability to reach strategic and financial goals.” Another 24% reported “enhanced business partnering across the organization,” such as greater alignment between the tax and finance functions, and 22% cited “sustainability and efficiency of the tax function through cost savings.”

“Tax departments should be prepared to transform or be transformed,” noted Emily VanVleet, partner, Deloitte Tax LLP, during the webcast. She explained that in many cases, finance executives have gone through a finance function transformation and currently are experiencing the benefits of that strategic change. As a result, tax departments may begin to feel pressure from CFOs to, for example, complete the tax close faster.

“CFOs know what they have accomplished through finance transformation, and so increasingly expect the tax department to undertake a similar process,” added Ms. VanVleet.

Expanding Tax Responsibilities

“There is a growing recognition of the tax department’s ability to contribute to the enterprise,” noted Nathan Andrews, partner, Deloitte Tax LLP, during the webcast. “As a result, the tax department is being included in strategic business discussions and participating in the processes that address marketplace shifts,” he added.

Continued in article


Teaching Case

Accounting Watchdog Says Most Brokerage-Firm Audits Need to Improve
by: Michael Rapoport
Aug 19, 2016
Click here to view the full article on WSJ.com

TOPICS: Audit Inspections, Auditing, PCAOB

SUMMARY: The Public Company Accounting Oversight Board found deficiencies in 77% of the broker-dealer audits it inspected in 2015, compared with 87% in 2014, the board said in its annual report on its broker-dealer audit inspection program. Nearly all of the audit firms that conducted the broker-dealer audits - 72 of 75 - had deficiencies in one or more of their audits. Auditor independence in broker-dealer audits improved, however.

CLASSROOM APPLICATION: This article is useful for auditing and financial accounting discussions of the PCAOB and inspection of audits.

QUESTIONS: 
1. (Introductory) What is the PCAOB? What is its purpose and area of authority?

2. (Advanced) What is an audit inspection? Why does the PCAOB conduct them?

3. (Advanced) What is a deficiency? What are the implications of a deficiency? If a deficiency is found, should the financial statements be restated? Why or why not? What problems could deficient audits cause?

4. (Introductory) What are broker-dealers? What are the statistics regarding deficiencies in audits of broker-dealers in recent years? What were the most common deficiencies?

5. (Advanced) What is auditor independence? What are the statistical trends regarding auditor independence in the audits of broker-dealers? Are these levels acceptable? Why or why not?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
Auditing the Auditors: U.S. Rethinks Approach
by Michael Rapoport
May 05, 2016
Online Exclusive

Audit Regulator Finds 17 Deficient Audits at PricewaterhouseCoopers
by Michael Rapoport
Jul 22, 2015
Online Exclusive

 

"Accounting Watchdog Says Most Brokerage-Firm Audits Need to Improve," by Michael Rapoport," The Wall Street Journal, August 19, 2016
http://www.wsj.com/articles/accounting-watchdog-says-most-brokerage-firm-audits-need-to-improve-1471555393?mod=djem_jiewr_AC_domainid

Inspectors found deficiencies in more than three-quarters of broker-dealer audits

Federal inspectors found deficiencies in more than three-quarters of the audits of broker-dealers they reviewed last year, down from the previous year but still at a high level, the government’s audit-industry regulator said Thursday.

The Public Company Accounting Oversight Board found deficiencies in 77% of the broker-dealer audits it inspected in 2015, compared with 87% in 2014, the board said in its annual report on its broker-dealer audit inspection program. Nearly all of the audit firms that conducted the broker-dealer audits—72 of 75—had deficiencies in one or more of their audits, the PCAOB said.

The PCAOB’s findings don’t mean that it has determined the broker-dealers themselves have operational deficiencies, just that the board believes the audits that assessed whether they might have a problem were flawed or insufficient.

Auditor independence in broker-dealer audits improved, however. The PCAOB found auditor independence—an auditor’s need to keep an arm’s length relationship from its client so as to preserve its impartiality—was impaired in 7% of the audits it inspected, down from 25% the previous year.

Among the most common deficiencies the PCAOB’s inspectors found were problems in auditing revenue, which the PCAOB identified in 70% of the audits it reviewed, and deficiencies in auditing fair value measures, in 44% of the audits where that area was inspected.

The PCAOB has consistently found high levels of deficiencies in its inspections of audits of broker-dealers, which the board has reviewed since 2011 under powers it was granted by the Dodd-Frank financial overhaul law. The board’s reports don’t identify the individual audit firms or the broker-dealers involved in the audits it inspects.

Continued in article


Teaching Case

Why It's So Hard to Get Rid of Tax 'Loopholes'
by: Richard Rubin
Aug 19, 2016
Click here to view the full article on WSJ.com

TOPICS: Itemized Deductions

SUMMARY: The problem with attacking "loopholes" in the tax code is just how popular they are. That's the challenge facing lawmakers who favor lowering rates and broadening the tax base. It's easy to talk about closing unjust loopholes - and depending on your definition of justice, there are a few of them out there. Taxpayers can itemize deductions if their total exceeds the standard deduction. Some itemized deductions, such as the break for tax-preparation fees, are already subject to strict limits, but the big three are largely uncapped: state and local taxes, home-mortgage interest and charitable contributions.

CLASSROOM APPLICATION: This article and topic is appropriate for use in an individual tax class.

QUESTIONS: 
1. (Introductory) What are itemized deductions? What are some examples of itemized deductions? Which are most common?

2. (Advanced) How many households itemize deductions? What do other households choose to do instead? Why do so few taxpayers itemize? What types of taxpayers are more likely to itemize?

3. (Advanced) What is a loophole? To what is the writer of this article referring when using the term tax loophole? Why does the writer call these loopholes?

4. (Advanced) What does the article say is the reason why it is challenging to eliminate tax loopholes? What could be done to remedy that? Should they be eliminated? Why or why not?

Reviewed By: Linda Christiansen, Indiana University Southea

 

"Why It's So Hard to Get Rid of Tax 'Loopholes'," by Richard Rubin," The Wall Street Journal, August 19, 2016 ---
http://blogs.wsj.com/economics/2016/08/18/why-its-so-hard-to-get-rid-of-tax-loopholes/?mod=djem_jiewr_AC_domainid

Many of the biggest—and most popular—tax breaks benefit the upper-middle class

The problem with attacking “loopholes” in the tax code is just how popular they are.

That’s the challenge facing lawmakers who favor lowering rates and broadening the tax base. It’s easy to talk about closing unjust loopholes—and depending on your definition of justice, there are a few of them out there.

But the reality is that many of the biggest breaks are the ones that benefit the upper-middle class: itemized deductions. That’s why President Barack Obama and Democratic presidential candidate Hillary Clinton have proposed limits on high earners’ deductions. Republican presidential candidates Jeb Bush and Mitt Romney talked about deduction caps and Donald Trump is considering one, too.

Taxpayers can itemize deductions if their total exceeds the standard deduction—$6,300 for individuals and twice that for married couples. Some itemized deductions, such as the break for tax-preparation fees, are already subject to strict limits, but the big three are largely uncapped: state and local taxes, home-mortgage interest and charitable contributions.

Only about 30% of households itemize their deductions, and they tend to be higher-income households who have mortgages, significant state taxes and available cash to donate to charities.

To see exactly how much money is at stake and what happens if you repeal the breaks, here’s a tool from the Open Source Policy Center at the free-market-oriented American Enterprise Institute, which draws on ideas from technical contributors.

Continued in article


Teaching Case from The Wall Street Journal Accounting Weekly Review on September 2, 2016

Apple Faces $14.5 Billion Irish Tax Bill
by: Natalia Drozdiak and Sam Schechner
Aug 31, 2016
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com WSJ Video

TOPICS: Accounting Change, Accounting for Income Taxes, Income Tax

SUMMARY: The EU says Apple's tax deal with Ireland allowed the company to pay almost zero tax on European profits between 2003 and 2014.

CLASSROOM APPLICATION: Questions in this article relate primarily to accounting for income taxes and international tax strategy.

QUESTIONS: 
1. (Introductory) What entity made the order that Apple should pay $14.5 billion in taxes?

2. (Introductory) Why are both Apple and Ireland appealing this ruling?

3. (Advanced) Watch the related video. What is Apple's effective tax rate in Ireland? What does the EU leadership say about that tax rate? In your answer, include the definition of effective tax rate.

4. (Advanced) Refer to the graphic entitled "Cash Flow" and the two related articles. Briefly (no more than 3 sentences) summarize Apple's tax strategies which lead to its low effective tax rate.

5. (Advanced) If Apple must pay these taxes, do you think they must re-issue financial statements for the years in question, 2003 to 2014? Explain your answer and describe what you think are the appropriate areas of accounting standards addressing this issue.

6. (Advanced) The decision is reported as a payment "well above most analysts' expectations." What is the significance of that statement? In your answer, comment on the role of analysts in the U.S. market for Apple's stock and the market reaction described in the article.

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES: 
EU Apple Tax Ruling Stirs Fears of Revenue Loss in U.S.
by Richard Rubin
Aug 30, 2016
Online Exclusive

Apple's Tax in Ireland
by WSJ Staff
Aug 30, 2016
Online Exclusive

 

"Apple Faces $14.5 Billion Irish Tax Bill," by Natalia Drozdiak and Sam Schechner," The Wall Street Journal, August 31, 2016
http://www.wsj.com/articles/apple-received-14-5-billion-in-illegal-tax-benefits-from-ireland-1472551598?mod=djem_jiewr_AC_domainid

The European Union’s antitrust regulator has demanded that Ireland recoup roughly €13 billion ($14.5 billion) of unpaid taxes accumulated over more than a decade by Apple Inc., a move that intensifies a feud between the EU and the U.S. over the bloc’s tax probes into American companies.

The size of the tax demand, which came in a formal decision issued Tuesday, risks further unsettling multinational companies, which face a broader international effort to curb aggressive tax avoidance. But the commission’s decision shows companies could be on the hook for past behavior and potentially be handed big bills for allegedly unpaid back taxes.

The sum is the highest ever demanded under the EU’s longstanding rules that forbid companies from gaining advantages over competitors because of government help.

The decision—which ordered a payment well above most analysts’ expectations— is likely to be the subject of years of appeals up to the EU’s top court. It could also set off a broader scramble by the U.S. and individual EU governments over the right to tax billions of dollars of offshore profits made by Apple and other large companies.

Apple disputed the reasoning of the decision and said it would appeal. Chief Executive Tim Cook, in an open letter, added: “Apple follows the law and we pay all the taxes we owe.”

Irish Finance Minister Michael Noonan said he disagreed “profoundly” with the European Commission’s decision and said Ireland would appeal the decision in order “to defend the integrity of our tax system.”

The European Commission said tax arrangements that Ireland offered Apple in 1991 and 2007 allowed the company to pay annual tax rates of between 0.005% and 1% on its European profits for over a decade to 2014, by designating only a tiny portion of its profit as taxable in Ireland.

“The commission’s investigation concluded that Ireland granted illegal tax benefits to Apple, which enabled it to pay substantially less tax than other businesses over many years,” said European antitrust commissioner Margrethe Vestager.

Mr. Cook described the decision as “an effort to rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process.”

Under EU rules, Ireland has four months to calculate the exact amount the commission says Apple owes and collect the cash. Apple, whose shares fell by 0.8% Tuesday in New York, said it would put the money in an escrow account pending appeals.

Continued in article


Teaching Case from The Wall Street Journal Accounting Weekly Review on September 2, 2016

Apple Likely to Benefit in U.S. from Irish Tax Bill
by: Kimberly S. Johnson and Tatyana Shumsky
Aug 31, 2016
Click here to view the full article on WSJ.com

TOPICS: Income Taxes, International Taxation

SUMMARY: The EU says Apple's tax deal with Ireland allowed the company to pay almost zero tax on European profits between 2003 and 2014.

CLASSROOM APPLICATION: Questions on this article include international taxation and accounting for income taxes.

QUESTIONS: 
1. (Introductory) Why do the amounts Apple pays in Irish taxes affect the company's U.S. tax bill? In your answer, define the term tax credit.

2. (Introductory) What are unrepatriated earnings? Describe the tax implications of unrepatriated earnings.

3. (Advanced) The article states that "many see Apple as finite amount of taxes to pay"-the more that Apple pays to other worldwide tax authorities, the less company will owe in the U.S. Why would this be the case for any multinational corporation? You may tie your answer to questions #1 and 2.

4. (Advanced) Regarding Apple's accounting for income taxes, why does tax consultant Robert Willens say that the $14.5 billion amount is "not damaging from a P&L point of view"? In your answer, state what is meant by "P&L" and comment on income tax expense calculation.

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES: 
EU Apple Tax Ruling Stirs Fears of Revenue Loss in the U.S.
by Richard Rubin
Aug 31, 2016
Page: A1

 

"Apple Likely to Benefit in U.S. from Irish Tax Bill," by Kimberly S. Johnson and Tatyana Shumsky," The Wall Street Journal, August 31, 2016
http://blogs.wsj.com/cfo/2016/08/30/apple-likely-to-benefit-in-u-s-from-irish-tax-bill/?mod=djem_jiewr_AC_domainid

The $14.5 billion Apple Inc. is being asked to pay to Ireland in back taxes could potentially help offset its tab with the Internal Revenue Service.

When an American company pays taxes on profits in foreign countries, they only owe Uncle Sam the difference between the taxes paid and the U.S. tax rate.

So in the case of Apple, recording a large foreign tax charge could “set the stage for a foreign tax credit,” said tax consultant Robert Willens.

“The tax detriment would be balanced out by a tax benefit,” he said. “It’s not damaging from a P&L point of view.”

Apple would have to accrue a tax bill in the U.S. in order to reflect such an assessment, most likely through a repatriation of foreign earnings. Many multinationals – Apple included – state that their foreign profits are indefinitely reinvested abroad.

Apple’s foreign subsidiaries held $186.9 billion of cash and marketable securities when its fiscal year ended last Sept. 26, Of that sum, Apple had set aside $91.5 billion as indefinitely reinvested, as previously reported.

The U.S. Treasury Department has criticized the EU’s tax investigations, and on Tuesday a spokeswoman said the EU’s decision was disappointing, reiterating that “retroactive tax assessments by the commission are unfair.”

But based on how multinationals book revenue and taxes, such a move puts the U.S. government at a disadvantage. “The taxes they pay in Ireland will reduce the taxes they pay in the U.S.,” Mr. Willens said. “Many see Apple as having a finite amount of taxes to pay. The more they pay to others, the less they get.”

Still, the U.S. could challenge whether Apple’s $14.5 billion payment is correctly classified as back taxes or whether it is, in fact a fine. The latter wouldn’t generate a foreign tax credit, said Stephen Brecher, senior advisor at accounting firm WeiserMazars LLP.

Ireland already arguing that it properly applied its tax law presents another wrinkle. It is unclear whether U.S. authorities will recognize the payment as an income tax payment even if Ireland changes its position and collects the payment, Mr. Brecher said.

“The U.S. might say that Apple has paid the correct amount of tax and that Ireland is wrong to collect this,” Mr. Brecher said. “Apple could get caught in the middle here,” he added.

For now, the U.S. tech giant has vowed to appeal the European Commission’s decision, a process that some say will take several years to play out.

“There’s little question that this story is closer to its beginning than its end,” said Manal Corwin, national leader KPMG LLP’s International Tax practice and former Deputy Assistant Secretary for International Tax Affairs in the Office of Tax Policy at the U.S. Department of the Treasury.

Continued in article


Teaching Case from The Wall Street Journal Accounting Weekly Review on September 2, 2016

Firms Drop Prettied-Up Results
by: Tatyana Shumsky
Aug 30, 2016
Click here to view the full article on WSJ.com

TOPICS: Non-GAAP, Non-GAAP Reporting

SUMMARY: More companies are responding to regulatory scrutiny of financial reporting by giving greater prominence to standard, or GAAP, accounting figures, rather than emphasizing non-GAAP, typically more-flattering metrics.

CLASSROOM APPLICATION: The article may be used in a financial reporting class above the introductory level.

QUESTIONS: 
1. (Introductory) What are non-GAAP items?

2. (Introductory) What are recent trends and events in U.S. companies' use of non-GAAP reporting?

3. (Advanced) Why does the opening line of the article describe the changes in reporting by S&P 500 companies as "giving investors the bad news first"? Is financial reporting according to generally accepted accounting principles (GAAP) always bad news?

4. (Advanced) Access the earnings releases filed on Forms 8-K for the company Electronic Arts, Inc. (EA) for the first and second quarter 2016. They are available through the web site of the U.S. Securities and Exchange Commission at the following web links. Comment on the differences you see in the two press releases. Focus on the headlines in pages 1-2. Fiscal fourth quarter ended March 31 2016: https://www.sec.gov/Archives/edgar/data/712515/000071251516000129/earningsrelease8216.htm Fiscal first quarter ended June 30, 2016: https://www.sec.gov/Archives/edgar/data/712515/000071251516000129/earningsrelease8216.htm

5. (Introductory) How will companies' reporting on a non-GAAP basis be evaluated in the coming months?

Reviewed By: Judy Beckman, University of Rhode Islan

 

"Firms Drop Prettied-Up Results," Tatyana Shumsky," The Wall Street Journal, August 30, 2016
http://www.wsj.com/articles/companies-play-up-standard-accounting-figures-1472495965?tesla=y

More companies are giving investors the bad news first, in response to heavier regulatory scrutiny of their financial reporting.

More than a quarter of the companies in the S&P 500 index have shifted results that conform with Generally Accepted Accounting Principles to the top of news releases outlining their most recent financial performance.

Among the S&P 500 companies reporting results since the start of July, 81% have given prominence to GAAP figures, an increase from the 52% that did so when reporting first-quarter results, according to an Audit Analytics analysis conducted for The Wall Street Journal.

Companies that have made the transition include Halliburton Co. , Walgreens Boots Alliance Inc. and videogame maker Electronic Arts Inc.

The uptick comes in response to new guidance issued by the Securities and Exchange Commission in May that requires companies to give GAAP figures greater weight. It reflects concerns that adjusted or non-GAAP figures make companies look healthier.

The SEC’s timing offered some breathing room, giving companies a chance to comply with the guidance for subsequent reporting periods, officials said.

The guidance, however, leaves little room for flexibility. If a paragraph or table contains standard and adjusted figures, companies must make sure sentences or columns with the standard, or GAAP, information precedes everything else.

Numbers must be also be presented in the same style, meaning customized metrics can’t be bolded or printed in a larger-size font, nor can they be described as “record” or “exceptional” unless GAAP results are characterized in a similar way.

“There’s little appetite at the SEC for companies who don’t assess the guidance and self-correct,” said Paula Hamric, a partner in accounting firm BDO USA’s national SEC practice.

Halliburton highlighted $64 million in “income from continuing operations excluding special items” in its first-quarter press release. But when reconciled to standard accounting principles, the company had a loss of $2.4 billion.

By contrast, the Houston oil-field services company led its second-quarter earnings release with a standard-accounting loss of $3.73 per share, or $3.2 billion.

A Halliburton spokeswoman confirmed that the change was made to comply with the SEC’s new instructions.

Over the past two quarters, drugstore operator Walgreens has switched around the sentences atop its earnings press release. The company led its fiscal second-quarter earnings release with an 11% increase in “adjusted net earnings,” adding that standard per-share results had plunged 56%. The following quarter, Walgreens put standard results first, reporting a 14% drop in per-share earnings.

“We did make some small changes to our most recent quarterly earnings announcement based on the new SEC guidance and to further enhance our disclosure to investors,” said a spokesman for Walgreens.

Some companies haven’t yet made the shift. Software provider Ellie Mae​ Inc. said in its second-quarter earnings release in July that it hadn’t yet modified “adjusted net income” to reflect certain tax impacts—a change now required by the SEC.

In a statement recently, Ellie Mae said it plans to comply with SEC guidelines and modify the “adjusted” benchmark, but is currently considering timing of the change. “Our measured approach to transitioning the reporting of this financial metric will balance our investors’ expectations with the concerns of the SEC staff,” the company said.

Companies that don’t make the necessary changes run the risk of additional regulatory scrutiny in the form of letters and forced revisions. in letters made public through Aug. 5, the SEC questioned 166 companies this year regarding their use of non-GAAP figures, up 13% from a year earlier, according to Audit Analytics.

The SEC makes such written exchanges public 20 days after the matter is resolved. The letters that have become public so far concern financial reports from before the new guidance was announced.

Accountants expect such correspondence to surge as the SEC evaluates how companies handle the new requirement.

Continued in article


Teaching Case from The Wall Street Journal Accounting Weekly Review on September 2, 2016

Hard to Find: Workers with Good 'Soft Skills'
by: Kate Davidson
Aug 31, 2016
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com WSJ Video

TOPICS: Accounting Careers

SUMMARY: This article and a recent video highlight the skills students must develop in today's workforce: both "soft skills" and, for accountants, good technology skills such as spreadsheets (e.g., Excel) and database management (e.g., Access).

CLASSROOM APPLICATION: The article may be used in any level of accounting class, particularly good at the start of the semester to discuss students' expectations about hiring practices.

QUESTIONS: 
1. (Introductory) What are 'soft skills'?

2. (Introductory) Why are soft skills becoming increasingly important in today's economy?

3. (Introductory) Do you feel that accountants in particular might be called upon to develop a broad mix of skills or do you think that is common across all professionals? Specifically compare the skills discussed in the article and those listed for accountants in particular by the speaker in the related video.

4. (Advanced) Refer to the related video. By what average percentage are accounting salaries expected to increase next year?

5. (Advanced) Accounting and finance associated technology skills include proficiency with Excel and Access. Are you developing those skills sufficiently at this point in your educational career? Discuss.

Reviewed By: Judy Beckman, University of Rhode Islan

"Hard to Find: Workers with Good 'Soft Skills'," Kate Davidson," The Wall Street Journal, August 31, 2016
http://www.wsj.com/articles/employers-find-soft-skills-like-critical-thinking-in-short-supply-1472549400?mod=djem_jiewr_AC_domainid

Companies put more time and money into teasing out job applicants’ personality traits

The job market’s most sought-after skills can be tough to spot on a résumé.

Companies across the U.S. say it is becoming increasingly difficult to find applicants who can communicate clearly, take initiative, problem-solve and get along with co-workers.

Those traits, often called soft skills, can make the difference between a standout employee and one who just gets by.

While such skills have always appealed to employers, decades-long shifts in the economy have made them especially crucial now. Companies have automated or outsourced many routine tasks, and the jobs that remain often require workers to take on broader responsibilities that demand critical thinking, empathy or other abilities that computers can’t easily simulate.

As the labor market tightens, competition has heated up for workers with the right mix of soft skills, which vary by industry and across the pay spectrum—from making small talk with a customer at the checkout counter, to coordinating a project across several departments on a tight deadline.

In pursuit of the ideal employee, companies are investing more time and capital in teasing out job applicants’ personality quirks, sometimes hiring consultants to develop tests or other screening methods, and beefing up training programs to develop a pipeline of candidates.

“We’ve never spent more money in the history of our firm than we are now on recruiting,” said Keith Albritton, chief executive of Allen Investments, an 84-year-old wealth-management company in Lakeland, Fla.

In 2014, the firm hired an industrial psychologist who helped it identify the traits of its top-performing employees, and then developed a test for job candidates to determine how closely they fit the bill.

In the increasingly complex financial-services world, advisers often collaborate with accountants, attorneys and other planning professionals, Mr. Albritton said. That means the firm’s associates must be able to work in teams. “You can’t just be the general of your own army,” he said.

A recent LinkedIn survey of 291 hiring managers found 58% say the lack of soft skills among job candidates is limiting their company’s productivity.

In a Wall Street Journal survey of nearly 900 executives last year, 92% said soft skills were equally important or more important than technical skills. But 89% said they have a very or somewhat difficult time finding people with the requisite attributes. Many say it’s a problem spanning age groups and experience levels.

A LinkedIn analysis of its member profiles found soft skills are most prevalent among workers in the service sector, including restaurant, consumer-services, professional-training and retail industries.

To determine the most sought-after soft skills, LinkedIn analyzed those listed on the profiles of members who applied for two or more jobs and changed jobs between June 2014 and June 2015. The ability to communicate trumped all else, followed by organization, capacity for teamwork, punctuality, critical thinking, social savvy, creativity and adaptability.

Continued in article


Teaching Case from The Wall Street Journal Accounting Weekly Review on September 2, 2016

Employers Boost Benefits for Interns
by: Dahlia Bazzaz
Aug 31, 2016
Click here to view the full article on WSJ.com

TOPICS: Accounting Careers

SUMMARY: Companies are offering interns benefits such as health insurance and retirement savings plans-and offering jobs at record levels-72% as opposed to 59% in 2015.

CLASSROOM APPLICATION: The article is useful in any level of accounting class, but particularly near when students will apply for internships.

QUESTIONS: 
1. (Advanced) Are you planning to obtain an internship position in your college career? If so, in what area?

2. (Introductory) What benefits are companies offering to interns?

3. (Advanced) How could employment benefits help some students to have an internship experience, even if most do not take advantage of them?

4. (Introductory) Why does offering health insurance pose little cost to employers offering internship experience?

Reviewed By: Judy Beckman, University of Rhode Island

 

"Employers Boost Benefits for Interns by: Dahlia Bazzaz," The Wall Street Journal, August 31, 2016
http://www.wsj.com/articles/more-employers-boost-benefits-for-interns-1472569293?mod=djem_jiewr_AC_domainid

Companies offer health insurance, retirement savings plans to attract permanent workers

More companies are offering interns benefits such as health insurance and access to retirement savings plans this year, according to a recent survey from the National Association of Colleges and Employers.

Interns are also getting job offers at record levels this year. Some 72% of them—a postrecession high—received offer letters at the end of their internships up from 58.9% in 2015, according to the survey, which looked at internship programs at 271 large companies including International Business Machines Corp. IBM offers its interns health insurance and 401(k) plans.

In 2015, 16.7% of companies offered health insurance. This year, some 46.5% offer medical coverage.

At the same time, companies are offering fewer internships and being more selective with regard to the interns they recruit. Companies are providing interns with better benefits in hopes of attracting them as permanent workers, said Edwin Koc, director of research at NACE.

Offering health insurance to interns “doesn’t come at much of a cost to the employer,” said Mr. Koc. Many paid interns who are offered insurance plans don’t take them. Since most interns are in their early 20s, they often have coverage through their parents, he said. The Affordable Care Act allows individuals to stay on their parents’ health-insurance plans until they are 26.

ACA rules may be part of the reason some companies are now offering insurance to interns. Under the health law, paid interns who work full-time (more than 30 hours a week) and are employed at a company with 50 or more employees are entitled to health-insurance benefits. Interns also have to be working full time for about 17 weeks, or 120 days, to be legally entitled. But even companies with internship programs that don’t fit these requirements are offering medical insurance.

Offering insurance could be a gesture of goodwill to future employees, and a response to demand for generous employee benefits. In a NACE survey of nearly 10,000 students graduating from college in 2015, 79% of those surveyed marked “a good benefits package” as important in an employer—above a “high starting salary” and “diversity.”

Demand could also explain the upward trend in the portion of companies offering 401(k) plans in recent years, which grew from 8.8% to more than half of employers in the past nine years, said Mr. Koc. In the student survey, a company-matched 401(k) plan ranked fourth in the list of preferred employer benefits, behind tuition reimbursement, the promise of a salary raise and more than two weeks of vacation.

Wages for interns have been stagnant for a number of years, Mr. Koc notes, reflecting the broader economy. The average hourly pay for interns, $17.69, is at a seven-year standstill, according to the employer survey. After calculating for inflation, interns in 2016 make less money than interns from six years ago.

Geni Harclerode, the director of employer recruitment at Northwestern University, said she hasn’t noticed any big firms touting hefty benefits packages. “I haven’t seen companies advertising it in their promotional material in big bold letters,” she said. Companies such as Goldman Sachs and Bank of America recruit from the school, Ms. Harclerode said.

Continued in article


Teaching Case from The Wall Street Journal Accounting Weekly Review on September 16, 2016

Indies Get a Way to Track Digital Sales
by: Ben Fritz
Sep 10, 2016
Click here to view the full article on WSJ.com

TOPICS: Accounting Theory

SUMMARY: Independent film producers face difficulties in assessing the financial performance of their films that are known as "indies." "The vast majority of indie-movie viewing takes place via video-on-demand retailers who typically provide statements to filmmakers quarterly." Orchard, an independent distributor, is attempting to stand out from competitors and thereby garner business by providing more frequent and transparent reporting of films' financial performance.

CLASSROOM APPLICATION: Questions ask students to discuss qualitative characteristics of financial information and interpret financial information presented graphically.

QUESTIONS: 
1. (Introductory) What makes finding information about an independent film's profitability difficult? How often do filmmakers typically receive financial information about their films' profitability?

2. (Introductory) What financial reporting improvement does independent film distributor Orchard provide? How important is that innovation for them in obtaining business?

3. (Advanced) Review the related graphiic enitled "Hollywood Accounting." Has the movie "Cartel Land" been profitable during the period July 2015 to August 2016? Explain your answer.

4. (Advanced) Consider the statement that "The Orchard's expenses...totalled nearly $1.5 million, including a $500,000 advance it paid for rights to release the movie..." Is it possible that this amount should not entirely be considered an expense in the period July 2015 through August 2016? Support your answer with references to accounting literature.

5. (Advanced) List the qualitative characteristics of financial reporting as identified in FASB Concept Statement 8. Which of these characteristics is Orchard is attempting to improve in its reporting to independent filmmakers?

Reviewed By: Judy Beckman, University of Rhode Island

"Indies Get a Way to Track Digital Sales," by Ben Fritz, The Wall Street Journal, September 10, 2016
http://www.wsj.com/articles/tallying-the-bottom-line-for-independent-films-is-tricky-business-1473413400?tesla=y?mod=djem_jiewr_AC_domainid

For bigger-budget movies that play nationwide in theaters, Hollywood can be one of America’s more transparent industries. Box-office receipts usually are a fraction of a movie’s revenue, but they are a good predictor of what the sum total will be, making it relatively straightforward to determine within weeks of a film’s release whether it will be a financial hit or flop.

Outside the major studio system, though, that is increasingly not the case. Low-budget films rarely get a theatrical release these days, and if they do, it typically is in just a handful of theaters meant to generate reviews, awards consideration and the perception that it is a “real” movie.

The vast majority of indie-movie viewing today takes place via video-on-demand retailers such as cable boxes and Apple Inc.’s iTunes, making them the primary source of revenue for such films. Box-office grosses, typically in the hundreds or even tens of thousands of dollars, essentially are meaningless.

Whereas reliable box-office tallies are made public on a daily basis by websites such as Box Office Mojo, no such mechanism exists for video-on-demand, for which retailers retain their own data.

Independent filmmakers rarely know how many times their movie has been rented on Amazon.com, streamed on Netflix, or purchased on DVD. Typically, they rely on quarterly statements from a distributor to learn how much revenue their movie has earned and how much that company has spent on expenses such as advertising. In between quarterly statements, filmmakers and agents typically pepper distributors with questions.

“It can be like pulling teeth to get any information, and some filmmakers get frustrated by how long they have to wait,” said Rena Ronson, head of independent film for the United Talent Agency.

Continued in article


Teaching Case from The Wall Street Journal Accounting Weekly Review on September 16, 2016

Wal-Mart Pulls 'Egyptian Cotton' Sheets
by: Sarah Nassauer and Preetick Rana
Sep 10, 2016
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com WSJ Video

TOPICS: Supply Chain

SUMMARY: Wal-Mart Stores has removed products from Welspun India, Ltd., because the supplier had not used Egyptian cotton in its sheets in approximately two years though the product was labeled as such.

CLASSROOM APPLICATION: Questions relate to supply chain management and also could be used in an auditing class to cover audit procedures.

QUESTIONS: 
1. (Introductory) What is a supply chain? What part of Wal-Mart's supply chain failed?

2. (Advanced) Is Wal-Mart incurring costs because of this failure at its supplier? Explain.

3. (Introductory) Who has hired an accounting firm to investigate the cause of these materials sourcing problems?

4. (Advanced) What type of an accountant do you think will do the work to investigate the cause of the problem with products not containing the Egyptian cotton materials as labeled?

5. (Introductory) What other steps is the supplier taking to resolve this materials sourcing problem?

Reviewed By: Judy Beckman, University of Rhode Island

 

"Wal-Mart Pulls 'Egyptian Cotton' Sheets," Sarah Nassauer and Preetick Rana," The Wall Street Journal, September 10, 2016
http://www.wsj.com/articles/wal-mart-to-stop-selling-offer-refunds-for-egyptian-cotton-sheets-made-by-welspun-1473445139?tesla=y

Retailer offering refunds for bed linen, the authenticity of which its says can’t be confirmed by manufacturer.

Wal-Mart Stores Inc. said it would stop selling Egyptian cotton sheets made by Welspun India Ltd. , after its investigation found the Indian textile giant couldn’t guarantee the products were legitimate.

“Welspun has not been able to assure us the products are 100% Egyptian cotton, which is unacceptable,” Wal-Mart spokeswoman Marilee McInnis said.

The world’s biggest retailer is removing the Welspun products from U.S. store shelves and Walmart.com. Wal-Mart said it would offer customers who purchased the products a full refund. It will donate the sheets currently on shelves.

The move is the latest blow to the Indian textile company after Target Corp. last month said it was pulling thousands of Welspun’s “Egyptian cotton” sheets from its shelves and cutting ties with the company after it found Welspun had not used actual Egyptian cotton in the products for about two years.

Target’s move spurred other Welspun customers, including Wal-Mart, J.C. Penney Co. and Bed Bath & Beyond Inc. also to investigate the products.

Penney and Bed Bath & Beyond on Friday didn’t immediately respond to requests for comment.

A spokesman for Welspun acknowledged the Wal-Mart action and said the company is working with retailers to resolve the issue. “We take the current traceability concerns around some of our product lines very seriously,” he said.

Continued in article


Teaching Case from The Wall Street Journal Accounting Weekly Review on September 16, 2016

Ford Cut Guidance on Recall Charges
by: Christina Rogers and Anne Steele
Sep 09, 2016
Click here to view the full article on WSJ.com

TOPICS: Forecasting, Non-GAAP, Warranty Expenses

SUMMARY: Ford Motor Co.'s reduced is guidance for expected operating profit this year because of a $640 million charge in the third quarter. The charge relates to doubling Ford's recall of vehicles with faulty latches from 1.5 to 2.4 million vehicles. The faulty latches lead to doors opening while vehicles are being driven.

CLASSROOM APPLICATION: Questions relate to quarterly reporting, warranty liability accounting, measuring operating profits, management guidance, and non-GAAP reporting.

QUESTIONS: 
1. (Introductory) Ford is doubling the number of automobiles it is recalling due to a faulty latch and will record the impact in its 3rd quarter reporting. If all of the latches on newly recalled vehicles will not be serviced in that quarter, why will the company record the entire cost in that time period? Include in your explanation an example entry to record the cost of the recall.

2. (Advanced) What is operating profit? What does it mean to say that a company issues guidance about revenues, operating profits, or earnings?

3. (Advanced) "The company expects adjusted pre-tax profit of about $10.2 billion, according to a regulatory filing..." What is "adjusted pre-tax profit"? You may refer to the announcement on which this article reports that is available on the SEC web site at https://www.sec.gov/Archives/edgar/data/37996/000003799616000147/f8-kdatedseptember82016.htm

Reviewed By: Judy Beckman, University of Rhode Island

 

"Ford Cut Guidance on Recall Charges," by Christina Rogers and Anne Steele," The Wall Street Journal, September 9, 2016
http://www.wsj.com/articles/ford-lowers-profit-guidance-as-it-expands-door-latch-recall-1473342127?mod=djem_jiewr_AC_domainid

Added vehicles bring the total to 2.4 million

Ford Motor Co. ’s outlook hit another speed bump Thursday, with the company saying hefty charges for an expanded safety recall will reduce this year’s operating profit guidance by 6%.

The Dearborn, Mich., auto maker in July flagged Brexit headwinds and an expected slowdown in its core U.S. market as reasons for concerns about 2016’s second half. Although benefiting from strong U.S. sales for pickups and sport utilities, recovery in Europe and momentum in Asia, Ford has been less bullish than rival General Motors Co. on near-term prospects for the industry.

Ford cut its profit outlook after announcing it would take a $640 million charge in the third quarter to double its recall of vehicles with faulty door latches. The No. 2 U.S. auto maker said it now expects adjusted pretax profit of about $10.2 billion, according to a regulatory filing, down from its previous guidance of at least $10.8 billion.

The company said Thursday it would recall an additional 1.5 million vehicles at the request of the National Highway Traffic Safety Administration, bringing the total to 2.4 million vehicles. Ford said there had been one reported accident and three reported injuries that may be related.

The recall will fix a spring in the side-door latch that could fracture and prevent the door from closing properly, causing it to open while driving. The campaign mostly covers newer models, including the 2013-2015 Escape, 2012-2015 Ford Focus and 2015 Ford Mustang.

Shares of Ford were flat in afternoon trading.

The $640 million safety-recall charge comes as Ford is scrambling to keep pace with rivals investing heavily in autonomous-car and electric-vehicle development.

Ford reported a 9% drop in profits in the second quarter and Chief Financial Officer Bob Shanks has warned the company will face a tougher second half.

Slowing U.S. retail sales, a weaker Chinese auto market and higher costs related to the roll out of a new heavy-duty pickup truck this fall will hurt the company’s prospects for meeting its 2016 guidance, Mr. Shanks said in July.

Auto makers are also facing greater scrutiny by U.S. regulators of their safety-recall practices, resulting in the industry recalling a record 51.26 million vehicles in the U.S. last year. The volume of safety campaigns has weighed on auto makers’ profitability in recent years.

Continued in article


Teaching Case from The Wall Street Journal Accounting Weekly Review on September 16, 2016

Companies Move to Reprice Stock Options
by: Alix Stuart
Sep 13, 2016
Click here to view the full article on WSJ.com

TOPICS: Equity Compensation

SUMMARY: According to Institutional Shareholder Services, so far this year at least 10 publicly traded companies have exchanged employees' worthless stock options for new options or restricted stock.

CLASSROOM APPLICATION: Questions related to accounting for employee stock options and accounting for restricted stock.

QUESTIONS: 
1. (Introductory) What are stock option exchanges?

2. (Introductory) What is the main reason companies undertake stock option exchanges?

3. (Introductory) What type of companies undertake exchanges? How is the need for exchanges related to a company's need to ccompete for employee talent?

4. (Advanced) Why could a stock option exchange generate "shareholder pushback"?

5. (Advanced) "Restricted stock has become much more popular partly because it is easier to account for." Compare the accounting for employee stock options and the accounting for restricted stock granted to employees.

Reviewed By: Judy Beckman, University of Rhode Island

 

"Companies Move to Reprice Stock Options," by Alix Stuart," The Wall Street Journal, September 13, 2016---
http://www.wsj.com/articles/companies-move-to-reprice-employees-stock-options-1473721243?mod=djem_jiewr_AC_domainid

Stock-option exchanges surged in popularity during market busts, when many options became underwater

Stock-option exchanges are making a bit of a comeback, despite a strong stock market and worries about the shareholder pushback they can generate.

Such exchanges, which let employees trade nearly worthless options for new options or restricted stock, have been proposed or implemented by at least 10 publicly traded companies so far this year, according to proxy-advisory firm Institutional Shareholder Services—up from seven last year, and three in 2014.

Options repricing surged in popularity after the dot-com bust in the early 2000s, then again following the financial crisis in 2009, when many employee stock options became underwater: The company’s stock had fallen way below the price at which they had the right to buy shares.

Eighty companies including Apple Inc., Starbucks Corp. and Google—now Alphabet Inc. —allowed employees to trade in underwater options in 2009. Back then, about 25% of companies swapped the options without consulting shareholders, according to ISS data.

For the most part, the trend these days is confined to younger firms that have recently gone public, said Brett Harsen, partner for Radford, a part of Aon Hewitt, a consulting company.

“Companies that have lower values are competing for employees with companies with stronger equity,” said Robert Finkel, a partner with the Boston-based law firm of Morse, Barnes-Brown & Pendleton PC. “And equity is still a very important part of compensation, particularly for technology companies.”

Shares of Jive Software Inc., a maker of business software, slid below $4 in March from a high of $27.16 in 2012. That left more than 25% of the options held by the company’s employees out of the money, with their strike prices far above Jive’s then current trading price.

The Palo Alto, Calif., company pitched the idea of an option exchange to shareholders and a majority approved. Nearly 80% of eligible options were exchanged over the past two months for restricted stock units that vest over two years.

“We were looking for ways wherever we could to help the people who were staying with Jive be as incented and motivated as possible,” said Bryan LeBlanc, Jive’s finance chief.

In the exchange process, Jive and other companies are offering employees restricted stock units that automatically convert to shares in place of the options to eliminate future uncertainty.

Companies typically take great pains to ensure that exchange terms are acceptable to shareholders as well as employees. That means executives and directors don’t participate and employees receive a value equivalent to their initial grant. While shareholders approve most exchanges, companies only float them when they know such approval is forthcoming, said Mr. Harsen.

Since 2012, Jive has used restricted stock exclusively for nonexecutive employee equity awards, said Mr. LeBlanc.

Restricted stock has become much more popular partly because it is easier to account for. It also lowers the risk to employees.

Such options exchanges can benefit companies by reducing compensation expenses, since companies are required to expense the value of outstanding stock options even when they are underwater.

And for employees who receive new options, there is no guarantee their prospects will improve. Electronics retailer hhgregg Inc. repriced options with a three-year vesting schedule for 58 employees on May 1, 2013 to the then-current trading price of $13.56, according to a filing. Since 2014, the stock hasn’t returned to that level, and is currently trading around $2 per share.

Continued in article


Teaching Case from The Wall Street Journal Accounting Weekly Review on September 16, 2016

Online Shopping Upends Small-Town Retail
by: Laura Stevens
Sep 12, 2016
Click here to view the full article on WSJ.com

TOPICS: Inventory, Profitability, Supply Chain

SUMMARY: The article discusses shipping costs for everyday consumer products by beginning with a vignette about Vince Bledsoe, a UPS delivery man in tiny Mangum, OK. "Until five years ago, Mr. Bledsoe was the bearer of special orders, tractor parts and business deliveries to this area. Now, he delivers dog food, fruit snacks and Kleenex, among other things. His business has increased 30% during the past couple of years, he estimates." Shipping these products to this remote location is estimated to turn sales unprofitable for retailers and is costlier for delivery services.

CLASSROOM APPLICATION: The article may be used to discuss inventory and shipping costs, along with marketing strategy, in a managerial accounting class.

QUESTIONS: 
1. (Introductory) When did Oklahoma-based UPS delivery driver Vince Bledsoe realize that a significant shift had occurred in what is sold online?

2. (Introductory) How has the change in online shopping 'transformed rural America"?

3. (Advanced) Review the graphic entitled "Diminishing Returns" and focus on the information related to the product Diorshow lash mascara. What is the cost (estimated) of shipping this product to Oklahoma City? To Mangum, OK?

4. (Advanced) Define the gross profit method of estimating inventory. How is that technique used to estimate the impact of shipping to rural locations on the profitability of product sales shown in the graphic 'Diminishing Returns'?

5. (Introductory) According to the article, why do retailers continue to make these unprofitable online sales by shipping to remote locations?

Reviewed By: Judy Beckman, University of Rhode Island

"Online Shopping Upends Small-Town Retail," by Laura Stevens, The Wall Street Journal, September 12, 2016
http://www.wsj.com/articles/e-commerce-a-boon-for-rural-america-but-it-comes-with-a-price-1473615741?tesla=y?mod=djem_jiewr_AC_domainid

MANGUM, Okla.— Vince Bledsoe, a United Parcel Service Inc. delivery man in this remote tiny town, remembers the exact moment he knew that e-commerce had changed the way rural America shops.

He was taping up a package a few months ago to one of the town’s 3,000 residents and noticed it contained a bottle of bleach. “It wasn’t lavender [scented] or anything,” he recalls. “It was just a bottle of plain Clorox. ”

Until five years ago, Mr. Bledsoe was the bearer of special orders, tractor parts and business deliveries to this area. Now, he delivers dog food, fruit snacks and Kleenex, among other things. His business has increased 30% during the past couple of years, he estimates.

“It is getting out of hand,” he said, recently while driving his truck along a highway bordered by cotton fields. “They can find anything online. Literally anything.”

E-commerce hasn’t just reached rural America, it is transforming it by giving small-town residents an opportunity to buy staples online at a cheaper price than the local supermarket. It also provides remote areas with big-city conveniences and the latest products. Contemporary fashion, such as Victoria Secret bathing suits or Tory Burch ballet flats—items that can’t be found at Dollar General —are easily shipped.

Consumers increasingly are shopping online instead of driving, often long distances, to stores. Online shopping also brings with it deals and new entrepreneurial opportunities. These consumers, however, are the most expensive to serve for both retailers and delivery companies.

According to Kantar Retail, about 73% of rural consumers—defined as those who drive at least 10 miles for everyday shopping—are now buying online versus 68% two years ago. Last year, 30% were members of Amazon Prime, up from 22% in 2014.

Flowers Unlimited and Bratton Drug are about all that is left of a red-brick town square that just a couple of decades ago buzzed with three florists, restaurants and a furniture store. A Wal-Mart built in 1982 in Altus, Okla., about 20 miles away, brought residents choice, convenience and low prices. Now, online shopping is creating another retail revolution here that doesn’t require a half-hour drive to Wal-Mart or roughly 2˝-hour drive to Oklahoma City.

April Geralds, a security-firm support manager, recently bought her two teenage daughters designer Miss Me jeans for half price on Macys.com. Her family now has access to things “I didn’t ever think we would have,” said the Mangum resident.

Residents here are even starting to buy groceries online because frequently it is cheaper than at the town’s United Supermarkets.

A can of Bush’s Best Bold and Spicy Baked Beans cost $2.07 on Walmart.com recently, 22% less than at the United in Mangum, where it’s more expensive to transport goods.

E-commerce has provided new opportunities for area residents to earn money. In Willow, Okla., Anneliese Rogers, a mother of three, raised $1,500 in one sitting by selling items from her closet on Facebook. Nearby, Kassandra Bruton mails up to 100 packages a week from her clothing store Trailer Trash.

Continued in article


Teaching Case from The Wall Street Journal Accounting Weekly Review on September 16, 2016

Investigation of Solar Firms Widens
by: Brody Mullins, Ianthe Jeanne Dugan and Richard Rubin
Sep 16, 2016
Click here to view the full article on WSJ.com

TOPICS: Financial Reporting, Income Taxes

SUMMARY: The Senate Finance Committee and the House Ways and Means Committe sent letters to seven foreign and domestic companies in the solar industry, expanding a more limited probe started earlier this year. Recipients were SolarCity Corp., Sunrun Inc. , Sungevity Inc., SunEdison Inc., Abengoa SA, NextEra Energy Inc. and NRG energy Inc. They are investigating valuation of solar energy installations for tax credits and/or government cash grants.

CLASSROOM APPLICATION: Both tax incentives (e.g., tax credits) and financial reporting disclosures are covered.

QUESTIONS: 
1. (Introductory) Define the two types of incentives offered by the U.S Federal government for investments in solar energy systems: tax credits and cash grants.

2. (Introductory) A solar energy developer company could choose between these two incentive options. When would each of the types of incentives described above likely be used?

3. (Advanced) When will companies enter into contracts to transfer these solar energy tax benefits to others?

4. (Advanced) Access SolarEnergy's financial filing on Form 10-Q for the quarter ended June 30, 2016 on the SEC web site at the link below https://www.sec.gov/Archives/edgar/data/1408356/000156459016023725/scty-10q_20160630.htm Search for the disclosure described in the article as adverse effects if the "Internal Revenue Service or the U.S. Treasury Department were to object to amounts...claimed [by the company] as too high of a fair market value on such systems...." Where is this disclosure made? Why is this disclosure important in this filing?

5. (Advanced) "Solar-energy developers...routinely enlist big investors and transfer the tax benefits. Some also lease systems to homeowners and businesses. So there is debate over the fair market value of the solar energy systems...." Why do these transactions lead to the need to appraise the fair market value of these solar-energy systems? Offer at least one explanation for either the scenario of a developer attracting other investors to a project or the case of a developer leasing systems to homeowners and businesses.

Reviewed By: Judy Beckman, University of Rhode Island

"Investigation of Solar Firms Widens," by Brody Mullins, Ianthe Jeanne Dugan and Richard Rubin, The Wall Street Journal, September 16, 2016
http://www.wsj.com/articles/lawmakers-probe-tax-incentives-received-by-solar-energy-firms-1473967056?mod=djem_jiewr_AC_domainid

Under investigation is how companies determine the value of the credits

Congressional lawmakers have launched a formal investigation into whether solar-energy companies improperly received billions of dollars in tax incentives from the Obama administration. The Senate Finance Committee and the House Ways and Means Committee on Wednesday sent letters to seven foreign and domestic companies in the solar industry, expanding a more limited probe started earlier this year. The recipients included three firms in the residential solar industry, SolarCity Corp. , Sunrun Inc. and Sungevity Inc., and four solar utility companies—SunEdison Inc., Abengoa SA, NextEra Energy Inc. and NRG Energy Inc.


Teaching Case from The Wall Street Journal Accounting Weekly Review on September 16, 2016

SEC Probes Exxon Over Accounting for Climate Change
by: Bradley Olson and Aruna Viswanatha
Sep 21, 2016
Click here to view the full article on WSJ.com

TOPICS: Auditing, Impairment

SUMMARY: The SEC sought information and documents in August from Exxon and the company's auditor, PricewaterhouseCoopers LLP, over how Exxon values its assets. The SEC's probe is homing in on how Exxon calculates the impact to its business from the world's mounting response to climate change, including what figures the company uses to account for the future costs of complying with regulations to curb greenhouse gases as it evaluates the economic viability of its projects....As part of its probe, the SEC is also examining Exxon's longstanding practice of not writing down the value of its oil and gas reserves when prices fall, people familiar with the matter said.

CLASSROOM APPLICATION: Questions cover impairment testing, carbon tax and cap-and-trad cost, and audit documentation

QUESTIONS: 
1. (Introductory) What two asset valuation issues is the SEC investigating at Exxon?

2. (Introductory) What is impairment testing?

3. (Advanced) The SEC is investigating how Exxon considers the impact of climate-related regulation compliance costs "as it evaluates the economic viability of its projects." When do companies base their accounting on the economic viability of their projects?

4. (Advanced) According to the article, how should cost of regulations impact evaluations of future oil and gas prospects? In your answer, define the terms "carbon tax" and "cap-and-trade systems."

5. (Advanced) The SEC has asked for documents from Exxon's auditor, PricewaterhouseCoopers, as well as the company. Name one type of documentation that PwC would have as audit evidence for its Exxon engagement. Describe the purpose of this audit evidence and then explain how it might be useful to the SEC in making its assessment of these issues.

Reviewed By: Judy Beckman, University of Rhode Island

 

"SEC Probes Exxon Over Accounting for Climate Change," by Bradley Olson and Aruna Viswanatha, The Wall Street Journal, September 21, 2016
http://www.wsj.com/articles/sec-investigating-exxon-on-valuing-of-assets-accounting-practices-1474393593?mod=djem_jiewr_AC_domainid

Probe also examines company’s practice of not writing down the value of oil and gas reserves

The U.S. Securities and Exchange Commission is investigating how Exxon Mobil Corp. values its assets in a world of increasing climate-change regulations, a probe that could have far-reaching consequences for the oil and gas industry. The SEC sought information and documents in August from Exxon and the company’s auditor, PricewaterhouseCoopers LLP, according to people familiar with the matter. The federal agency has been receiving documents the company submitted as part of a continuing probe into similar issues begun last year by New York Attorney General Eric Schneiderman, the people said. The SEC’s probe is homing in on how Exxon calculates the impact to its business from the world’s mounting response to climate change, including what figures the company uses to account for the future costs of complying with regulations to curb greenhouse gases as it evaluates the economic viability of its projects.

The decision to step into an Exxon investigation and seek climate-related information represents a moment in the effort to take climate change more seriously in the financial community, said Andrew Logan, director of the oil and gas program at Ceres, a Boston-based advocacy organization that has pushed for more carbon-related disclosure from companies.

“It’s a potential tipping point not just for Exxon, but for the industry as a whole,” he said. As part of its probe, the SEC is also examining Exxon’s longstanding practice of not writing down the value of its oil and gas reserves when prices fall, people familiar with the matter said. Exxon is the only major U.S. producer that hasn’t taken a write down or impairment since oil prices plunged two years ago. Peers including Chevron Corp. have lowered valuations by a collective $50 billion. “The SEC is the appropriate entity to examine issues related to impairment, reserves and other communications important to investors,” said Exxon spokesman Alan Jeffers. “We are fully complying with the SEC request for information and are confident our financial reporting meets all legal and accounting requirements.” A spokeswoman for PwC declined to comment. An SEC spokeswoman declined to comment. A spokesman for Mr. Schneiderman said the attorney general wouldn’t comment on the matter. The SEC probe isn’t believed to involve other energy companies, according to a person familiar with the matter.

Activists, members of Congress and former government officials have ratcheted up pressure on the SEC in the past year to do more to assess climate risks. Four congressional Democrats including U.S. Rep. Ted Lieu last year asked the SEC to investigate Exxon over its climate-related science and advocacy. Three former U.S. treasury secretaries wrote the SEC in July urging the agency to adopt industry-specific standards for disclosure in company filings.

Continued in article


Teaching Case from The Wall Street Journal Accounting Weekly Review on September 16, 2016

For U.S. Firms, Figuring Out GAAP is Not the Only Challenge
by: Nina Trentmann
Sep 19, 2016
Click here to view the full article on WSJ.com

TOPICS: Generally accepted accounting principles, IFRS

SUMMARY: The article discusses the differences between U.S. GAAP and IFRS in the areas of inventory write-downs and long-lived asset impairments. It is driven by the related article on the SEC inquiry of Exxon and its auditor, PwC, on accounting for oil & gas related assets.

CLASSROOM APPLICATION: The article may be used when covering impairment analysis or in an IFRS course.

QUESTIONS: 
1. (Introductory) According to the article, how does Exxon's financial reporting for long-lived assets (oil fields) under U.S. GAAP compare to competitors Royal Dutch Shell PLC, Total SA, and BP PLC (which report under IFRS) and even Chevron Corp. (which reports under U.S. GAAP)?

2. (Advanced) What is the goal of accounting practices related to impairment testing under both U.S. GAAP and IFRS? Reference the description in the article but then support the statement with reference to authoritative accounting literature.

3. (Advanced) What is the difference in requirements between IFRS and U.S. GAAP leading to the statement in the article that it is "much harder to write down assets under [U.S.] GAAP than under IFRS? Again, cite your sources in authoritative accounting literature.

4. (Advanced) What is the difference in treatment of impairment loss allowances in U.S. GAAP and IFRS? Again, support the statement in the article with reference to authoritative guidance.

5. (Introductory) Do you think that the differences in reporting practices between U.S. GAAP and IFRS described in this article might influence judgments in difficult areas of accounting such as estimating values of oil & gas? Explain

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES: 
SEC Probes Exxon Over Accounting for Climate Change
by Bradley Olson and Aruna Viswanatha
Sep 21, 2016
Page: A

"For U.S. Firms, Figuring Out GAAP is Not the Only Challenge," by Nina Trentmann, The Wall Street Journal, September 19, 2016
http://blogs.wsj.com/cfo/2016/09/19/for-u-s-firms-figuring-out-gaap-is-not-the-only-challenge/?mod=djem_jiewr_AC_domainid

A U.S. investigation into the lack of write-downs at Exxon Mobil Corp. despite the slump in oil-prices has brought to light the challenge of assessing impairments under U.S. Generally Accepted Accounting Principles (GAAP).

But, for international companies and U.S. firms with foreign operations, figuring out GAAP is not the only contest, as there is second set of rules.

International Financial Reporting Standards (IFRS) are a single set of accounting standards that are now mandated for use by more than 100 countries, including the EU and more than ⅔ of the G20.

U.S. companies with overseas operations keep two sets of books, as they have to convert their IFRS results into GAAP. International firms that are stocklisted in the U.S. are exempt from this rule, they file in IFRS.

According to its latest earnings report, Exxon consolidates in GAAP.

Both in GAAP and in IFRS, the goal is to ensure that assets are not reported above their so-called fair value, or the amount that can be recovered from liquidating the asset, said Emmanuel De George, assistant professor of accounting at London Business School.

Once it is determined that an asset requires a write-down, reporting entries and disclosure are similar between IFRS and GAAP, the professor said.

However, there are substantial distinctions between IFRS and GAAP. “The key difference arises in the determination of whether or not an asset requires a write-down,” Mr. De George said.

Exxon said it hasn’t needed to record a write-down since oil-prices came falling 2014. Last year, a trade publication quoted Exxon Chief Executive Rex Tillerson with saying “we don’t do write-downs.”

It is much harder to write down assets under GAAP than under IFRS, Mr. De George said.

This is because under IFRS impairment losses can be reversed if economic conditions change and value is restored, whereas under GAAP reversals are prohibited, once a write-down has taken place, even if economic conditions improve.

“Under GAAP, a write-down is triggered if the sum of the undiscounted expected future cash flows from the asset fall below the net book value,” said Mr. De George.

This means that over time changes to the value of the asset, for example due to currency fluctuations, are not taken into consideration when calculating the expected future cash flow that is generated by the asset.

For the write-down itself, however, companies don’t reference undiscounted expected future cash flows, but the discounted expected future cash flow.

This is also described as “fair value,” the “price that would be expected upon sale of the asset,” said Mr. De George.

Under IFRS, there’s a difference in testing whether there needs to be a write-down. IFRS starts with the discounted future expected cash flows, thus directly accounting for over time changes to the value of the asset.

The second step, the write-down, follows the same route as GAAP.

In addition there is another major difference between GAAP and IFRS. IFRS does not permit a method called last-in-first-out (LIFO) which shows a lower cost of sales and higher gains during periods of declining oil prices, said Karthik Balakrishnan, assistant professor of accounting at London Business School.

“This is what Exxon and most U.S. oil companies use,” said Mr. Balakrishnan.

Because of the difference in assessing write-downs and LIFO, IFRS will produce more conservative numbers for earnings during periods of declining prices, said Mr. Balakrishnan.

In the case of Exxon, the experts warn against simply accrediting the lack of write-downs to the differences in accounting standards between the U.S. and other parts of the world.

“That would be an unfair comparison, given that the threshold for impairment testing is higher under GAAP,” said Mr. De George.

Exxon tends to be more conservative when capitalizing the costs of their fields which lead to lower book values to begin with, Mr. George said. “That further reduces the probability that they will trigger an impairment event,” he said.

Exxon’s competitors Chevron Corp., Royal Dutch Shell PLC, Total SA and BP PLC have written down more than $50 billion since 2014. Shell, Total and BP use IFRS, Chevron consolidates in GAAP.

Continued in article


Teaching Case from The Wall Street Journal Accounting Weekly Review on September 16, 2016

Microsoft Plans $40 Billion Stock Buyback and Raises Dividend
by: Don Clark and Josh Beckerman
Sep 21, 2016
Click here to view the full article on WSJ.com

TOPICS: Dividend Yield

SUMMARY: Microsoft announced a stock buyback amounting to approximately 9% of the company's $442.7 billion market value and increased the dividend rate to 39 cents from 36 cents.

CLASSROOM APPLICATION: Questions cover accounting for dividends, treasury stock (stock buybacks) and dividend yield calculations.

QUESTIONS: 
1. (Introductory) Define the terms declaration date, date of record, and date of payment in relation to dividends. Identify those three dates for Microsoft's declared dividend reported in the article.

2. (Advanced) What is dividend yield?

3. (Advanced) Show the calculation from the information in the article which determines that Microsoft's dividend yield is 2.7%.

Reviewed By: Judy Beckman, University of Rhode Island

 

"Microsoft Plans $40 Billion Stock Buyback and Raises Dividend," by Don Clark and Josh Beckerman, The Wall Street Journal, September 21, 2016
http://www.wsj.com/articles/microsoft-plans-40-billion-stock-buyback-and-raises-dividend-1474404013?mod=djem_jiewr_AC_domainid

Rise in Tech giant’s quarterly payout to 39 cents from 36 cents represents an increased dividend yield to 2.7%

Microsoft Corp. announced plans to buy back up to $40 billion in stock and boost its dividend by 8%, the latest in a series of moves by the software giant to share a steady flood of cash with shareholders. The latest repurchase target is the same size as a buyback plan announced in 2013, which the company said Tuesday it expects to complete by the end of this year. Microsoft didn't set an expiration date for the new buyback, which represents about 9% of Microsoft’s market value of $442.7 billion. The company has been among most active in buying back shares, having spent nearly $140 billion on the tactic over the years.

Microsoft tends to announce dividend increases in September. The 8% increase announced Tuesday is a smaller rate of increase than those of recent years. Last year, the company raised its quarterly payout by 16% to 36 cents from 31 cents, after an 11% increase in 2014. This year’s increase, to 39 cents per quarter, from 36 cents, raises Microsoft’s dividend yield to 2.7% from 2.3%. The dividend is payable Dec. 8 to shareholders of record Nov. 17. Microsoft, based in Redmond, Wash., enjoyed torrid revenue growth in the 1990s fueled by the spread of personal computers. After its growth slowed, the company began offering increasingly generous dividends as well as buybacks. The latter tactic tends to prop up a company’s stock price by reducing total shares outstanding, thereby increasing earnings per share. Though a slowdown in unit sales of PCs has tended to hurt sales of Microsoft’s Windows operating system, the company sells other software and services that generate a steady flow of cash. Microsoft reported $113 billion in cash and investments at the end of June. Meanwhile, investors have become more optimistic about the company’s plans to build a big business in cloud services since Satya Nadella took over as chief executive in February 2014. Underscoring his bet on services, Microsoft agreed in June to buy professional social network LinkedIn Corp. for $26.2 billion. The company’s shares are up 31% over the past year. They rose 1%, or 54 cents, in after-hours trading. In 4 p.m. trading, Microsoft shares fell 12 cents, to $56.81. Strength in Microsoft’s cloud business helped the company beat sales and profit expectations in its fiscal fourth quarter, which ended June 30, although revenue fell 7% to $20.61 billion.

Continued in article


Teaching Case from The Wall Street Journal Accounting Weekly Review on September 16, 2016

Lew is Right on EU Tax But Lacks Credibility
by: Reps. John K. Delaney and Richard Hanna
Sep 16, 2016
Click here to view the full article on WSJ.com

TOPICS: International Taxation

SUMMARY: This Letter to the Editor from Representatives John K. Delaney (D., MD) and Richard Hanna (R., nY) proposes a combination of international tax "reform" and infrastructure investment.

CLASSROOM APPLICATION: The article may be used in tax class to address the political impretus behind tax law in relation to the recent EU finding against Apple.

QUESTIONS: 
1. (Introductory) Describe the features of this proposal to repatriate U.S. multinationals' foreign held earnings and invest in U.S. infrastructure. Greater detail is available in the related letter to the editor by Treasury Secretary Jacob Lew.

2. (Advanced) Refer to the related article: what is Treasury Secretary's concern about U.S. federal tax revenues because of the European Union decision on Apple tax payments to Ireland?

3. (Advanced) Explain the argument that U.S. business leave for foreign countries because of our aging infrastructure. What is the evidence against this argument?

Reviewed By: Judy Beckman, University of Rhode Island

RELATED ARTICLES: 
Europe's Bite Out of the Apple Shows the Need for U.S. Tax Reform
by Jacob J. Lew
Sep 13, 2016
Page: A11

"Lew is Right on EU Tax But Lacks Credibility," by Reps. John K. Delaney and Richard Hanna, The Wall Street Journal, September 16, 2016
http://www.wsj.com/articles/lew-is-right-on-eu-tax-grab-but-lacks-credibility-1473962171?mod=djem_jiewr_AC_domainid

Our bipartisan Infrastructure 2.0 Act is the way to get this done: Combine international tax reform with infrastructure investment.

We agree with Treasury Secretary Jacob Lew’s diagnosis of our flawed international tax system (“Europe’s Bite Out of the Apple Shows the Need for U.S. Tax Reform,” op-ed, Sept. 13) and we agree, directionally, with his description of the proper solution. We encourage the secretary and congressional leadership to focus on our bipartisan Infrastructure 2.0 Act. The way to get this done is to combine international tax reform with infrastructure investment. The $2 trillion of existing overseas earnings would be “deemed” repatriated and subject to a minimum tax of 8.75% (less any tax already paid) and on a “go forward” basis, deferral would end and the rate would be 12.25% for profits in low-tax jurisdictions with deductions for taxes already paid.

This bipartisan approach generates $170 billion of revenue that would be applied to our nation’s infrastructure and creates a new national infrastructure fund that would provide an additional $750 billion in financing to state and local governments. The urgency of this problem demands embracing a smart, practical plan that has bipartisan support, like the Infrastructure 2.0 Act. This is the only way to actually make progress.

Continued in article

 




 

Humor for September 2016

Is looking for a gap between an object and its reflection a good way to distinguish two-way mirrors from ordinary mirrors?
http://www.snopes.com/crime/warnings/mirror.asp
Jensen Comment
Reminds me of the time a Texas Aggie coed wore a see-through dress and nobody wanted to

 

Gene Wilder Recalls the Beginnings of His Creative Life in Two Hilarious, Poignant Stories ---
http://www.openculture.com/2016/08/gene-wilder-recalls-the-beginnings-of-his-creative-life-in-two-hilarious-poignant-stories.html

11 Books by Comedians That Will Make You Laugh ---
http://www.businessinsider.com/comedian-books-2016-8

Florida: The Punchline State ---
http://www.wsj.com/articles/florida-the-punchline-state-1472845591

I completely forgot to write about jail being one of the retirement options
70-year-old says he robbed bank because he preferred jail to his wife -+--
http://www.thestate.com/news/nation-world/national/article100357577.html#fmp

Ex-Playboy model runs from Interpol to avoid prison for honeypot mafia-murder plot ---
http://www.washingtontimes.com/news/2016/sep/7/slobodanka-tosic-ex-playboy-model-runs-from-interp/
Jensen Comment
You can identify her by looking for the staple scars


Video:  The Twilight of the Clintons. A very funny parody of the Ring cycle ---
https://www.youtube.com/watch?v=Prls6Iz3B3E

The funniest puns and double-entendres from 'Great British Bake Off' ---
http://www.businessinsider.com/great-british-bake-off-funniest-puns-and-double-entendres-from-2016-9

This is not funny, but it is a little ironic
'Sherlock' actress has a new mystery to solve: Who took her purse when she was accepting her Emmy ---
http://www.businessinsider.com/amanda-abbington-purse-stolen-at-emmys-2016-9


Time Magazine:  2016 Ig Nobel Prize Winning Quirky Research ---
http://time.com/4505383/ig-nobel-awards-2016-spoof-prize-quirky-science/?xid=newsletter-brief

Home Page and Archives ---
http://www.improbable.com/ig/


Canadian Mint employee accused of smuggling $180K of gold in his rectum ---
http://ottawacitizen.com/news/local-news/egan-170k-in-mint-gold-allegedly-smuggled-in-body-cavity-judge-hears

Jensen Comment
This is the one and only time it might be very interesting to be a proctologist.

Johnny Cash's Cadillac could not top this one ---
https://www.youtube.com/watch?v=rWHniL8MyMM&list=RDrWHniL8MyMM

 


 

Forwarded by Paula

One Liners In An Election Year

 

Sayings that never grow old!

 

  If God wanted us to vote, 

he would have given us candidates.

~Jay Leno~

 

 The problem with political jokes is they 

get elected.

~Henry Cate, VII~

 

 We hang the petty thieves and appoint 

the great ones to public office.

~Aesop~

 

  If we got one-tenth of what was promised 

to us in these State of the Union speeches, 

there wouldn't be any inducement to go to heaven.

~Will Rogers~

 

  Politicians are the same all over. 

They promise to build a bridge even 

where there is no river.

~Nikita Khrushchev~

 

  When I was a boy I was told that anybody 

could become President; I'm beginning to believe it.

~Clarence Darrow~

 

  Politicians are people who, when they see 

light at the end of the tunnel, go out and 

buy some more tunnel.

~John Quinton~

 

 Why pay money to have your family tree 

traced; go into politics and your opponents 

will do it for you.

~Author unknown

 

  Politics is the gentle art of getting votes 

from the poor and campaign funds from 

the rich, by promising to protect each from the other.

~Oscar Ameringer~

 

 I offer my opponents a bargain: if they will 

stop telling lies about us, I will stop telling 

the truth about them.

~Adlai Stevenson, 1952~

 

  A politician is a fellow who will lay 

down your life for his country.

~ Tex Guinan~

 

 I have come to the conclusion that politics 

is too serious a matter to be left to the politicians.

~Charles de Gaulle~

 

  Instead of giving a politician the keys to the 

city, it might be better to change the locks.

~Doug Larson~

 

 There ought to be one day -- just one -- 

when there is open season on Congressmen.

~Will Rogers~ 


Forwarded by Paula

You may not remember the old-time Jewish comedians:

Shecky Green, Red Buttons, Totie Fields, Milton Berle,

Henny Youngman, and others.

But some of us miss their kind of humor. Not a single

swear word in their routines, and you don't have to be

Jewish to enjoy their jokes.

*A car hit an elderly Jewish man. The paramedic asks, "Are you comfortable?" The man says, "I make a good living."

*I just got back from a pleasure trip. I took my mother-in-law to the airport.

*I've been in love with the same woman for 49 years. If my wife finds out, she'll kill me!

*Someone stole all my credit cards, but I won't be reporting it. The thief spends less than my wife did.

*We always hold hands. If I let go, she shops.

*My wife and I went to a hotel where we got a waterbed. My wife calls it the Dead Sea.

*My wife and I revisited the hotel where we spent our wedding night. This time I was the one who stayed in the bathroom and cried.

*My Wife was at the beauty shop for two hours. That was only for the estimate. She got a mud pack and looked great for two days. Then the mud fell off.

*The Doctor gave a man six months to live. The man couldn't pay his bill, so the doctor gave him another six months.

*The Doctor called Mrs. Cohen saying, "Mrs. Cohen, your check came back."Mrs. Cohen replied, "So did my arthritis!"

*Doctor: "You'll live to be 60!"

Patient: "I AM 60!"

Doctor: "See! What did I tell you?"

*A doctor held a stethoscope up to a man's chest. The man asks, "Doc, how do I stand?"

The doctor says, "That's what puzzles me!"

*Patient: "I have a ringing in my ears."

Doctor: "Don't answer!"

*A drunk was in front of a judge. The judge says, "You've been brought here for drinking."

The drunk says, "Okay, let's get started."

*Why do Jewish divorces cost so much?

They're worth it.

*Why do Jewish men die before their wives?

They want to.

*The Harvard School of Medicine did a study of why Jewish women like Chinese food so much.

The study revealed that the reason is Won Ton spelled backward is Not Now.

*There is a big controversy on the Jewish view of when life begins. In Jewish tradition, the fetus is not considered

viable until it graduates from law school.

*Q: Why don't Jewish mothers drink?

A: Alcohol interferes with their suffering.

*Q: Have you seen the newest Jewish-American-Princess horror movie? A: It's called, "Debbie Does Dishes."

*Q: Why do Jewish mothers make great parole officers?

A: They never let anyone finish a sentence.

*A man called his mother in Florida . "Mom, how are you?"

"Not too good," said the mother. "I've been very weak."

The son asked, "Why are you so weak?"

She replied, "Because I haven't eaten in 38 days."

The son said,"That's terrible. Why haven't you eaten in 38 days?"

The mother answered, "Because, I didn't want my mouth to be full in case you should call."

*A Jewish man said that when he was growing up, they always had two choices for dinner - Take it or leave it.

*A Jewish boy comes home from school and tells his mother he has a part in the play. She asks, "What part is it?"

The boy says, "I play the part of the Jewish husband."

The mother scowls and says, "Go back and tell the teacher you want a speaking part."

*Q: Where does a Jewish husband hide money from his wife?

A: Under the vacuum cleaner.

*Q: How many Jewish mothers does it take to change a light bulb?

A: (Sigh) "Don't bother. I'll sit in the dark. I don't want to be a nuisance to anybody."

*A Jewish mother gives her son a blue shirt and a brown shirt for his birthday. On the next visit, he wears the

brown one. The mother says, "What's the matter

already? Didn't you like the blue one?"

*Did you hear about the bum who walked up to a Jewish mother on the street and said, "Lady I haven't eaten in three days." "Force yourself," she replied.

*Q: What's the difference between a Rottweiler and a Jewish mother?

A: Eventually, the Rottweiler lets go.

*Q: Why are Jewish Men circumcised?

A: Because Jewish women don't like anything that isn't 20% off.

 


Taxing Tattoos and Other Fine Arts ---
http://www.bna.com/sales-tax-slice-b73014447392/

Jensen Comment
I'll resist commenting further on a tattoo of one's cat (mentioned in the article)
I guess that beats making a tattoo of one's significant other who could become insignificant most any time.
Accountants might consider a forehead tattoo of a green eyeshade.
But that might lead to lonely times in singles bars.

I think I'll get a tattoo that reads "Test Checker for Your Inventory"

Any better suggestions?


Awful  Punish Humor from Paula

Venison for dinner again? Oh deer!

* How does Moses make tea? Hebrews it.

* England has no kidney bank, but it does have a Liverpool.

* I tried to catch some fog, but I mist.

* They told me I had type-A blood, but it was a typo.

* I changed my iPod's name to Titanic. It's syncing now.

* Jokes about German sausage are the wurst.

* I know a guy who's addicted to brake fluid, but he says he can stop any time.

* I stayed up all night to see where the sun went, and then it dawned on me.

* This girl said she recognized me from the vegetarian club, but I'd never met herbivore.

* When chemists die, they barium.

* I'm reading a book about anti-gravity. I just can't put it down.

* I did a theatrical performance about puns. It was a play on words.

* Why were the Indians here first? They had reservations.

* I didn't like my beard at first. Then it grew on me.

* Did you hear about the cross-eyed teacher who lost her job because she couldn't control her pupils?

* When you get a bladder infection, urine trouble.

* Broken pencils are pointless.

* What do you call a dinosaur with an extensive vocabulary? A thesaurus.

* I dropped out of communism class because of terrible Marx.

* I got a job at a bakery because I kneaded dough.

* Velcro - what a rip off!

* Don't worry about old age it doesn't last

 



Humor September  2016 --- http://faculty.trinity.edu/rjensen/book16q3.htm#Humor093016.htm

Humor August  2016 --- http://faculty.trinity.edu/rjensen/book16q3.htm#Humor083116.htm

Humor July  2016 --- http://faculty.trinity.edu/rjensen/book16q3.htm#Humor0716.htm  

Humor June  2016 --- http://faculty.trinity.edu/rjensen/book16q2.htm#Humor063016.htm

Humor May  2016 --- http://faculty.trinity.edu/rjensen/book16q2.htm#Humor053116.htm

Humor April  2016 --- http://faculty.trinity.edu/rjensen/book16q2.htm#Humor043016.htm

Humor March  2016 --- http://faculty.trinity.edu/rjensen/book16q1.htm#Humor033116.htm

Humor February  2016 --- http://faculty.trinity.edu/rjensen/book16q1.htm#Humor022916.htm

Humor January  2016 --- http://faculty.trinity.edu/rjensen/book16q1.htm#Humor013116.htm

Humor December 1-31,  2015 --- http://faculty.trinity.edu/rjensen/book15q4.htm#Humor123115.htm.htm

Humor November 1-30,  2015 --- http://faculty.trinity.edu/rjensen/book15q4.htm#Humor113015.htm

Humor October 1-31,  2015 --- http://faculty.trinity.edu/rjensen/book15q4.htm#Humor103115

Humor September 1-30,  2015 --- http://faculty.trinity.edu/rjensen/book15q3.htm#Humor093015

Humor August 1-31,  2015 --- http://faculty.trinity.edu/rjensen/book15q3.htm#Humor081115

Humor July 1-31,  2015 --- http://faculty.trinity.edu/rjensen/book15q3.htm#Humor073115

Humor June 1-30,  2015 --- http://faculty.trinity.edu/rjensen/book15q2.htm#Humor043015

Humor May 1-31,  2015 --- http://faculty.trinity.edu/rjensen/book15q2.htm#Humor043015

Humor April 1-30, 2015 --- http://faculty.trinity.edu/rjensen/book15q2.htm#Humor043015

Humor March 1-31, 2015 --- http://faculty.trinity.edu/rjensen/book15q1.htm#Humor033115

Humor February 1-28, 2015 --- http://faculty.trinity.edu/rjensen/book15q1.htm#Humor022815

Humor January 1-31, 2015 --- http://faculty.trinity.edu/rjensen/book15q1.htm#Humor013115




Tidbits Archives --- http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm

An Oklahoma mother and daughter are behind bars after it was revealed they had an incestuous marriage. Patricia Ann Spann, 43, and Misty Velvet Dawn Spann, 25, were married in March 2016 in Comanche County. It has since been revealed that Patricia Spann, also known as Patricia Clayton, was previously married to one of her sons, Jody Calvin Spann, in 2008
http://www.dailymail.co.uk/news/article-3778944/Oklahoma-woman-daughter-arrested-incestuous-marriage.html
I'm My Own Grandpa ---
https://www.youtube.com/watch?v=eYlJH81dSiw

 

 

 




Humor August  2016 --- http://faculty.trinity.edu/rjensen/book16q3.htm#Humor083116.htm

Humor July  2016 --- http://faculty.trinity.edu/rjensen/book16q3.htm#Humor0716.htm  

Humor June  2016 --- http://faculty.trinity.edu/rjensen/book16q2.htm#Humor063016.htm

Humor May  2016 --- http://faculty.trinity.edu/rjensen/book16q2.htm#Humor053116.htm

Humor April  2016 --- http://faculty.trinity.edu/rjensen/book16q2.htm#Humor043016.htm

Humor March  2016 --- http://faculty.trinity.edu/rjensen/book16q1.htm#Humor033116.htm

Humor February  2016 --- http://faculty.trinity.edu/rjensen/book16q1.htm#Humor022916.htm

Humor January  2016 --- http://faculty.trinity.edu/rjensen/book16q1.htm#Humor013116.htm

Humor December 1-31,  2015 --- http://faculty.trinity.edu/rjensen/book15q4.htm#Humor123115.htm.htm

Humor November 1-30,  2015 --- http://faculty.trinity.edu/rjensen/book15q4.htm#Humor113015.htm

Humor October 1-31,  2015 --- http://faculty.trinity.edu/rjensen/book15q4.htm#Humor103115

Humor September 1-30,  2015 --- http://faculty.trinity.edu/rjensen/book15q3.htm#Humor093015

Humor August 1-31,  2015 --- http://faculty.trinity.edu/rjensen/book15q3.htm#Humor081115

Humor July 1-31,  2015 --- http://faculty.trinity.edu/rjensen/book15q3.htm#Humor073115

Humor June 1-30,  2015 --- http://faculty.trinity.edu/rjensen/book15q2.htm#Humor043015

Humor May 1-31,  2015 --- http://faculty.trinity.edu/rjensen/book15q2.htm#Humor043015

Humor April 1-30, 2015 --- http://faculty.trinity.edu/rjensen/book15q2.htm#Humor043015

Humor March 1-31, 2015 --- http://faculty.trinity.edu/rjensen/book15q1.htm#Humor033115

Humor February 1-28, 2015 --- http://faculty.trinity.edu/rjensen/book15q1.htm#Humor022815

Humor January 1-31, 2015 --- http://faculty.trinity.edu/rjensen/book15q1.htm#Humor013115




And that's the way it was on September 30, 2016 with a little help from my friends.

 

Bob Jensen's gateway to millions of other blogs and social/professional networks ---
http://faculty.trinity.edu/rjensen/ListservRoles.htm

Bob Jensen's Threads --- http://faculty.trinity.edu/rjensen/threads.htm

Bob Jensen's Blogs --- http://faculty.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called New Bookmarks --- http://faculty.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called Tidbits --- http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called Fraud Updates --- http://faculty.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's past presentations and lectures --- http://faculty.trinity.edu/rjensen/resume.htm#Presentations   

Free Online Textbooks, Videos, and Tutorials --- http://faculty.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
Free Tutorials in Various Disciplines --- http://faculty.trinity.edu/rjensen/Bookbob2.htm#Tutorials
Edutainment and Learning Games --- http://faculty.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses --- http://faculty.trinity.edu/rjensen/000aaa/updateee.htm#OKI

Bob Jensen's Resume --- http://faculty.trinity.edu/rjensen/Resume.htm
 

Bob Jensen's Homepage --- http://faculty.trinity.edu/rjensen/

Accounting Historians Journal --- http://www.libraries.olemiss.edu/uml/aicpa-library  and http://clio.lib.olemiss.edu/cdm/landingpage/collection/aah
Accounting Historians Journal
Archives--- http://www.olemiss.edu/depts/general_library/dac/files/ahj.html
Accounting History Photographs --- http://www.olemiss.edu/depts/general_library/dac/files/photos.html

 

 

 

 

 

 

August 2016

 

 

 

Bob Jensen's New Additions to Bookmarks

August 2016 

Bob Jensen at Trinity University 


For earlier editions of Fraud Updates go to http://faculty.trinity.edu/rjensen/FraudUpdates.htm
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Bookmarks for the World's Library --- http://faculty.trinity.edu/rjensen/bookbob2.htm 

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For example if you want to know what Jensen documents have the term "Enron" enter the phrase Jensen AND Enron. Another search engine that covers Trinity and other universities is at http://www.searchedu.com/

Bob Jensen's Blogs --- http://faculty.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called New Bookmarks --- http://faculty.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called Tidbits --- http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called Fraud Updates --- http://faculty.trinity.edu/rjensen/FraudUpdates.htm

 

Bob Jensen's Pictures and Stories
http://faculty.trinity.edu/rjensen/Pictures.htm

 

All my online pictures --- http://www.cs.trinity.edu/~rjensen/PictureHistory/

David Johnstone asked me to write a paper on the following:
"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics Science"
Bob Jensen
February 19, 2014
SSRN Download:  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2398296 

Scholarpedia (a cross between Wikipedia and Google Scholar) --- http://www.scholarpedia.org

Google Scholar --- https://scholar.google.com/

Wikipedia --- https://www.wikipedia.org/

Bob Jensen's search helpers --- http://faculty.trinity.edu/rjensen/searchh.htm

Bob Jensen's World Library --- http://faculty.trinity.edu/rjensen/Bookbob2.htm




Accounting History Corner
Understanding Practice and Institutions: A Historical Perspective
SSRN, July 29, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2815900
Accounting Horizons, Vol. 30, No. 3, 2016

Authors

Ross L. Watts Massachusetts Institute of Technology (MIT) - Sloan School of Management

Luo Zuo Cornell University - Samuel Curtis Johnson Graduate School of Management

Abstract

This paper explains how and why Anglo-American accounting and auditing, along with corporate governance and capital markets, evolved over many centuries in response to changes in market forces and technology. We first trace the development of practices that were included in U.S. corporate governance (including accounting and auditing) before the 1930s. We then describe the nature and effect of the increase in U.S. regulation from the 1930s and the development of fair value accounting. Finally, we give an assessment of the current state of accounting, auditing and corporate governance. Our historical accounts suggest that the approach to accounting and financial reporting is more consistent with stewardship (care of net assets) than an attempt to value the firm, and that conservatism (prudence) is a critical information control and governance mechanism. We echo the U.K. Financial Reporting Council’s call on standard setters to reintroduce an explicit reference to conservatism (prudence) into the Conceptual Framework for financial reporting.

Bob Jensen's threads on accounting history ---
http://faculty.trinity.edu/rjensen/Theory01.htm#AccountingHistory


Economist Magazine, July 30, 2016
Minsky's Moment
The second article in our series on seminal economic ideas looks at Hyman Minsky’s hypothesis that booms sow the seeds of busts

http://www.economist.com/news/economics-brief/21702740-second-article-our-series-seminal-economic-ideas-looks-hyman-minskys?cid1=cust/ednew/n/bl/n/20160728n/owned/n/n/nwl/n/n/NA/n

Economist Magazine:  July 22, 2016
The Market for Lemons
The first in our series on seminal economic ideas looks at George Akerlof’s 1970 paper, a foundation stone of information economics ---
http://www.economist.com/news/economics-brief/21702428-george-akerlofs-1970-paper-market-lemons-foundation-stone-information?cid1=cust/ednew/n/bl/n/20160721n/owned/n/n/nwl/n/n/NA/n


Strategic Finance and Journal of Cost Management Articles

From MAAW's Blog on August 12, 2016
Stratigic Finance 2016 - http://maaw.blogspot.com/2016/08/strategic-finance-update.html

From MAAW's Blog on August 7, 2016
Cost Management 2016 - http://maaw.info/JournalOfCostManagement2016.htm 

Cost Management 1987-2016 - http://maaw.info/JournalofCostManagement.htm

The MAAW site has thousands of citations of journal articles in accountancy, auditing, AIS, etc. ---
http://maaw.info/
Thank you Jim Martin for this painstaking work.


I can't remember when I read a more fascinating article
The Time Everyone “Corrected” the World’s Smartest Woman
---
https://priceonomics.com/the-time-everyone-corrected-the-worlds-smartest/


Time-Series Non-Stationarity --- https://en.wikipedia.org/wiki/Stationary
In my opinion this is the biggest hurdle in statistical analysis in general and time-series analysis in particular

Time Series Co-Integration --- https://en.wikipedia.org/wiki/Cointegration
Especially note the illustration in the Introduction

"The Forecasting Performance of Models for Cointegrated Data," by David Giles, Econometrics Beat, July 26, 2016 ---
http://davegiles.blogspot.com/2016/07/the-forecasting-performance-of-models.html


"GDP Is a Wildly Flawed Measure for the Digital Age," by Barry Libert and Megan Beck, Harvard Business Review Blog, July 28, 2016 ---
https://hbr.org/2016/07/gdp-is-a-wildly-flawed-measure-for-the-digital-age?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date 


How CPAs Rated Their Tax Software ---
http://www.journalofaccountancy.com/issues/2016/aug/2016-tax-software-survey.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=01Aug2016


Tax Policy Center's researchers and staff:  USA Taxes are Very Progressive ---
http://www.taxpolicycenter.org/taxvox/federal-taxes-are-very-progressive

The USA tax code is highly progressive with the top 50% of taxpayers paying 97.2% of the income tax collected in 2013 ---
http://taxfoundation.org/article/summary-latest-federal-income-tax-data-2015-update 

In 2013, the bottom 50 percent of taxpayers (those with AGIs below $36,841) earned 11.49 percent of total AGI. This group of taxpayers paid approximately $34 billion in taxes, or 2.78 percent of all income taxes in 2013.


Walmart’s Out-of-Control Crime Problem Is Driving Police Crazy ---
https://www.bloomberg.com/features/2016-walmart-crime/?cmpid=BBD081716_BIZ
Jensen Question
In this era on not wanting to incarcerate non-violent people, how do you stop the hard core of shop lifters who repeatedly defy the law?
There are gangs of shoplifters, many of them teenagers, that now attack fast and furiously.


FASB proposes concepts for financial statement presentation ---
http://www.journalofaccountancy.com/news/2016/aug/new-fasb-presentation-concepts-201614996.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=12Aug2016#sthash.v0RHPjGV.dpuf


Should You Use Retirement Savings to Fund Your Child's College Education?
Possibly not!
http://money.usnews.com/money/blogs/on-retirement/articles/2016-08-17/should-you-use-retirement-savings-to-fund-your-childs-college-education


"Bogus Audited Statements Are Holding Africa Back," by Ndubuisi Ekekwe, Harvard Business Review, August 22, 2016 ---
https://hbr.org/2016/08/bogus-audited-statements-are-holding-africa-back?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm


IRS Employee Gets Nine Years for Identity Theft ---
http://www.forbes.com/sites/robertwood/2016/08/15/irs-employee-gets-9-years-in-prison-for-stealing-taxpayer-identities/#106b726820e7

Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm


U.S. Army fudged its accounts by trillions of dollars, auditor finds
http://www.reuters.com/article/us-usa-audit-army-idUSKCN10U1IG
Jensen Comment
So, what's new?

Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm


Stanford University:  Corporations profit from tax-avoidance schemes even when they’re likely to trigger IRS audits ---
http://www.gsb.stanford.edu/insights/game-global-income-shifting-feds-are-overmatched?utm_source=Stanford+Business&utm_campaign=ec357949c2-Stanford-Business-Impact-Issue-95-8-21-2016&utm_medium=email&utm_term=0_0b5214e34b-ec357949c2-70265733&ct=t(Stanford-Business-Impact-Issue-95-8-21-2016)  

Jensen Comment
In general, white collar crimes usually pay if the amount stolen is enormous enough. The reason is that the courts are excessively lenient on white collar crime even when the culprits know they will get caught ---
http://faculty.trinity.edu/rjensen/FraudConclusion.htm#CrimePays


SEC Charges Former NFL Football Player With Running $10 Million Fraud

Washington D.C., Aug. 10, 2016 — The Securities and Exchange Commission today charged Merrill Robertson Jr., a former player for the Philadelphia Eagles, with defrauding investors, including coaches he knew from his time playing football for the Fork Union Military Academy and the University of Virginia.

The SEC’s complaint, filed in federal court in Richmond, Virginia, charges Robertson, Sherman C. Vaughn Jr., and the company they co-owned, Cavalier Union Investments LLC. According to the complaint, the defendants promised to invest in diversified holdings but diverted nearly $6 million of the more than $10 million they raised from investors to pay for personal expenses and used other funds to repay earlier investors.

Robertson and Vaughn, both of Chesterfield, Virginia, are alleged to have lied about the unregistered debt securities they sold, saying they would yield as much as 20 percent “while providing safety and security for our investors.” According to the complaint, the defendants claimed that Cavalier had investment funds operated by experienced investment advisers when it did not have any funds or investment advisers and was functionally insolvent shortly after it was formed. The defendants allegedly hid this fact from potential investors and relied on cash from new investors to stay afloat. The complaint further alleges that Cavalier’s only investments were in restaurants that had all failed by 2014, something the defendants never disclosed as they continued soliciting and accepting investors’ money. The scheme allegedly targeted seniors and coaches, donors, alumni, and employees of schools Robertson had attended.

“Our complaint alleges that Robertson and Vaughn preyed on elderly victims and others who placed their trust in these individuals, only to have their savings stolen,” said Sharon B. Binger, Director of the SEC’s Philadelphia Regional Office. “We will continue to aggressively pursue fraudsters who exploit their relationship of trust with victims and promise returns that appear to be too good to be true.”

The SEC encourages investors to check the backgrounds of people selling them investments. A quick search on the SEC’s investor.gov website would have shown that Robertson and Vaughn are not registered to sell securities.

In a parallel action, the U.S. Attorney’s Office for the Eastern District of Virginia today announced criminal charges against Robertson.

Continued in article

Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm


The Pill That Made Northwestern University Rich ---
http://www.bloomberg.com/news/articles/2016-08-18/the-pill-that-made-northwestern-rich

Jensen Comment
In the 1950s the invention of Crest Tootpaste helped make Indiana University relatively rich ---
http://www.bloomberg.com/news/articles/2016-08-18/the-pill-that-made-northwestern-rich


PCAOB --- https://en.wikipedia.org/wiki/Public_Company_Accounting_Oversight_Board

PCAOB:  ANNUAL REPORT ON THE INTERIM INSPECTION PROGRAM RELATED TO AUDITS OF BROKERS AND DEALERS ---
http://www.ey.com/Publication/vwLUAssetsAL/PCAOB_InterimInspectionProgram_18August2016/$FILE/PCAOB_InterimInspectionProgram_18August2016.pdf

Jensen Conclusion
In spite of previous efforts by the PCAOB to improve audits of brokers and dealers, progress has been frustratingly slow. This seems to be one of the least proud lines of work for audit firms in terms of audit deficiencies and audit independence.


Personal Finance
Possible Student Project on Deciding Who Should Take Out Long-Term Care Insurance and What Coverage to Choose

Less is more: The dilemma over long term care insurance ---
http://www.cnbc.com/2016/08/24/less-is-more-the-dilemma-over-long-term-care-insurance.html

Jensen Comment
Unless you're already on Medicaid or commit unethical/illegal effort to shed assets in you're estate to qualify for Medicaid long-term care can become a very expensive proposition with or without long-term care insurance since Medicare does not pay for long-term care except under very restrictive rules of hospital confinement (rather than nursing home confinement and home care). Bad things are happening in the long-term care insurance industry. About 90% of the insurers in the 1990s dropped their coverage. And the deals are worse for more expensive for more limited coverage.

This is not those "cheap" burial insurance policies advertised ad nauseam on television. These are very expensive policies with possibly high payouts. The real problem is uncertainly over how long a patient will need long-term care outside a hospital combined with the explosion in the costs of providing long-term care, especially in nursing homes. Regulations increased the quality of care, but those regulations also added greatly to the coverage costs.

Jensen Comment
I know of a case in the 1990s where a son (of one of my cousins) sold this type of insurance for a time. I sighed when I thought he sort of conned his grandmother into taking out an expensive policy. But it turned out to be a darn good deal when she was covered for nearly 10 years in an Iowa nursing home.

Having said this, I'm still pretty negative about this type of insurance. Part of the reason is the increased cost of the insurance combined with the newer coverage limitations that make the insurance less exciting in recent years --- when the only thing "exciting" about going to a nursing home is the huge cost involved one way or another. What some heirs need to learn is that one purpose of building up a nest egg for old age is being able to pay for long-term care coverage in addition to providing an estate to inherit. This is no longer an era where it's expected that children almost always care for their elderly parents by moving them into the homes of those children (like the Amish continue to do in this era). Most children these days want to put the old folks into nursing homes.


"FASB Proposed Modifications to Hedge Accounting: Good Thing, Bad Thing, or Just a Thing?* by Tom Selling, The Accounting Onion, August 22, 2016 ---
http://accountingonion.com/2016/08/fasb-proposed-modifications-to-hedge-accounting-good-thing-bad-thing-or-just-a-thing.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+typepad%2Ftheaccountingonion+%28The+Accounting+Onion%29

If we don’t destroy ourselves first, we will someday discover intelligent life on another planet.  But when we do, the chances are about one in a billion that we’ll find hedge accounting standards more complex than our own.

Now would also be as good a time as any to peel the onion on hedge accounting since the FASB has recently reached a consensus on a revisions to rules that have been in place since the issuance of SFAS 133 in 1998.

The Basics

At the risk of oversimplifying, the FASB addressed three problems in SFAS 133:

First, there was the problem of accounting for derivatives, which without additional guidance would be measured at historic cost. Historic cost accounting is always suboptimal, but it is especially problematic when it comes to derivatives.  Consider, for example, a financial institution with $9 billion in liabilities covered by $10 billion of assets. Next, assume that said financial institution enters into a (near) cashless interest rate swap with a notional amount of $10 billion — or a credit default swap, or a commodities future contract.  Basically, it enters into  any kind of financial derivative contract, I don’t care which.

All accounting measurement conventions applied to this derivative would produce a net value of (near) zero at inception because the present value of the contract’s receivable leg would be (nearly) equal to its payable leg.  But, should the “underlying” of the contract (e.g., an interest rate, a commodity price, a credit rating) change even a tiny bit, there will be a large change in the fair value of the derivative contract —  owing to its relatively large national amount .

You don’t need to be a derivatives expert to figure out what’s going on here: derivative contracts are the soft underbelly of historic cost accounting.  Failure to recognize the economic effects of the market risks from being a party to a derivative contract renders the entire endeavor of accounting for entities like this hypothetical financial institution an utter sham.  Consequently, the FASB correctly decided that interests in derivative contracts must be, without exception, measured at fair value.

First problem solved.  But, it creates two additional and related problems, which I will call Problems 2a and 2b:

Problem 2a is how to deal with the irony that if a company were to enter into a derivative contract reduce a source of risk — i.e., reducing the volatility of future enterprise value — then marking a derivative to market through net income could be expected to increase the volatility of future net income.  This could be the case if GAAP requires that the item creating the risk in the first place (e.g., a commodity held as inventory or a fixed-rate mortgage loan) is measured at historic cost.

Problem 2a was addressed in SFAS 133 by the so-called “fair value hedge accounting” treatment if the source of the risk is the change in the fair value of a recognized asset, liability, or “firm commitment.” The issuer may elect to offset the gain/loss recognized in income on the derivative with an offsetting change to the hedged item.

Fair value hedging might seem like a reasonable accounting treatment, but there are a number questionable aspects to it.  Two of these are:

Inconsistencies in measurement — Assets, liabilities and firm commitments that happen to be linked with a derivative in fair value hedge accounting are measured one way, and unlinked items are measured another way.  Moreover, an added source of inconsistency exists since “special” hedge accounting is optional. For example, both Kellogg and General Mills report that they hedge their commodities positions with derivatives.  But Kellogg uses hedge accounting and General Mills doesn’t.  Obviously, this is not helpful when trying to analyze the differences in their gross margins.

Arbitrary measurement — The measurement of the assets and liabilities in the hedging relationship are neither historic cost nor fair value.  They are something in between — what former FASB member Tom Linsmeier dubbed “mutt accounting.”  This is not much different than the insane numbers generated by the FASB’s treatment of foreign subsidiaries set forth in SFAS 52, and which I described in a recent post as one of the worst and most divisive accounting standards ever written.  One of the reasons I was particularly harsh in my assessment of SFAS 52 is because I don’t think that the SFAS 133 fair value hedge accounting provisions would have been at all palatable (or even considered) if SFAS 52 had not opened up a Pandora’s box of arbitrary accounting measurements.  (And, as we will see later in this post, it also legitimized the concept of dirty surplus — euphemistically termed “other comprehensive income).

Problem 2b is that if a company were to enter into a derivative contract for the purposes of risk reduction, but the risk was not a recognized asset, liability or firm commitment, then marking the derivative to market through net income would again increase the volatility of future net income.  However, fair value hedging would not be an effective solution since there is no recognized hedged item on which the offsetting changes could be lumped into.

The solution to Problem 2b that the FASB came up with is known as “cash flow hedging.” It temporarily parks the portions of the gains/losses on marking the derivative to market that are actually “effective” (more on that term later) as a hedge in Accumulated Other Comprehensive Income (AOCI). When the risk being hedged actually hits the income statement, the appropriate offsetting amounts in AOCI are transferred to net income.

Are you with me so far?  These are just the first layers of the onion.  I still have to tell you about additional provisions that can make hedge accounting very difficult to pull off in practice.  Many of these details

Continued in article

August 22, 2016 reply from Bob Jensen

Hi Tom,

In the past your alternatives for derivatives contract accounting did not distinguish between speculation and hedging with those contracts. Until you show me an a derivatives contract accounting alternative that does so I will prefer FAS 133 or IFRS 9. Simply appealing to "full disclosure" is a cop out since annual reports with over a million footnotes are not practical.

 

Your statement that General Mills hedges with derivatives without applying FAS 133 is misleading. General Mills applies FAS 133 in a backhanded way. I do not think that any company can  simply ignore FAS 133 for derivative contracts scoped into FAS 133. Here's what General Mills says about using hedge accounting ---
http://sec.edgar-online.com/general-mills-inc/8-k-current-report-filing/2008/09/17/section10.aspx

 

Regardless of designation for accounting purposes, we (at General Mills)   believe all of our commodity hedges are economic hedges of our risk exposures, and as a result we consider these derivatives to be hedges for purposes of measuring segment operating performance. Thus, these gains and losses are reported in unallocated corporate expenses outside of segment operating results until such time that the exposure we are hedging affects earnings. At that time we reclassify the hedge gain or loss from unallocated corporate expenses to segment operating profit, allowing our operating segments to realize the economic effects of the hedge without experiencing any resulting mark-to-market volatility, which remains in unallocated corporate expenses. We no longer have any open commodity derivatives previously accounted for as cash flow hedges.

Continued in article

 

Note that General Mills is trying to exclude those mark-to-market earning fictions I've talked about in our past debates.

 

From what I can tell I pretty much go along with the proposed 2016 revisions in FAS 133 even though I hate some of the previous revisions in IFRS 9. You seem to think that commodity prices in Chicago can be used satisfactorily for all commodity inventories. The fact of the matter is that for most commodities there's a huge difference between commodities held as local inventory hundreds or thousands of miles from Chicago and the CBOT, CBT, CBOT, or CME prices in Chicago. Having grown up on an Iowa farm I'm well aware that the commodities we stored on the farm should not have been valued at Chicago exchange prices. Firstly, our inventories on the farm differed greatly in quality from the Chicago exchange standards.

 

We (on our Iowa farm) held these inventories sometimes because the local elevator did not want our lower quality inventories. Instead we either fed our crops to our own livestock or sold them to nearby feeders who would buy these inventories at serious price discounts. Today's corn farmers are often selling corn to nearby livestock containment feeding operations for the same reasons.



Secondly the Chicago exchange prices were quite different from local prices due to future shipping costs. If you look at the original FAS 133 Appendix illustrations of hedge ineffectiveness you will find that almost all those illustrations for commodities focused on hedge ineffectiveness due to shipping cost ---
http://www.cs.trinity.edu/rjensen/000overview/mp3/000ineff.htm
(Note that the FASB Codification does not include the Appendix illustrations that were in the original FAS 133 hard copy standard.)

 

 

Teaching Case
Cost Accounting and Inventory Valuation
by Bob Jensen: 
Differences Between Mark-to-Market Accounting for Derivative Contracts Versus Commodity Inventories ---
http://www.trinity.edu/rjensen/Mark-to-MarketCorn.htm

 August 22, 2016 reply from Tom Selling

Bob,

My responses to your concerns are indented, below:

You wrote: In the past your alternatives for derivatives contract accounting did not distinguish between speculation and hedging with those contracts. Until you show me an a derivatives contract accounting alternative that does so I will prefer FAS 133 or IFRS 9.

Under extant GAAP, you can: (1) hold a freestanding derivative; (2) “hedge" and apply hedge accounting, or (3) “hedge" and not apply hedge accounting. I put “hedge” in quotes, because the FASB has not defined “hedge.” You say you are happy with SFAS 133 even though it does not, as you demand of me, distinguish between (1) and (3). That’s because the FASB no longer defines a “hedge.” Indeed, the whole purpose of SFAS 133 was to supply a hedge accounting solution without having to actually consider the difference between hedging and speculation.

You wrote: Simply appealing to "full disclosure" is a cop out since annual reports with over a million footnotes are not practical.

I did nothing of the sort. I would prefer disclosures that allow an analyst to unwind hedge accounting if they think it is a stupidity (as I do), but it is not a necessary condition. I want all commodities and financial instruments to be measured the same way. After that, feel free to screw up the income statement as much as you please.

You wrote: Your statement that General Mills hedges with derivatives without applying FAS 133 is misleading. General Mills applies FAS 133 in a backhanded way. I do not think that any company can simply ignore FAS 133 for derivative contracts scoped into FAS 133. Here's what General Mills says about using hedge accounting —

Bob, please be careful when you use the term misleading. I regard your use of the term very much like the way you took offense when you thought Zafar called you a liar. Surely, you can think of a more respectful and appropriate term than “misleading" … perhaps, “inaccurate”?

That said, I provided a link to a 10-K. It reads in relevant part as follows:

“We use derivatives to manage our exposure to changes in commodity prices. We do not perform the assessments required to achieve hedge accounting for commodity derivative positions. Accordingly, the changes in the values of these derivatives are recorded currently in cost of sales in our Consolidated Statements of Earnings.”

It appear that you provide a link to an 8-K, which I have not read. As best as I can tell, you describe GM’s presentation of segment disclosures (where departures from GAAP are permitted). That’s a far cry from the consolidated financial statements.

You wrote: From what I can tell I pretty much go along with the proposed 2016 revisions in FAS 133 even though I hate some of the previous revisions in IFRS 9. You seem to think that commodity prices in Chicago can be used satisfactorily for all commodity inventories. The fact of the matter is that for most commodities there's a huge difference between commodities held as local inventory hundreds or thousands of miles from Chicago and the CBOT, CBT, CBOT, or CME prices in Chicago. Having grown up on an Iowa farm I'm well aware that the commodities we stored on the farm should not have been valued at Chicago exchange prices. Firstly, our inventories on the farm differed greatly in quality from the Chicago exchange standards.

Again, “perfection is the enemy of the good,” even for your family farm. Do you mean to tell me that your parent’s actually gave a hoot about the historic cost of your corn after it was harvested? When they asked themselves, “how did we do?” is that what they talked about?

If you are going to provide examples of practical barriers, I suggest you use public companies. And, don’t try to tell me that Kellogg and GM don’t know the current values of their commodity inventories on a daily basis.

Best,

Tom

August 23, 2016 reply from Bob Jensen

Hi Tom,

You miss the point when you say that our farm's distant (from Chicago) less than top quality corn would not be valued at Chicago exchange prices. That's my whole point. When you hedge most often it will be done with net settlement derivative contracts priced at Chicago exchange prices. This is what gives rise to hedging ineffectiveness because your local inventory valuation differs from the Chicago exchange pricing in your hedging contracts. See the definition of "ineffectiveness" under the "I" letter at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm

Therefore,  the extent your hedges are ineffective you are speculating and not hedging due to those differences in prices between your inventory valuation and Chicago exchange price valuation of your hedging contracts. To the extent hedges are effective then you are hedging and should choose to not show earnings fluctuations to the extent the hedges are effective (ala General Mills). To the extent hedges are ineffective you are speculating and should post the ineffective portion to retained earnings.

The FASB does have a definition of a derivative contract, and I elaborate on it at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm
Click on "D" and then scroll down.
For the definition of a hedging contract click on "H" and scroll down.

The IASB's definition differs somewhat from the FASB's definition of a derivative. Where it gets even messier is in the definitions of derivatives for macro hedges. A "macro" contract hedges a portfolio with multiple types of risks with a hedging instrument that only hedges one of those risks. An exception now allowed under FAS 138 (that amended FAS 133)  is a cross-currency hedge that hedges both FX risk and interest rate (price) risk simultaneously using one hedging instrument. The IASB and FASB departed when it comes to accounting for some (very limited) types of macro hedges.

Any USA company that has derivative contracts under the FASB's definition had better consult its attorneys and auditors before deciding to depart from FAS 133 and its amendments.

Are you trying to tell us that, unlike in its 8K discussion of derivative contracts, that General Mills has what the FASB calls derivatives contracts in its 10K that it elects not to account for under FAS 133 rules? I really, really doubt that!

One piece of information in the 8K is that General Mills does not hedge cash flows. If it did so it would abide by FAS 133 rules or worry about lawsuits.

To the extent that General Mills does have fair value hedging contracts meeting the FASB definition it does have to resort to FAS 133 for accounting purposes. An to the extent it acquires other types of hedging contracts (like cash flow hedges) meeting the FAS 133 definition it will resort to FAS 133 accounting whether in an 8K or a 10K.

If you find an exception in the General Mills 10K please let us and the auditors and the SEC know about it.

And my parents cared about the historic cost of corn. For one thing this affected taxes. Secondly when the great scorer comes to write against your aggregate lifetime profit the aggregate "cash in" versus the aggregate "cash out" is what determined how good you were as a farmer (adjusted of course when you butchered your own livestock to eat). All the unrealized commodity value ups and downs were fictions --- like it says in the General Mills 8K that you conveniently selected only part of to quote from my longer quotation.

Of course my parents looked at current fair values of their inventories. They even made decisions based on changes in values. But they did that in a two-column set of financial statements rather than confine themselves to one fair value column containing fiction accounting

August 23. 2016 reply from Tom Selling

Bob,

We are talking past each other. I don’t even think you read what I write, even though I specifically address each of your points. Just for one example, I did not state that the FASB doesn’t have a definition of a derivative; I stated that it does not have a definition of “hedge” apart from what “hedge accounting” is.

This is my last word on this subject.

Best,

Tom

August 23, 2016 reply from Bob Jensen

FAS 133 does not scope in weather derivatives mostly because the underlying (e.g., cumulative rainfall for the months of July and August) are not exchange traded like commodity price underlyings.

ASC 815-45 provides guidance on the financial accounting and reporting for weather derivatives

ASC 815-45 provides guidance on the financial accounting and reporting for weather derivatives.

 


FASB:  Important Differences in Accounting for Embedded Derivatives in FAS 133 Versus IFRS 9
http://www.iasplus.com/en-us/standards/ifrs-usgaap/embedded-derivatives


"The Dirty Little Secret of Finance: Asymmetric Information," by Noah Smith, Bloomberg, August 11, 2016 ---
http://www.bloomberg.com/view/articles/2016-08-11/the-dirty-little-secret-of-finance-asymmetric-information

. . .

Why is asymmetric information so crucial to an understanding of financial markets? It’s probably related to the reason people want financial assets in the first place. People want cars and bananas and microwave ovens because those things are immediately useful. But most people who buy and sell financial assets have no intrinsic desire for the asset itself -- they only care about how its value to other people will change in the future. That means that while information is important for many products, when it comes to financial markets, information is the product.

Many major economics papers have explored this fact. One example is the famous 1980 paper “On the Impossibility of Informationally Efficient Markets,” by Sanford Grossman and Joseph Stiglitz. The authors showed that if it costs money (or time) to gather information about financial assets, then market prices can’t be perfectly efficient -- if they were, there would be no incentive for people to go out and pay the costs to gather data. That paper showed why the famed Efficient Markets Hypothesis can only be approximately true at best.

A 1982 paper by Paul Milgrom and Nancy Stokey is no less important. Entitled “Information, Trade, and Common Knowledge,” it demonstrated why rational financial markets should have a lot less trading than they do. Suppose you come to me offering to sell me a stock for $100 a share. Why are you offering to sell it to me for $100? Maybe you’re selling stocks because you’re shifting into bonds, or ready to retire, or need to pay a sudden medical expense. But chances are, you think the stock is worth less than $100, and you’re trying to unload it. That should make me wary about taking you up on your offer. But on the other hand, if I jump at the offer, that should tell you that I have reason to believe the stock is worth more than $100 … and that should make you wary. In an ideal market filled with rational agents, this means that trading is very rare. The fact that trade volumes are huge is a continuing puzzle for economists, not explained by the classic theories of perfect rationality.

So with all this asymmetric information, why are financial markets so active? A pair of papers in 1985 attempt to explain why. These studies -- the first by Lawrence Glosten and Paul Milgrom, the second by Albert “Pete” Kyle -- model the interaction between informed traders, market makers and liquidity traders. The liquidity traders need to buy or sell immediately for reasons unrelated to the market, but the informed traders are trading because they know something about the asset’s fundamental value. The market-makers -- basically, middlemen -- profit off of the former and lose money to the latter. At the end of the day, this delicate dance gets information out of traders’ heads and into the price. But as some other researchers showed over a decade later, if the information is too complicated, this process can lead to bubbles and crashes.

The upshot of all this -- which will be confirmed by the experience of anyone who has ever traded for real -- is that asymmetric information, which is a nothing more than a nuisance in most markets, is at the core of finance. It’s key to the way traders, including high-frequency traders, make their profits. And it’s probably at the root of why markets break down and crash.

So when someone -- say, a presidential candidate -- proposes big rollbacks of financial regulation, we should be suspicious. In many cases that might be a good idea, but finance is no ordinary market.


Law School Deans in Australia Are Running and Bait and Switch Operation ---
http://taxprof.typepad.com/taxprof_blog/2016/08/law-prof-law-school-deans-are-running-a-bait-and-switch-operation.html

Bob Jensen's Fraud Updates ---  http://faculty.trinity.edu/rjensen/FraudUpdates.htm 


2 KPMG auditors given stiffer penalties for TierOne work ---
http://journalstar.com/business/local/kpmg-auditors-given-stiffer-penalties-for-tierone-work/article_d140abea-c6d9-52c0-babc-513cee3f4b00.html

Two auditors for an international accounting company tried to get the Securities and Exchange Commission to overturn the suspensions they got for professional misconduct related to work they did for Lincoln's TierOne Bank before it collapsed in 2010.

Instead, a divided Securities and Exchange Commission ruled last week that the two men who worked for KPMG deserved harsher sentences.

The commission voted 2-1 to bar John J. Aesoph, a KPMG partner from Omaha, from working with SEC-regulated companies for three years, and Darren M. Bennett, a senior manager from Elkhorn, for two years.

In 2014, an SEC judge recommended bans of one year for Aesoph and six months for Bennett. The two filed an appeal of those suspensions within weeks of the judge's decision, but oral arguments were not held until last month.

The proposed suspensions were based on their work on the year-end 2008 audit of TierOne, which SEC administrative law judge Carol Fox Foelak called "a single instance of highly unreasonable conduct."

The SEC had charged the two auditors with professional misconduct, alleging that they failed to appropriately scrutinize management's estimates of TierOne's allowance for loan and lease losses.

The SEC had originally sought a three-year suspension for Aesoph and two years for Bennett.

In Friday's order, the SEC said the two committed "egregious violations of multiple auditing standards," and it called their methods in conducting the TierOne audit "highly unreasonable."

The commission also said the auditors failed to acknowledge any wrongdoing or provide any assurances that they would not commit future violations.

"Taken together, these facts lead us to conclude that there is a risk that respondents will commit future violations," the commission said.

Not only did the SEC extend the period during which the two auditors cannot work with publicly traded companies, but by barring them rather than suspending them, it made it harder for them to resume such work.

Aesoph and Bennett will have to apply to be reinstated. Under the previous suspension order, they would have been reinstated automatically.

Continued in article

SEC's Full Ruling 
https://www.sec.gov/litigation/opinions/2016/34-78490.pdf

Bob Jensen's threads on KPMG scandals ---
http://faculty.trinity.edu/rjensen/fraud001.htm


IFRS 9 rattles large banks:  They Weren't Prepared for in This (in a poll of 91 banks)
http://www.ft.com/cms/s/26dfb19c-60a4-11e6-b38c-7b39cbb1138a,Authorised=false.html?siteedition=intl&_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F26dfb19c-60a4-11e6-b38c-7b39cbb1138a.html%3Fsiteedition%3Dintl&_i_referer=&classification=conditional_standard&iab=barrier-app#axzz4II1gKfoC

Nearly half of big banks around the world are unprepared for an international accounting standard due to take force in less than two years, even as they expect provisions for bad loans to soar as a result of the new rules.

A poll of 91 banks across the globe — excluding US banks that are governed by their own rules — has found that 46 per cent of those surveyed do not believe they have enough resources to deliver changes by the 2018 implementation date, with a significant minority going on to say there were not enough skilled candidates in the market to hire.

With less than 18 months to go before the change, nearly two-thirds of banks are unsure how the rules might impact their balance sheets, according to Deloitte, which undertook the global survey.

The rules force banks to have a provision on their balance sheets for expected losses in the future rather than actual losses already suffered.

Those banks that have made the calculations reckon the rules will result in a surge of at least 25 per cent in total impairment provisions across all asset classes.

Banks are also forecasting that the rules, dubbed IFRS 9, will cause their capital ratios to deteriorate: they are expecting core tier one capital — one of the most keenly watched metrics of the health of a bank’s balance sheet — to decrease on average by half a per cent as a result of moving to the new standard, according to Deloitte.

Uncertainty is not limited to the banking industry: 99 per cent of respondents said their local financial regulator had yet to say how they might incorporate IFRS 9 numbers into regulatory capital requirements.

IFRS 9 is part of a suite of measures by the International Accounting Standards Board to overhaul accounting since the financial crisis. The reform package is an attempt to increase regulatory co-operation between the US and international standard setters. Converging the different corporate reporting frameworks has been fraught.

By moving from an “incurred loss” to an “expected loss” model in 2018, under IFRS 9 the regulators hope to avoid the problems that occurred during the crisis, when banks could not book accounting losses until they happened, even though they could see them coming. This should help to keep banks properly capitalised for the loans they have made. UK banks have experienced historically low impairments recently because of the record low interest rate. However, there are some concerns that if economic growth were to stall following the Brexit vote, impairments could go up even without the new rules. Steven Hall at KPMG said the estimated increase in provisions as a result of IFRS 9 was actually “cautious”. “IFRS 9 will be almost as difficult to implement as it is to say,” he said. “Firms need to consider a range of future scenarios, and in today’s uncertain economic environment assessing the impact of that is not an easy task.” Mr Hall has called for a grace period during which the new systems might be tested and embedded.

Continued in article


Coursera --- https://en.wikipedia.org/wiki/Coursera

August 25, 2016 Message from Glen Gray

Collaborating with Coursera

Empowering people through learning

At PwC, our purpose is to build trust in society and solve important problems. We think there's an opportunity to do this by sharing our experience and expertise with anyone who wants to learn. We’re joining forces with Coursera to create a series of courses designed around topics that address big global issues, drawing on the real-world knowledge and experience of PwC experts from around the globe from multiple disciplines. Our first course is focused on data and analytics, one of the biggest areas of opportunity to help solve problems in an increasingly complex world.

All course materials can be accessed at no charge. (Those who want to take the assessments and get a certification will pay a small charge). As instructors, you may identify portions of the courses which you wish to incorporate into your classes as assignments to help demonstrate concepts you are teaching. We hope you will agree that this will be a valuable resource. To learn more about and access Coursera, click here.

Glen L. Gray, PhD, CPA
Professor Emeritus
Dept. of Accounting & Information Systems
David Nazarian College of Business & Economics
California State University, Northridge
18111 Nordhoff ST Northridge, CA 91330-8372

http://www.csun.edu/~vcact00f

 


How the 2016 Leasing Standards Differ Under IFRS Versus the FASB ---
http://www.accountingweb.com/aa/standards/leasing-under-us-gaap-and-ifrs-similar-new-standards-with-significant-differences?source=ei081016
Requires login or free registration.


Earnings Management --- https://en.wikipedia.org/wiki/Earnings_management

The Effects of Creative Culture on Real Earnings Management
SSRN, August 4, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2818499

Author

Ryan D. Guggenmos
Cornell University - Samuel Curtis Johnson Graduate School of Management

Abstract

Chief Executive Officers identify creativity as one of the most desired business leadership competencies. Accordingly, managers are increasingly looking to build creative and innovative cultures within their organizations. However, research in psychology suggests that these attempts may have unintended negative consequences. In this study, I predict and find that an innovative company culture leads to higher levels of real earnings management (REM). To reduce REM in innovative cultures, I design and test interventions based on lower-level and higher-level construals. As I predict, an intervention based on lower-level construal reduces REM, but a higher-level construal intervention reduces REM to a greater extent. I also provide evidence that these interventions reduce the desirability of self-interested behavior that is a consequence of innovation-focused culture. My findings contribute to the emerging accounting literature regarding REM. In addition, I extend the psychology literature investigating the link between self-interested behavior and creativity, as well as expand research on the effects of mental construal on decision making

Bob Jensen's threads on creative earnings management ---
http://faculty.trinity.edu/rjensen/Theory02.htm#Manipulation


Earnings Management --- https://en.wikipedia.org/wiki/Earnings_management

Impact of Assurance Level and Tax Status on the Tendency of Relatively Small Manufacturers to Manage Production and Earnings
SSRN. July 25, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2814314

 

Authors

Benjamin P. Foster University of Louisville - College of Business and Public Administration

John M. Mueller California State University, Fresno; Western Michigan University

Trimbak Shastri University of Louisville - Department of Accountancy

Abstract

The number and importance of private companies in the United States indicates that reliable quality of financial accounting reports (QFAR) of private companies that are useful for decision making is likely to be important for economic growth. Most previous research examining QFAR addressed earnings management among publicly-traded companies. This study extends prior literature by examining whether abnormal production of public and private companies is impacted by (i) assurance type (PCAOB-audit, GAAS-audit, and SSARS-Review), (ii) tax status (separately taxed versus pass-through entity) of private companies, and (iii) relative size. An audit of financial statements provides a high degree of assurance, whereas a review provides limited assurance. Due to data limitations with our private company sample, this study focuses on earnings management through abnormal production by manufacturing companies. When examining companies that just met the benchmark of prior years' earnings or zero earnings we found positive abnormal production for publicly traded companies and privately held audited-taxable companies, but not for other privately held companies. Not identified in previous studies, we find that abnormal production of similarly sized public companies and private companies differ. Our findings provide evidence relevant to the Big GAAP/Little GAAP debate and that one set of accounting standards may not satisfy all public and private company financial statement users. Also, results of this study support the recommendations of the Financial Accounting Foundation’s Blue Ribbon Panel’s Report for establishing a separate private company standards board to help ensure appropriate modifications to GAAP.

Bob Jensen's threads on creative earnings management ---
http://faculty.trinity.edu/rjensen/Theory02.htm#Manipulation


The Interplay between Financial Reporting Biases and Audit Quality
SSRN. August 3, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2818038

Authors

Sebastian Kronenberger University of Graz, Doctoral Program for Accounting, Reporting, and Taxation (DART), Students

Volker Laux University of Texas at Austin - Department of Accounting

Abstract

We show that a firm's optimal financial reporting bias and an auditor's choice of audit effort are inextricably intertwined. Aggressive or conservative accounting practices influence the auditor's optimal choice of audit effort, and the auditor's incentive and ability to detect misstatements in turn influence the firm's optimal accounting bias. Due to this interplay, a shift to more aggressive accounting can reduce, rather than increase, the incidence of overstatements and hence overinvestment and investor litigation. While ex ante litigation risk is typically considered to be a major driver of conservative accounting practices in corporations, we derive conditions under which a heightened threat of litigation can encourage more aggressive accounting.

Bob Jensen's threads on audit firm professionalism ---
http://faculty.trinity.edu/rjensen/Fraud001c.htm


The Interaction of the IFRS 9 Expected Loss Approach with Supervisory Rules and Implications for Financial Stability
SSRN, August 5, 2016

Accounting in Europe (Forthcoming)

Author

Zoltán Novotny-Farkas
Lancaster University - Management School

Abstract

This paper examines the interaction of the IFRS 9 expected credit loss (ECL) model with supervisory rules and discusses potential implications for financial stability in the European Union. Compared to the incurred loss approach of IAS 39, the IFRS 9 ECL model incorporates earlier and larger impairment allowances and is more closely aligned with regulatory expected loss. The earlier recognition of credit losses will reduce the build-up of loss-overhangs and the overstatement of regulatory capital. In addition, extended disclosure requirements are likely to contribute to more effective market discipline. Through these channels IFRS 9 might enhance financial stability. However, due to the reliance on point-in-time estimates of the main input parameters (probability of default and loss given default) IFRS 9 ECLs will increase the volatility of regulatory capital for some banks. Furthermore, the ECL model provides significant room for managerial discretion. Bank supervisors might play an important role in the implementation of IFRS 9, but too much supervisory intervention bears the risk of introducing a prudential bias into loan loss accounting that compromises the integrity of financial reporting. Overall, the potential benefits of the standard will crucially depend on its proper and consistent application across jurisdictions.

Bob Jensen's threads on loan losses and bad debts ---
http://faculty.trinity.edu/rjensen/Theory02.htm#LoanLosses


Jus gentium --- https://en.wikipedia.org/wiki/Jus_gentium

Comparative Law and the 'Ius Gentium’
SSRN,  July 29, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2815824

Author

Se-shauna Wheatle
Durham Law School

Abstract

Constitutional principles are sometimes invoked in adjudication as a bridge to foreign law. This article argues that a cosmopolitan approach, such as that advocated by Jeremy Waldron through his ius gentium theory, is useful in accounting for the use of constitutional principles by courts insofar as the commonality of language and methodology surrounding the use of constitutional principles is connected to societal and institutional needs. The article argues that constitutional principles often serve as a connection to foreign law because the principles are applied as representations of a societal need for order and stability. At the same time, the article cautions that transnational judicial dialogue is impacted by compartmentalisation and divergence. Consequently, arguments for a ius gentium must be more cautious and nuanced. As a step in this direction, the article proposes two ideas for modifying the ius gentium theory: conceiving of the ius gentium as an emerging but not yet fully realised system and characterising the ius gentium as a convergence of methodology rather than substantive norms.


Flexibility in Cash Flow Classification Under IFRS: Determinants and Consequences
SSRN. July 27, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2815123

Authors

Elizabeth A. Gordon Temple University - Department of Accounting

Elaine Henry Stevens Institute of Technology

Bjorn Jorgensen London School of Economics & Political Science (LSE) - Department of Accounting

Cheryl L. Linthicum University of Texas - San Antonio

Abstract

International Financial Reporting Standards (IFRS) allow managers flexibility in classifying interest paid, interest received, and dividends received within operating, investing, or financing activities within the statement of cash flows. In contrast, U.S. Generally Accepted Accounting Principles (GAAP) requires these items to be classified as operating cash flows (OCF). Studying IFRS-reporting firms in 13 European countries, we document firms’ cash-flow classification choices vary, with about 76%, 60%, and 57% of our sample classifying interest paid, interest received, and dividends received, respectively, in OCF. Reported OCF under IFRS tends to exceed what would be reported under U.S. GAAP. We find the main determinants of OCF-enhancing classification choices are capital market incentives and other firm characteristics, including greater likelihood of financial distress, higher leverage, and accessing equity markets more frequently. In analyzing the consequences of reporting flexibility, we find some evidence that the market’s assessment of the persistence of operating cash flows and accruals varies with the firm’s classification choices, and the results of certain OCF prediction models are sensitive to classification choices.

Jensen Comment
This is one of the many times when I question why a research paper needs so many authors.


How Would Investing in Equities Have Affected the Social Security Trust Fund?
SSRN, July 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2815052 

Authors

Gary Burtless Brookings Institution; Boston College - Retirement Research Center

Anqi Chen Center for Retirement Research at Boston College

Wenliang Hou Center for Retirement Research at Boston College

Alicia H. Munnell Boston College - Center for Retirement Research

Anthony Webb Boston College - Center for Retirement Research

Abstract

Some observers believe that investing a portion of the Social Security Trust Fund in equities would strengthen its finances and improve the program’s intergenerational risk-sharing. However, equity investments would also expose the program to greater financial risk and potentially greater political risk. Monte-Carlo simulation methods are used to investigate whether equity investments would likely strengthen the long-term outlook of the Trust Fund relative to the current policy of investing 100 percent of reserves in U.S. government bonds. The issues surrounding equity investments also go beyond expected returns on the Trust Fund portfolio. Concerns of government interference with the allocation of capital in the economy and with corporate decision-making as well as the accounting treatment of equity investments are also discussed.

This paper found that:

- Both prospective and retrospective analyses suggest that investing a portion of the Social Security Trust Fund in equities would have improved its finances.
- Little evidence exists that Trust Fund equity investments would disrupt the stock market.
- Accounting for returns on a risk-adjusted basis would not show any up-front gains from equity investment, but gains would become evident over time if higher returns were realized.
- Equity investments could be structured to avoid government interference with capital markets or corporate decision-making.

The policy implications of this paper are:

- Investing a portion of trust fund assets in equities would likely reduce the need for higher payroll taxes.
- At the 50th percentile of outcomes, equity investing has the potential to maintain a healthy Trust Fund ratio through the 75-year period.
- The experience with the Thrift Savings Plan provides a road map for separating the government from actual investment decisions.

Jensen Comment
The article fails to mention how investing pension funds sector differs from investing pension funds in the private sector. The main reason is that the public sector funds can take on bigger financial risks because of the greater assurance that they will be bailed out by taxpayers is their gambles do not pay off. This is certainly the case of the SS Trust Funds, although this SSRN research paper makes no mention of this.

We can blame democracy for the high risk of public-sector pension plans.
The Economist Magazine
July 26, 2016
http://www.economist.com/news/business-and-finance/21702623-rules-encourage-public-sector-pension-plans-take-more-risk-putting-it-all

Jensen Comment
It turns out that pension investing risk relies heavily on investment and accounting rules where public-sector pension fund managers are allowed to get their funds into riskier investments, including junk bonds.

The enormous TIAA/CREF and some other pension funds give investors risk choices. TIAA bond funds are doing worse due to the Fed's low-interest policy such that teachers in TIAA/CREF are choosing more risky funds. Deals are no longer as good for fixed-annuity plans on the date of retirement relative to when I retired in 2006 (blind luck rather than brilliant strategy).

Sadly, riskier public-sector pension plans increase the expectation of future taxpayer bailouts. Public-sector pension plans would probably not be as risky if government declared there was zero chance of future bailouts. But then what legislators seeking office are going to promise zero chance of a public-sector pension bailout? Hence we can blame democracy for the high risk of public-sector pension plans.

One definition of democracy is gambling with taxpayer dollars.
Bankers as well as K-12 teachers helped to invent the taxpayer bailout idea along with municipal workers. Public-sector workers opposed to gambling probably don't even know they are gambling with taxpayer dollars.


The Effect of CFO Personal Litigation Risk on Firms’ Disclosure and Accounting Choices
SSRN. July 28, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2815011

Authors

Hagit Levy City University of New York (CUNY) - Stan Ross Department of Accountancy

Ron Shalev New York University (NYU) - Leonard N. Stern School of Business

Emanuel Zur University of Maryland - Robert H. Smith School of Business

Abstract

In Gantler v. Stephens (2009), the Delaware Supreme Court makes explicit that corporate officers owe the same fiduciary duty to the firm and shareholders as do board members. The decision increased the risk of non-board-serving officers being added as named defendants to investor litigation but did not change the risk of corporate litigation. Analyzing the effect of the Gantler ruling on non-board-serving CFOs, we find a significant change in their behavior as well as in their firms’ disclosure and accounting choices. Specifically, CFOs’ speech tone during earnings calls becomes more negative and their firms disclose bad news earlier and report more conservatively. Results are stronger for firms incorporated in Delaware. Our findings suggest that CFOs respond to personal litigation risk over and above corporate litigation risk.

Jensen Comment
I like this study in that it's not just another purchased database (e.g., CRSP, Compustat, or AuditAnalytics) multiple regression fishing expedition.


Crude Inventory Accounting and Speculation in the Physical Oil Market
SSRN. July 26, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2814943

Authors

Ivan Diaz-Rainey University of Otago - School of Business

Helen Roberts University of Otago

David H. Lont University of Otago - Department of Accountancy and Finance

Abstract

This paper uses inventory data from financial accounts to explore whether companies involved in the physical oil market were speculating in the run-up to 2008. Using quarterly inventory data over the period 1990Q4 to 2012Q1 and a sample of 15 of the largest listed oil companies in the world, we derive an Index of Scaled Physical Inventories (ISPI). We find declining ISPI up to the early 2000s is consistent with firms minimizing inventory for efficiency sake; then ISPI starts to increase, suggesting physical inventories could have contributed to the run-up in oil prices between 2003 and 2008. Highlighting heterogeneity in inventory behaviors amongst the large oil companies, the structural break test on the ratio of inventory to sales and the days to sales for individual companies shows that five companies had positive structural breaks during the speculation period, while the other companies had no or negative structural breaks. Contrary to declining inventory expectations due to a tightening oil market, the positive structural breaks suggest speculative behavior. We also examine the relationship between changes in profitability and changes in oil inventory over the pre-speculation and speculation period. Though some coefficients for inventory do switch from negative to positive over the two periods as hypothesized, they are on the whole not significant. The conclusion based on these models is that inventory ‘positions’ have not materially affected performance of most companies, save for a few exceptions.

Jensen Comment
The article makes passing reference to Contango and Carry trade hedging of inventories, but I would think that if companies were speculating in oil prices that more mention would be made of other types of derivatives used for speculation.


Where to Hide in Bad Times: Or Should One Still Diversify Internationally?
SSRN, July 1, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2812623

Authors

Redouane Elkamhi University of Toronto - Rotman School of Management

Denitsa Stefanova Universite du Luxembourg - School of Finance

Abstract

Among the stylized features of international equity markets is the pronounced asymmetric nonlinear dependence and upward trend in correlations. Such features call into question investors' efforts to diversify internationally. We propose a model to capture those well understood characteristics of international equity index returns. Casting them in a dynamic portfolio problem, we evaluate the gains for a home-biased investor from including foreign assets in her portfolio. We find that accounting for the optimal dynamic demand for hedging on top of a standard mean-variance portfolio policy brings substantial benefits from international portfolio exposure. Such benefits become increasingly sizeable over long investment horizons.


Senate Bill Proposes Shot in Arm for Career and Technical Education ---
https://thejournal.com/articles/2016/07/27/senate-bill-proposes-shot-in-arm-for-cte.aspx


How to Claim a Loss Deduction on Worthless Stocks ---
http://www.accountingweb.com/tax/individuals/how-to-claim-a-loss-deduction-on-worthless-stocks?source=tx080816


A Useful Excel Reporting Feature ---
http://www.businessinsider.com/link-your-reports-to-excel-word-powerpoint-2016-8
Also see
Excel 2016 Forecasting Tool --- "
http://www.journalofaccountancy.com/issues/2016/aug/excel-forecast-sheet.html?utm_source=mnl:globalcpa&utm_medium=email&utm_campaign=17Aug2016 

How to Use Excel 2016 for Forecasting ---
http://www.journalofaccountancy.com/issues/2016/aug/excel-forecast-sheet.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=08Aug2016


Accounting Again Leads as Most Profitable Industry ---
http://www.accountingweb.com/practice/growth/accounting-tops-list-of-most-profitable-industries

Jensen Comment
This may be one of those ways to mislead with statistics.
For example, I think an orthopedics surgeon corporation down the road in our Alpine Clinic has a much higher percentage of return to owners than any accounting firm in the State of New Hampshire. This is probably true for most every MD specialty corporation in the State.
Much depends upon what you call an "industry."

One thing that helps accounting firms have high returns is relatively cheap labor. For example, we have a granddaughter who graduated in pharmacy and then interned with the Veterans Administration in Boston. She's now returning to Maine (Portland) for her first real job at a starting salary of $125,000 plus fringe benefits. Are there any accounting firms in New England with starting salaries of entry level graduates of $125,000? There might be some who specialize in computer and IT services, but I doubt that this salary is offered to accounting graduates.

Having said this, I still recommend in many instances going to work for an accounting firm at less than half this starting pharmacist salary. The reason is that accountancy offers so many alternative tracks for advancement into much higher paying careers. And believe it or not I think an auditor traveling from client to client has more interesting and varied work. I watch those high paid pharmacists in our Wal-Mart pharmacy working intently day-to-day and year-to-year and thank my lucky stars that I never became a Wal-Mart pharmacist.


"Economic Slump Sends Big Ships to Scrap Heap," by Ben Fritz, The Wall Street Journal, August 15, 2016, Page B1 ---
http://www.wsj.com/articles/economic-slump-sends-big-ships-to-scrap-heap-1471192256

Up until a year ago, the shipping industry was ordering ships in droves. This year, orders of new vessels have fallen to a record low and companies can’t get rid of ships fast enough.

About 1,000 ships that have the combined capacity to haul 52 million metric tons of cargo will be dragged onto beaches, cut into pieces and sold for scrap metal this year. That is second only to the record amount of capacity of 61 million so-called dead weight tons that were scrapped and recycled in 2012.

The global economic slowdown is putting shipping through its most bruising period since the 2008 financial crisis. Companies including Maersk Line, a unit of Danish conglomerate A.P. Mřller Maersk A/S, Germany’s Hapag-Lloyd AG and China Cosco Bulk Shipping Co. have 30% more capacity in the water than cargo. As the companies, mostly based in Europe and Asia, fight for bigger shares of the global market, freight rates have dropped so low they barely cover fuel costs.

In the five years through 2015, owners ordered an average of 1,450 ships annually. This year orders through July fell to 293 vessels, or 11.6 million tons, according to U.K. marine data provider Vessels Value.

“Given the tremendous overcapacity, it will take much more recycling and at least two to three years of no growth in capacity to see some balance between supply and demand,” said Basil Karatzas, chief executive of New York-based Karatzas Marine Advisors Co.

Continued in article


Here's An Illustration of Grade Inflation

"Nearly Half Of Detroit’s Adults Are Functionally Illiterate, Report Finds," Huffington Post, July 8, 2013 ---
http://www.huffingtonpost.com/2011/05/07/detroit-illiteracy-nearly-half-education_n_858307.html

Detroit’s population fell by 25 percent in the last decade. And of those that stuck around, nearly half of them are functionally illiterate, a new report finds.

According to estimates by The National Institute for Literacy, roughly 47 percent of adults in Detroit, Michigan — 200,000 total — are “functionally illiterate,” meaning they have trouble with reading, speaking, writing and computational skills. Even more surprisingly, the Detroit Regional Workforce finds half of that illiterate population has obtained a high school degree.

The DRWF report places particular focus on the lack of resources available to those hoping to better educate themselves, with fewer than 10 percent of those in need of help actually receiving it. Only 18 percent of the programs surveyed serve English-language learners, despite 10 percent of the adult population of Detroit speaking English “less than very well.”

Additionally, the report finds, one in three workers in the state of Michigan lack the skills or credentials to pursue additional education beyond high school.

In March, the Detroit unemployment rate hit 11.8 percent, one of the highest in the nation, the U.S. Bureau of Labor Statistics reported last month. There is a glimmer of hope, however: Detroit’s unemployment rate dropped by 3.3 percent in the last year alone.

Continued in article

Jensen Question
Will nearly all the illiterate high school graduates in Detroit get a free college diploma under the proposed "free college" proposal?

My guess is that they will get their college diplomas even though they will still be illiterate, because colleges will graduate them in order to sop up the free taxpayer gravy for their college "education."
Everybody will get a college diploma tied in a blue ribbon.

I doubt that illiteracy is much worse in Detroit than in other large USA cities like Chicago and St Louis.

In Europe less than have the Tier 2 (high school) graduates are even allowed to to to college or free trade schools ---
OECD Study Published in 2014:  List of countries by 25- to 34-year-olds having a tertiary education degree ---
https://en.wikipedia.org/wiki/List_of_countries_by_25-_to_34-year-olds_having_a_tertiary_education_degre


For CPAs:  The next frontier in data analytics ---
http://www.journalofaccountancy.com/issues/2016/aug/data-analytics-skills.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=10Aug2016


Top Heavy in Data Analytics
KPMG to pay entry-level employees to earn Villanova and Ohio State's master’s in accounting
---
http://www.bizjournals.com/philadelphia/news/2016/08/04/kpmg-paying-villanova-masters-accounting-degree.html

Jensen Questions

  1. Have Villanova and OSU relegated admissions decisions for this program to KPMG?
     
  2. Have Villanova and OSU relegated curriculum decisions to KPMG regarding such things as using KPMG software, KPMG datasets, and KPMG proprietary audit procedure literature?
     
  3. Is an entire semester of internship in KPMG offices for academic credit under this program top heavy on non-academic credit in reality?
     
  4. In other words is this just a KPMG training program?
     
  5. This KPMG program most certainly is outside the original stated purpose of the fifth year accounting program that was supposed to broaden the curriculum of accounting majors with non-accounting content (e.g., in communications, ethics, critical thinking etc.) without adding significantly more technical accounting, tax, and auditing content. Is this program with 50% auditing data analytics in the spirit of the fifth year program as originally designed?

Teaching Case
Cost Accounting and Inventory Valuation
by Bob Jensen: 
Differences Between Mark-to-Market Accounting for Derivative Contracts Versus Commodity Inventories
---
http://faculty.trinity.edu/rjensen/Mark-to-MarketCorn.htm


Fair value of inventory before a sale may differ from net realizable value because of unknowable future selling and delivery costs. For example, future deliver costs are unknowable until the location of the customer is known.

For these and other reasons (such as different underlyings) the value of a hedging instrument like a forward, futures, or option contract may differ from the value of hedged-item fair value of inventory. This difference gives rise to hedging instrument ineffectiveness. Both the FASB (in FAS 133) and the IASB (in IFRS 9) require testing for hedge ineffectiveness although the IFRS tests are more subjective.

Here are some helpers for learning about testing for hedge ineffectiveness.

IFRS Hedge Ineffectiveness ---
http://www.ifrs.org/Current-Projects/IASB-Projects/Financial-Instruments-A-Replacement-of-IAS-39-Financial-Instruments-Recognitio/Phase-III-Hedge-accounting/edcl/Pages/Hedge-Effectiveness.aspx

Bob Jensen's illustrations of hedge ineffectiveness ---
http://www.cs.trinity.edu/rjensen/000overview/mp3/000ineff.htm

Ira Kawaller's illustrations of inventory hedging strategies ---
http://kawaller.com/taking-stock-hedging-inventories-hedging-sales/

KPMG summary of testing for hedge ineffectiveness ---
https://www.cmegroup.com/education/files/basics-of-hedge-effectiveness.pdf

Teaching Cases:  Hedge Accounting Scenario 1 versus Scenario 2
Two Teaching Cases Involving Southwest Airlines, Hedging, and Hedge Accounting Controversies ---
http://faculty.trinity.edu/rjensen/caseans/SouthwestAirlinesQuestions.htm

 

Short Summary
"Hedge Effectiveness:  The Wild Card in Accounting for Derivatives," by Ira C. Kawaller --- http://www.kawaller.com/pdf/AFP-Hedge Effectiveness.pdf
Also see http://www.cs.trinity.edu/~rjensen/Calgary/CD/HedgeEffectiveness.pdf

Neither the FASB nor the IASC specify a single method for either assessing whether a hedge is expected to be highly effective or measuring hedge ineffectiveness.   Tests of hedge effectiveness should be conducted at least quarterly and on financial statement dates.  The appropriateness of a given method can depend on the nature of the risk being hedged and the type of hedging instrument used.  See FAS 133 Appendix A, Paragraph 62 and IAS 39 Paragraph 151.  

Wells Fargo: The Sunny Side of Hedge Ineffectiveness
By Ed Rombach
Link --- http://www.fas133.com/search/search_article.cfm?page=61&areaid=439 

How Wells Fargo's hedge selection benefits from current climate.

Recent media coverage of deflationary indicators like the recent CPI announcement of -.3% in October has prompted some analysts to differentiate between "bad" deflation caused by monetary policy mistakes and "good" deflation attributable to increases in labor productivity. Similarly, when it comes to risk management as practiced in accordance with FAS 133, a case can be made for differentiating between "bad" and "good" hedge ineffectiveness. Since the beginning of the year, with the most aggressive Federal Reserve rate cutting in memory, financial institutions involved in mortgage originations, securitization and retention of mortgage servicing rights (MRS) have been consistently the most prone to reporting significant hedge ineffectiveness. As the Fed cut the over night funds rate another 100 basis points during the third quarter, Wells Fargo & Co, which is included in the Portfolio of '33' took the prize for hedge ineffectiveness - the good kind.

A windfall
Specifically, Wells Fargo recognized a gain of $320 million for the third quarter in non-interest income, representing the ineffective portion of fair value hedges of mortgage servicing rights. This excess hedging gain boosted quarterly EPS by $.19 to $.68, accounting for over 23% of third quarter earnings. If only hedge ineffectiveness was always so kind.

How did Wells Fargo manage to rack up such robust fair value hedging gains relative to their mortgage servicing rights? Did they over hedge, or did the actual prepayment speed of home mortgage re-financing turn out to be less than anticipated? Perhaps it was a little bit of both.

Wells Fargos's third quarter 10Q provides some insights about their hedging methodology, indicating that the ineffectiveness windfall was primarily related to yield curve and basis spread changes that impacted favorably on the derivative hedges relative to the hedged exposures in the volatile interest rate environment.

Divergent spread movement
Subsequent, to June 30 and especially after the September 11 attacks, swap spreads were volatile but generally tended to narrow in the falling interest rate environment, as ten-year swap spreads narrowed from 90 basis points on 7/2/01 to 63 basis points on 9/28/01. If the bank had used Treasury instruments to hedge the prepayment risk on its MRS assets instead of LIBOR based products, the hedges would have under performed. However, Wells Fargo's third quarter 10Q discloses that the company uses a variety of derivatives to hedge the fair value of their MSR portfolio including futures, floors, forwards, swaps and options indexed to LIBOR.

The yield curve steepens
Moreover, the yield curve continued to steepen during the third quarter with the yield spread between ten and thirty year Treasuries widening from 33 basis points out to 88 basis points while the spread between 10yr and 30yr LIBOR swap rates widened from 28 basis points to 65 basis points. Since the ten-year maturity is the duration of choice for mortgage hedgers, it follows that these hedges would have out performed hedges with longer durations.

In connection with this, the company reported that all the components of each derivative instrument's gain or loss used for hedging mortgage servicing rights were included in the measurement of hedge ineffectiveness and was reflected in the statement of income. However, time decay (theta) and the volatility components (vega) pertaining to changes in time value of options were excluded in the assessment of hedge effectiveness. As of September 30, 2001, all designated hedges continued to qualify as fair value hedges. In addition, all components of each derivative instrument's gain or loss used to convert long term fixed rate debt into floating rate debt were also included in the assessment of hedge effectiveness.

Ineffectiveness cuts both ways
There was also some of the bad kind of hedge ineffectiveness which showed up in Wells Fargo's cash flow hedges which include futures contracts and mandatory forward contracts, including options on futures and forward contracts, all of which are used to hedge the forecasted sale of its mortgage loans. During the third quarter the company recognized a net loss of $54 million (-$.03 per share), accounting for ineffectiveness of these hedges, all component gains and losses of which were included in the assessment of hedge effectiveness.

It would appear that this hedge ineffectiveness was the flip side of the coin of the ineffectiveness on the fair value hedges because the futures contracts most commonly used to hedge this kind of pipeline risk are ten year Treasury note futures which would have tended to under-performed relative to the value of the mortgage loans, given the steepening of the yield curve and the general spread widening of mortgage rates relative to treasuries.

For example, ten year constant maturity treasury yields fell 86 basis points, from 5.44% on 7/5/01 to 4.58% on 9/27/01 in contrast to the Freddie Mac weekly survey of mortgage rates reports average 30-year fixed rate mortgages at 7.19% on 7/05/01 or a spread of 1.75% over the ten-year constant maturity treasury rates, vs. average fixed mortgage rates of 6.72% on 9/27/01 or a spread of 2.14% over ten-year treasury rates.

The net impact of the $320 million of excess gains in the fair value hedges vs. net losses of $54 million in the cash value hedges weighs in at a net hedge ineffectiveness of $271 million or almost $.16 (16 cents) per share courtesy of a Federal Reserve policy cutting interest rates with a vengeance. However, the unprecedented interest rate volatility of this period could well turn this quarter's ineffectiveness windfall into next quarter's shortfall. Risk managers should at least be able to take some comfort though from the fact that the fed can't lower interest rates below zero percent.

A Great Article!
"A Consistent Approach to Measuring Hedge Effectiveness," by Bernard Lee, Financial Engineering News --- http://www.fenews.com/fen14/hedge.html

Another Great Article With Formulas
"Complying with FAS 133 Accounting Solutions in Finance KIT," Trema, http://www.trema.com/finance_online/7/2/FAS133_FK.html?7 

During the past year Trema has worked with clients, partners and consulting firms to ensure that all Finance KIT users will be FAS 133 compliant by Summer 2000, when the new U.S. accounting standards come into effect. In Finance Line 3/99, Ms. Mona Henriksson, Director of Trema (EMEA), addressed the widespread implications the FAS 133 accounting procedures will have on the financial industry (see ‘Living Up to FAS 133’ in Finance Line 3/99). Now, in this issue, Ms. Marjon van den Broek, Vice President, Knowledge Center – Trema (Americas), addresses specific FAS 133 requirements and their corresponding functionality in Finance KIT.

See software 

 


We tend to think of commodity prices (think corn) in derivatives has highly competitive because there are so very many buyers and sellers of options, forwards, futures, and swaps.

However, what fail to do is think of the commodity prices (again think corn) of physical inventories as highly concentrated.

This is something to think about when it comes to speculating in physical inventories versus commodity derivatives.

From Agueconomics on April 26, 2008 ---
http://www.aguanomics.com/2008/04/who-benefits-from-ethanol.html

Concentrations are significant: DuPont, Monsanto, Novartis and Dow sell 69 percent of (corn) seeds; ADM, Cargill and two others companies control 74 percent of buying side of the corn market. This level of market share means that these industries are "highly concentrated oligopolies."


Law School Tax Clinic Wins Big Case For Students Seeking To Deduct MBA Expenses ---
http://taxprof.typepad.com/taxprof_blog/2016/08/law-school-tax-clinic-wins-big-tax-court-case-for-students-seeking-to-deduct-mba-expenses.html

Jensen Comment
If this trend continues for MBA degrees then it may increase demands from other professions such as accountants, nurses, pharmacists, physicians, engineers, etc.
I can't imagine the IRS giving up fighting the deduction of graduate degree expenses.
Of course since the bottom half of taxpayers pay almost no income taxes, the majority of students seeking graduate degrees may not need to deduct graduate school expenses since they don't pay any income taxes in the first place. The sticking point would be those substantially employed who are already in the top half of the income ladder for taxpayers or spouses who are not employed but are parties to higher income joint returns.

 


Beta Coefficient --- https://en.wikipedia.org/wiki/Capital_asset_pricing_model

Also see https://en.wikipedia.org/wiki/Beta_(finance)

"Do Portfolio Managers Underestimate Risk by Overanalyzing Data? New research questions whether “smart” beta is always smart," by Louise Lee, Insights from the Stanford University Graduate School of Business, July 25, 2016 ---

 Criticism of Beta ---
https://en.wikipedia.org/wiki/Beta_(finance)#Criticism


How to Mislead With Statistics

The following two articles show how economists can put two different spins on the same data (something that seems to be taught in social sciences in general whenever politics gets involved).

The City of Seattle hired a group of economists to study the transitory impact of minimum wage hikes on labor and business firms in Seattle. I say "transitory" because the wage hikes are being phased in and won't reach the $15 level until

The Study
REPORT ON THE IMPACT OF SEATTLE’S MINIMUM WAGE ORDINANCE ON WAGES, WORKERS, JOBS, AND ESTABLISHMENTS THROUGH 2015 The Seattle Minimum Wage Study Team1 University of Washington
July 2016
http://evans.uw.edu/sites/default/files/MinWageReport-July2016_Final.pdf

This report presents the short-run effects of the Seattle Minimum Wage Ordinance on the Seattle labor market. The Seattle Minimum Wage study team at the University of Washington analyzed administrative records on employment, hours, and earnings from the Washington Employment Security Department to address two fundamental questions: 1) How has Seattle’s labor market performed since the City passed the Minimum Wage Ordinance, and particularly since the first wage increase phased in on April 1, 2015? 2) What are the short-run effects of the Minimum Wage Ordinance on Seattle’s labor market? While quite similar at first glance, these two questions address very different issues and require very different methods to answer. The first question can be studied with a simple before/after comparison. Although the comparison is simple, it risks conflating the impact of the minimum wage with other local trends. Many things have happened in Seattle’s labor market since June 2014, most of them having little or nothing to do with the minimum wage itself. The City has enjoyed steady expansion in tech sector employment, and a construction boom fueled by rising residential and commercial property prices. Even the weather – a key determinant of economic activity in the Puget Sound region – was favorable in 2015, with record-low precipitation in the early months of the $11 minimum wage. The before-after comparison can tell us the net impact of all these simultaneous trends, but this comparison cannot distinguish among them. Our second question – the more important one for purposes of evaluating the policy – aims to isolate the impact of the minimum wage from all the other regional trends seen over the same time period. Whereas the first question asks “are we better off than we were when Seattle raised the minimum wage” and requires only a simple comparison of yesterday to today, the second asks “are we better off than we would have been if Seattle had not adopted a higher minimum wage?” To answer it requires imagining how the local economy would look in absence of a Minimum Wage Ordinance. While it is impossible to directly observe what would have happened if no wage ordinance had been implemented, this report uses widely accepted statistical techniques to compare Seattle in its current state—with the presence of the Minimum Wage Ordinance—to an image of what Seattle might have looked like today if not for the Minimum Wage Ordinance. We take advantage of data going back to 2005 to build a model of the way Seattle’s labor market typically works. We also take advantage of data on nearby regions that did not increase the minimum wage to better understand how other factors might have influenced what we observe in the City itself.

3 In this report, we present findings on wages, workers, jobs, and establishments. Our findings can be summarized as follows: Wages:  The distribution of wages shifted as expected.  The share of workers earning less than $11 per hour declined sharply.  This decline began shortly after the ordinance was passed.  However, similar declines were seen outside of Seattle, suggesting an improving economy may be the cause of the change in the distribution of wages. Low-Wage Workers:  In the 18 months after the Seattle Minimum Wage Ordinance passed, the City of Seattle’s lowest-paid workers experienced a significant increase in wages.  The typical worker earning under $11/hour in Seattle when the City Council voted to raise the minimum wage in June 2014 (“low-wage workers”) earned $11.14 per hour by the end of 2015, an increase from $9.96/hour at the time of passage.  The minimum wage contributed to this effect, but the strong economy did as well. We estimate that the minimum wage itself is responsible for a $0.73/hour average increase for low-wage workers.  In a region where all low-wage workers, including those in Seattle, have enjoyed access to more jobs and more hours, Seattle’s low-wage workers show some preliminary signs of lagging behind similar workers in comparison regions.  The minimum wage appears to have slightly reduced the employment rate of low-wage workers by about one percentage point. It appears that the Minimum Wage Ordinance modestly held back Seattle’s employment of low-wage workers relative to the level we could have expected.  Hours worked among low-wage Seattle workers have lagged behind regional trends, by roughly four hours per quarter (nineteen minutes per week), on average.  Low-wage individuals working in Seattle when the ordinance passed transitioned to jobs outside Seattle at an elevated rate compared to historical patterns.  Seattle’s low-wage workers did see larger-than-usual paychecks (i.e., quarterly earnings) in late 2015, but most— if not all—of that increase was due to a strong local economy.  Increased wages were offset by modest reductions in employment and hours, thereby limiting the extent to which higher wages directly translated into higher average earnings.  At most, 25% of the observed earnings gains—around a few dollars a week, on average—can be attributed to the minimum wage.  Seattle’s low-wage workers who kept working were modestly better off as a result of the Minimum Wage Ordinance, having $13 more per week in earnings and working 15 minutes less per week.

4 Jobs:  Overall, the Seattle labor market was exceptionally strong over the 18 months from mid2014 to the end of 2015.  Seattle’s job growth rate tripled the national average between mid-2014 and late 2015.  This job growth rate outpaced Seattle’s own robust performance in recent years.  Surrounding portions of King County also had a very good year; the boom appears to fade with geographic distance.  Job growth is clearly driven by increased opportunities for higher-wage workers, but businesses relying on low-wage labor showed better-than-average growth as well.  For businesses that rely heavily on low-wage labor, our estimates of the impact of the Ordinance on the number of persistent jobs are small and sensitive to modeling choices. Our estimates of the impact of the Ordinance on hours per employee more consistently indicate a reduction of roughly one hour per week.  Fewer hours per employee could reflect higher turnover rather than cutbacks in staffing.  Reductions in hours are consistent with the experiences of low-wage workers. Establishments:  We do not find compelling evidence that the minimum wage has caused significant increases in business failure rates. Moreover, if there has been any increase in business closings caused by the Minimum Wage Ordinance, it has been more than offset by an increase in business openings. In sum, Seattle’s experience shows that the City’s low-wage workers did relatively well after the minimum wage increased, but largely because of the strong regional economy. Seattle’s low wage workers would have experienced almost equally positive trends if the minimum wage had not increased. Although the minimum wage clearly increased wages for this group, offsetting effects on low-wage worker hours and employment muted the impact on labor earnings. We strongly caution that these results show only the short-run impact of Seattle’s increase to a wage of $11/hour, and that they do not reflect the full range of experiences for tens of thousands of individual workers in the City economy. These are “average” effects which could mask critical distinctions between workers in different categories. Our future work will extend analysis to 2016, when Seattle’s minimum wage increased a second time and began to distinguish between businesses of different sizes and industries. It will also incorporate more detailed information about workers by linking employment records to other state databases. This will give us a greater capacity to answer key questions, such as whether the workers benefiting most from higher minimum wages are more likely to be living in poverty. We are also in the process of collecting additional survey information from Seattle businesses and conducting interviews with a worker sample tracked since early 2015. The next report, expected in September, will focus specifically on how the minimum wage has affected nonprofit organizations.

Continued in article

Spin From Investors Business Daily
The Bitter Lesson From Seattle's Minimum Wage Hike
August 10, 2016
http://www.investors.com/politics/commentary/the-bitter-lesson-from-seattles-minimum-wage-hike/

Spin From a Respected, Albeit Very Liberal Economist --- Jared Bernsten
So far, the Seattle minimum-wage increase is doing what it’s supposed to do
August 10, 2016
https://www.washingtonpost.com/posteverything/wp/2016/08/10/so-far-the-seattle-minimum-wage-increase-is-doing-what-its-supposed-to-do/?utm_term=.d5bf0bcad438
 

Jensen Comment
The issue of minimum wage became an enormous political issue when the workers receiving the wage changed. When I grew up in the 1950s and 1960s and those McJobs having low pay were primarily intended to be temporary jobs where students could earn a little outside the classroom and where younger people in general could get a start in the work place. Nobody with normal capabilities intended to make careers out of those very low paying McJobs. Somewhere along the way things changed to where now those McJobs became careers for many folks who are not destined for bigger and better careers in the economy. With that change came increasing demands to increase the minimum wage to a more suitable wage for longer-term careers.

The real question that the Seattle study is trying to answer is whether raising the minimum wage in Seattle had a positive or negative impact on employers, employees, and low-skilled unemployed. The answer seems to be varied (depending upon what economist and what workers you consult.) Impact on is hard to isolate statistically because Seattle is a relative boom town due to the high tech economic sector. Thus just because a lot of McJob employers are still thriving is confounded by the boom times apart from the minimum wage increase. McJob employers are likely to be hit harder in communities having less boom success in general. Also the wage increases are being phased in over time (until 2021)such that there is not one big boom to study.

It's hard judge impact on some McJob employers in very large or otherwise isolated communities relative to those surrounded by competition not required to raise minimum wage. For example, restaurant customers in in Seattle are not likely to go elsewhere because their favorite restaurant had to raise prices slightly. Restaurant customers on the very edge of Seattle might drive a bit further for better prices.

Thus the impact of the Seattle's minimum wage hike focuses more on labor/employment impact than on employer impact. And herein commences the lying or possible lying with statistics. I would dwell on all the issues since you can read them for your self in the above links.

Personally, I think the $15 minimum wage eventually is a good idea in a high cost city like Seattle.

But I would like to conclude with what I think is trickery in Jared Bernstein's rejoinder. He skirts important issues like how entry level employees without skills (like students in need of part-time jobs and employees who messed up their early years (e.g., with drugs and crime) get a start without higher turnover in the minimum wage jobs that open up entry-level jobs.

At times he totally ignores the study's findings such as:

Wages:
 The distribution of wages shifted as expected.
 The share of workers earning less than $11 per hour declined sharply.
 This decline began shortly after the ordinance was passed.
 However, similar declines were seen outside of Seattle, suggesting an improving economy may be the cause of the change in the distribution of wages.

Second he seems to imply without more data or foresight that in larger firms the minimum wage is an even better idea than it is at fast-food restaurants. What he fails to note that it is in the larger firms where robotics alternatives to low-paying jobs are exploding. :

Wal-Mart Has An Army Of Robots That Pick, Pack, and Send in Their 130 Distribution Centers ---
http://www.businessinsider.com/wal-mart-warehouse-robots-2013-12

McJobs in those Wal-Mart distribution centers have already disappeared with advances in robotics. Perhaps this was inevitable but eliminating McJobs with higher minimum wages will speed up job sacrices to robots and drive more and more low skilled workers to welfare rolls and crime.

Also see
The Automated Wal-Mart:  A Thought Experiment
http://faculty.washington.edu/sandeep/automated/walmart.pdf

The Seattle experiment is hard to extrapolate to every town and city in the USA. I think higher minimum wages where the cost of living is very high is probably a good idea. For example, the cost of living is even high in the suburbs of Seattle and San Francisco. But the same minimum wage successes for those metropolitan areas can be a disaster in rural America where the job losses are likely to be enormous, For example, down the road from our mountain cottage is an old fashioned hardware store that is already struggling to compete with stores 10 miles away (in Littleton, NH), stores like Wal-Mart, Home Depot, and Lowes. A $15 minimum wage might close the doors on my favorite and struggling little hardware store that now makes almost zero profit. The workers in this store are typically part-time spouses who supplement the family income with a bit of added wage within walking distance of the store.

The main conclusion from this illustration is that professional economists cannot agree on much of anything!


"PwC faces 3 major trials that threaten its business (existence)." by Francine McKenna, Marketwatch, August 17, 2016 ---
http://www.marketwatch.com/story/pwc-faces-three-major-trials-that-could-put-firm-out-of-business-2016-08-12?mod=mw_share_twitter 

Bob Jensen's threads on Big Four lawsuits ---
http://faculty.trinity.edu/rjensen/fraud001.htm


The Women's Library @ LSE --- http://digital.library.lse.ac.uk/collections/thewomenslibrary

The library seems to overlook the vast literature on gender issues in accounting ---
http://faculty.trinity.edu/rjensen/Bookbob2.htm#Women


Social-science researchers don’t need to be nearly as afraid of the Institutional Review Board process as they usually are ---
http://chronicle.com/article/Does-This-Have-to-Go/237476?cid=at&utm_source=at&utm_medium=en&elqTrackId=523b59dd1962441f8a807798fce2666d&elq=f9442a4087aa4f53a76e0cd63bed7868&elqaid=10288&elqat=1&elqCampaignId=3852

Jensen Comment
The IRB reviews also apply to disciplines other than the the social sciences. For example, accounting researchers using human subjects generally face IRB reviews as well.


"Science Isn’t Broken." By Christie Aschwanden, Nate Silver's 5:38 Blog, August 19, 2015 ---
http://fivethirtyeight.com/features/science-isnt-broken/#part1

If you follow the headlines, your confidence in science may have taken a hit lately. Peer review? More like self-review. An investigation in November uncovered a scam in which researchers were

researchers were rubber-stamping their own work,
circumventing peer review at five high-profile publishers. Scientific journals? Not exactly a badge of legitimacy, given that the International Journal of Advanced Computer Technology recently accepted for publication a paper titled “Get Me Off Your Fucking Mailing List,” whose text was nothing more than those seven words, repeated over and over  
for 10 pages. Two other journalsallowed an engineer posing as Maggie Simpson and Edna Krabappel to publish a paper, “Fuzzy, Homogeneous Configurations.” Revolutionary findings? Possibly fabricated. In May, a couple of University of California, Berkeley, grad students discovered irregularities in
Michael LaCour’s influential paper suggesting that an in-person conversation with a gay person could change how people felt about same-sex marriage. The journal Science retracted the paper shortly after, when LaCour’s co-author could find no record of the data.Taken together, headlines like these might suggest that science is a shady enterprise that spits out a bunch of dressed-up nonsense. But I’ve spent months investigating the problems hounding science, and I’ve learned that the headline-grabbing cases of misconduct and fraud are mere distractions. The state of our science is strong, but it’s plagued by a universal problem: Science is hard . . .

Continued in article

Jensen Comment
Accounting researchers have a bit easier since it's almost certain their research will never be subjected to replicaWhy Pokémon Go’s technology is no fad tion ---
http://faculty.trinity.edu/rjensen/TheoryTaR.htm


The Unraveling of Harvard’s Star Trading Desk,” by Michael McDonald, Bloomberg, July 28, 2016 ---
http://www.bloomberg.com/news/articles/2016-07-28/behind-harvard-shakeup-a-star-trading-desk-that-unraveled-fast?cmpid=BBD072916_BIZ&utm_medium=email&utm_source=newsletter&utm_campaign=

 

. . .

After years of missteps, controversy and even crisis, Harvard Management Corp., which oversees the university’s $37.6 billion endowment, began assembling a new corps of equity traders and analysts in 2014, in hopes of recapturing a part of the investment magic that had once made the fund the envy of the world.

Only now, just two years later, that plan has collapsed. Stephen Blyth, 48, the former bond trader behind that effort, stepped down as HMC’s chief executive Wednesday for personal reasons after just 18 months on the job. His resignation follows the departure in June of Michael Ryan and Robert Howard, the two former Goldman Sachs Group Inc. partners he had brought in to guide the new equity strategy.

Pulled Plug

While Blyth’s exit was said to be unrelated to those of his star hires, the talk inside HMC’s offices at the Federal Reserve Bank of Boston centered on why management had pulled the plug on the team so quickly amid a volatile equities market.

According to people familiar with the matter, some traders in Ryan’s group posted losses in 2015 significant enough to trigger internal temporary stop-loss orders. Ryan also lost money in a portfolio he managed. The extent of the losses is unclear, however, and came at a time when most hedge funds were struggling to beat market indexes.

But now, Harvard is once again confronting the same, uncomfortable question that has dogged it for years: why can’t the world’s richest university, for all its brains, make smarter investments?

The IRS Scandal, Day 1180
World Tribune, ‘Smoking-Gun Documents’ Show IRS Knew About Targeting of Conservatives Before 2012 Election ---
http://taxprof.typepad.com/taxprof_blog/2016/08/the-irs-scandal-day-1180.html

Top IRS officials knew the agency was targeting conservatives because of their ideology and political affiliation two years before disclosing it to Congress and the public, according to a Judicial Watch report released on July 28.

“Senior IRS officials knew that agents were targeting conservative groups for special scrutiny as early as 2011,” the report said.

Lois Lerner revealed the targeting in May 2013 when she responded to a planted question at an American Bar Association conference.

Continued in article

Jensen Comment
Lois Lerner continues to refuse to testify whether or not the conservative targeting was at the behest of somebody in the Whitehouse (not necessarily President Obama who was up for re-election).

The IRS admits to destroying the evidence in Virginia that might answer the question of who instigated the targeting of the conservative fund raising groups.

It would become a tremendous scandal if the Whitehouse manipulated the IRS or any other government agency to aid in the election of a USA President. But without testimony and other evidence the genuine scandal cannot be proven. The shadow of scandal will probably last long into history after President Obama leaves office. By not investigating the scandal himself he has not cleared his own record.

As a minor scandal, Lois Lerner was given a bonus by the IRS after her resignation in disgrace.


VAT Tax --- https://en.wikipedia.org/wiki/Value-added_tax

Corporate Income/Revenue Taxes Increases Are Either Avoided (such as sweetheart deals from the Illinois Governor)
or They Get Passed Along in Higher Prices
or They Drive Companies Out of State (as Wisconsin learned the hard way)

"Oregon’s Regressive Tax Referendum:  A gross-receipts levy would punish the 99% to help public unions," The Wall Street Journal, August 11, 2016 ---
http://www.wsj.com/articles/oregons-regressive-tax-referendum-1470958010?mod=djemMER

Progressives claim they can pay for their grand spending ambitions by soaking the rich, but the little guy invariably gets wet. The latest illustration is Oregon, where unions are campaigning for a gross-receipts tax on large corporations that even state budget analysts warn will drench the 99% too.

Last week Governor Kate Brown endorsed a November referendum that would impose a 2.5% tax on corporate sales exceeding $25 million. Oregon’s top income tax rate of 9.9% is the second highest in the country after California, and it hits at an income of only $125,000 for a single tax filer.

The Beaver State last raised income taxes in 2009, and state revenues have grown by nearly 30% in the last four years. But unions say the new business tax is needed to close a $1.4 billion deficit and pay for baked-in spending—the same justification for the last tax increase.

Health-care costs will rise by $1 billion in the next two-year budget thanks in part to the state’s ObamaCare Medicaid expansion. Generous new union contracts that increase worker pay and reduce their health-care premium contributions will add hundreds of millions to the fisc, while public pension costs are projected to swell by 150% to $4.5 billion by 2021.

The gross-receipts tax, which would throw off $3 billion annually and expand the budget by a third, would be a revenue gusher because of its pyramiding effect. As the Tax Foundation notes, “In effect, the tax gets built into prices and compounded as a product moves through the production process.” So low-margin businesses at the end of the supply chain—particularly retailers—get walloped.

Only five states assess a gross-receipts tax. Many including Michigan and New Jersey have dumped theirs due to its economic distortions. Oregon’s would be the highest and most onerous since it wouldn’t include deductions or differential rates to ameliorate the burden on low-margin industries. For instance, Texas allows businesses to deduct the cost of goods sold and employee compensation—and the Lone Star State has no income tax.

Businesses will respond by raising prices, reducing investment and laying off workers. The state Legislative Revenue Office estimated that the tax would cost 38,200 jobs in the private economy including 13,600 in retail trade while increasing government employment by 17,700. By 2022 state income would decline by 0.17% while prices would edge up 0.89% relative to the office’s baseline forecast.

The analysts also forecast that the measure would increase the state’s per capita tax burden by $600, and that “the marginal impact of the tax will be regressive.” Households making less than $21,000 in income would experience a 0.9% decline in after-tax income—about twice as much as those earning more than $206,000.

Continued in article

Jensen Comment
Actually I favor a VAT tax to replace the easily-avoided corporate income tax, but the VAT tax will only work well if it is imposed nationally.


GAO:  IRS Faulted for Lax Housing Tax Credit Oversight ---
http://www.accountingweb.com/tax/irs/irs-faulted-for-lax-housing-tax-credit-oversight?source=tx080116

Bogus Tax Return Refund Fraud:  GAO Finds Holes in IRS Taxpayer Protection Program (TPP) ---
http://www.accountingweb.com/tax/irs/gao-finds-holes-in-irs-taxpayer-protection-program?source=tx080116  


Some interesting real world company illustrations of negative goodwill are listed at
https://www.scheller.gatech.edu/centers-initiatives/financial-analysis-lab/files/2011/gatech_finlab_bargainpurchase_4apr2011.pdf


Pokemon Go --- https://en.wikipedia.org/wiki/Pok%C3%A9mon_Go

Augmented Reality --- https://en.wikipedia.org/wiki/Augmented_reality

MAAW's Blog by Jim Martin:  Why Pokémon Go’s technology is no fad ---
http://maaw.blogspot.com/2016/07/why-pokemon-gos-technology-is-no-fad.html


Learning maps, diagrams, and flowcharts. A sampling of illustrations from MAAW ---
http://maaw.info/LearningMapsandFlowCharts.htm


These are Not Your Average Business Cards ---
https://www.moo.com/us/products/business-cards.html?cvosrc=ppc content.bidtellect.bid-4054-How To Geek LLC-393367-jul16&cvo_campaign=28259&utm_source=bidtellect&utm_medium=native&utm_campaign=us_soho_bidtellect_camp28259_4054_How To Geek LLC_393367_jul16&utm_content=393367&utm_term=4054


Questions
How do WebLedgers differ from other types of accounting software"
How is this difference changing in the era of cloud storage?
How is there still a difference betwee WebLedgers and other accounting software in this era of cloud storage?

 

NetSuite --- https://en.wikipedia.org/wiki/NetSuite

Oracle plans to acquire NetSuite for $9.3 billion ---
http://www.usatoday.com/story/tech/news/2016/07/28/oracle-acquires-netsuite-93-billion/87652732/?AID=10709313&PID=6147589&SID=ir6rex3qep005fwm00dth

Oracle continues expanding the size of its cloud.

The software giant, which has its own growing cloud computing business, is making a $9.3 billion bid to acquire NetSuite, another cloud software provider, the companies said Thursday.

Oracle will pay $109 in cash per NetSuite share in the transaction, expected to close in 2016, a 19% percent premium to NetSuite's closing share price of $91.57 Wednesday. NetSuite's board has unanimously approved the deal, the company said.

Shares of NetSuite (N) were up 18% in midday trading Thursday to $108.15 after rising 9% Wednesday on speculation of a deal.

Oracle (ORCL) shares were up 0.13% to $40.99 midday.

Redwood Shores, Calif.-based Oracle has been growing its cloud business beyond its traditional corporate software offerings. In NetSuite, Oracle gets the company that became the first to a full suite of enterprise resource planning (ERP) applications, said Ray Wang, principal analyst and founder at Constellation Research.

Located in San Mateo, Calif., NetSuite was co-founded in 1998 by current NetSuite Chairman and Chief Technology Officer Evan Goldberg and Oracle founder Larry Ellison as NetLedger, a cloud accounting company. Ellison, who stepped down as Oracle CEO two years ago, is now Oracle's executive chairman. He and his family remain the largest shareholders of NetSuite, owning more than 45% of outstanding shares as of March 31, 2016, according to filings with the Securities and Exchange Commission.

With NetSuite’s IPO in 2007, the company was valued at $2.1 billion and had grown to $7.7 billion by the end of 2013. Today, NetSuite has more than 30,000 companies in more than 100 countries using its cloud-based business management software. Current NetSuite CEO Zach Nelson, who handled global marketing for Oracle from 1996 to 1998, has said he expects NetSuite to hit $1 billion in revenue for the first time.

Continued in article

Jensen Comment
Cloud computing as we know it today was nonexistent in 1998 when NetLedger and other WebLedger accounting systems were formed. NetLeger was probably the most successful of the WebLedger ventures. WebLedgers like NetLedger differed from other accounting software in that the ledgers and journals of a company were remotely stored databases such as huge Oracle databases. The good news is that the expensive costs of acquiring and maintaining accounting databases were provided by WebLedger systems thereby relieving clients, especially smaller clients, from having to install accounting systems and hire the IS experts to maintain local databases. The bad news, of course, was the loss of some controls that arise from having your own databases locally.

I wrote about WebLedger alternatives at the time at
http://faculty.trinity.edu/rjensen/webledger.htm

In those days students could get free access to NetLedger and set up an accounting system for a hypothetical company. You can read the resulting project for one of my student teams at
http://faculty.trinity.edu/rjensen/acct5342/projects/NetLedger.pdf

Today cloud storage offers some of the WebLedger advantages of offsite storage and maintenance. However, WebLedgers still offer the advantages and disadvantages of offsite accounting software.


Friends, Partners, or Dummies on the Inside Are More Important Than Hacking Skills

A new study suggests many data breaches are caused by insider threats -- whether through malice or accident ---
http://www.zdnet.com/article/data-theft-rises-sharply-insiders-to-blame/

Jensen Comment
The enormous problem is a disgruntled employee with a key to the kingdom.


How to Mislead With Statistics

"The Great Productivity Puzzle," by John Cassady, The New Yorker, August 10, 2016 ---
http://www.newyorker.com/news/john-cassidy/the-great-productivity-puzzle


What's the difference between "John Doe, CPA" versus "John Doe, CPA, ABV?"

AICPA Answer ---
http://www.aicpa.org/Membership/Join/Pages/credentials.aspx#tab-5?utm_source=mnl:cpald&utm_medium=email&utm_campaign=23Aug2016

Jensen Comment
Note the other certifications in the tabs at the top of the page.

Badges and certifications will probably replace college diplomas in terms for both landing jobs and obtaining promotions in the future.

But not all badges and certifications are created equally. The best ones will be those that have both tough prerequisites and tough grading and tough experience requirements. There's precedence for the value of certifications in medical schools. The MD degree is now only a prerequisite for such valuable certifications in ophthalmology, orthopedics, neurology cardio-vascular surgery, etc.

What will be interesting is to see how long it will take badges/certifications to replace Ph.D. degrees for landing faculty jobs in higher education. At present specializations are sort of ad hoc without competency-based testing. For example, accounting professors can advance to specialties like auditing and tax corporate tax accounting with self-study and no competency-based testing. This may change in the future (tremble, tremble).

Watch this video link forwarded by Denny Beresford ---
Watch the video at
https://www.youtube.com/watch?v=5gU3FjxY2uQ
The introductory screen on the above video reads as follows (my comments are in parentheses)

In Year 2020 most colleges and universities no longer exist (not true since residential colleges provide so much more than formal education)

 

Academia no longer the gatekeeper of education (probably so but not by Year 2020)

 

Tuition is an obsolete concept (a misleading prediction since badges will not be free in the USA that already has  $100 trillion in unfunded entitlements)

 

Degrees are irrelevant (yeah, one-size-fits-all diplomas are pretty much dead already)

 

What happened to education?

 

What happened to Epic?

Bob Jensen's threads on the  future of badges and certifications ---
http://faculty.trinity.edu/rjensen/assess.htm#ConceptKnowledge


From the CFO Journal's Morning Ledger on August 26, 2016

Europe's radical copyright reform trains cross hairs on Google
The European Commission is finalizing reforms that will allow European news publishers to levy fees on internet platforms such as Alphabet Inc.’s Google if search engines show snippets of their stories, the Financial Times reports. The proposals, to be published in September, aim to dilute the power of big online operators that can lead to imbalanced commercial negotiations between search engines and content creators, officials say.

Jensen Comment
What's a snippet?

If this restricts anything from being quoted it Europe will be shutting down academic debate. The whoe purpose of allowing "short" quotations is to allow scholars to write critiques and inspire debate.

As a rule copyright holders cannot prevent you from quoting their published works as long as the quotations are short in length. One of the main reasons is that authors cannot use copyright law to put their works above criticism. Sometimes it's really not effective to criticize a work without quoting some parts of that work. Europe's "radical copyright reform" will hopefully not make authors' works above criticism.


Will the largest for-profit training school (with 130 campuses) be thrown under the bus?

ITT --- https://en.wikipedia.org/wiki/ITT_Technical_Institute

From the CFO Journal's Morning Ledger on August 26, 2016

This could be it for ITT
The Obama administration took steps Thursday that could effectively force the closure of one of the nation’s largest for-profit college chains, banning ITT Technical Institute from enrolling new students who receive federal aid. ITT, which has about 43,000 students nationwide, is facing accusations from its accreditor of chronic mismanagement of its finances and using questionable recruiting tactics. The company is also under investigation by state and federal authorities. Parent ITT Educational Services Inc.’s stock plunged.

Bob Jensen's threads on fee-based training alternatives ---
http://faculty.trinity.edu/rjensen/Crossborder.htm


From the CFO Journal's Morning Ledger on August 23, 2016

U.S. and German audit regulators sign cooperation pact
The Public Company Accounting Oversight Board and the German Auditor Oversight Body agreed to cooperate in oversight of audit firms subject to both regulatory jurisdictions, the Journal of Accountancy reports. The deal provides a framework for joint inspections and allows the regulators to exchange confidential information in accordance with German laws and the Dodd-Frank Act.

 


From the CFO Journal's Morning Ledger on August 23, 2016

Court rules against EY in overtime case
A federal appeals court has ruled in favor of two Ernst & Young employees who wanted to participate in a class-action lawsuit against the firm about overtime pay rather than submit to mandatory arbitration, Accounting Today reports. The U.S. Court of Appeals for the Ninth Circuit handed down an opinion Monday in favor of two EY employees, vacating a district court’s order that would have compelled they submit to individual arbitration of their claims. The class-action lawsuit they wished to participate in alleged that EY misclassified employees in order to deny them overtime wages, in violation of the Fair Labor Standards Act and California labor laws.

 


From the CFO Journal's Morning Ledger on August 23, 2016

BofA gets nod against DOJ appeal
An appellate court on Monday declined to reconsider its decision to throw out a mortgage-fraud case against Bank of America Corp., a blow to the Justice Department as it tried to rescue one of its highest-profile cases tied to the financial crisis. Judges for the Second U.S. Circuit Court of Appeals in New York said in a filing that they had considered the Justice Department’s request and would deny it. The judges didn’t elaborate on their decision.


From the CFO Journal's Morning Ledger on August 23, 201

Wells Fargo settles with CFPB
Wells Fargo Bank agreed to pay $4 million to resolve allegations by the Consumer Financial Protection Bureau that it used illegal payment-processing practices resulting in higher costs for some borrowers. The settlement includes a $410,000 refund to affected consumers and a $3.6 million civil penalty to the CFPB, which has recently stepped up its scrutiny of student-loan servicing companies. The unit of Wells Fargo & Co. said it disagreed with the CFPB’s assertions.b

 


From the CFO Journal's Morning Ledger on August 19, 2016

FASB tweaks nonprofit reporting
The Financial Accounting Standards Board’s updated rules aim to make it simpler for nonprofits to classify and report their assets. The new rules also make it easier for donors, creditors and other interested parties to see how a nonprofit’s funds are being used. Nonprofits will now report two classes of assets, instead of three, which should reduce some of the burden of deciding which charitable assets can be used, and when. The new reporting will separate cash that is available now from cash that may have time contingencies or other strings attached.

 


Record Dividend Payouts Hurting Bond Investing Since the Fed Drove Interest Rates to Virtually Zero

From the CFO Journal's Morning Ledger on August 19, 2016

Big companies are handing more of their profits to shareholders than at any time since the financial crisis, as record-low bond yields put a premium on dividends, Mike Bird, Vipal Monga and Aaron Kuriloff write. Payouts at S&P 500 companies for the 12 months were nearly 38% of net income. Moreover, 44 of those firms paid more than they earned over the previous year, the most in a decade and a practice some analysts deem unsustainable. The dividend yield on the S&P 500, or annual payouts as a share of the current price, has been steadily above the 10-year U.S. Treasury yield for most of 2016, after only occasionally doing so for decades.

The shift has forced many investors to conclude there is no alternative to investing in stocks, a mantra that has accompanied the rise this year of the Dow Jones industrial Average and S&P 500 to records.The increase also underscores the intense pressure on corporate earnings. Earnings at S&P 500 companies are set to decline from a year earlier in five straight quarters, a retreat not seen since in the financial crisis. Companies paying more than their income over the past 12 months included drug firm Pfizer Inc., aluminum smelter Alcoa Inc., toy maker Mattel Inc. and food companies Kellogg Co. and Kraft Heinz Co.


From the CFO Journal's Morning Ledger on August 19, 2016

Harley settles on emissions probe
Harley-Davidson Inc.
 reached a $15 million settlement to resolve U.S. claims that it violated air-pollution laws amid growing government scrutiny of vehicle emissions on the road. The company made or sold 340,000 “super tuner” devices that improved engine performance but increased engine exhaust to levels beyond the emissions levels the company had certified with regulators, according to a complaint and consent decree, both filed Thursday by the Justice Department on behalf of the Environmental Protection Agency.

 


From the CFO Journal's Morning Ledger on August 17, 2016

Hain’s problematic revenue accounting
Something could be rotten in Hain Celestial Group Inc.’s revenue, Miriam Gottfried writes for Heard on the Street. Hain, which specializes in natural and organic foods, said Monday it will delay its earnings report because of a potential problem with how it has accounted for revenue. Hain is evaluating whether revenue associated with concessions it granted certain U.S. distributors was recorded in the correct period. The company has historically recognized it at the time products are shipped to distributors, but is examining whether that revenue should have been recognized when products were sold through distributors to stores

Bob Jensen's threads on revenue accounting frauds and errors ---
http://faculty.trinity.edu/rjensen/ecommerce/eitf01.htm


From the CFO Journal's Morning Ledger on August 17, 2016

Health care a sticky wicket
Many companies are cutting jobs in response to rising health-care costs spurred by the Affordable Care Act, according to a new survey by the Federal Reserve Bank of New York. Roughly one-fifth of service sector and manufacturing company executives said they are reducing the number of workers in response to provisions in the health-care law, Vipal Monga reports. The results add to a bevy of bad news related to the Obama administration’s signature health-care law.

Bob Jensen's universal health care messaging --- http://faculty.trinity.edu/rjensen/Health.htm 


From the CFO Journal's Morning Ledger on August 16, 2016

Aetna bails on many Obamacare exchanges
Aetna Inc. will withdraw from 11 of the 15 states where it currently offers plans through the Affordable Care Act exchanges, becoming the latest of the major national health insurers to pull back sharply from the law’s signature marketplaces after steep financial losses. Aetna’s move will sharpen concerns about competitive options in the exchanges—and it puts at least one county at risk of having no insurers offering exchange plans in 2017.

Bob Jensen's universal health care messaging --- http://faculty.trinity.edu/rjensen/Health.htm 


Home Equity Loan --- https://en.wikipedia.org/wiki/Home_equity_loan

From the CFO Journal's Morning Ledger on August 12, 2016

Home equity loans come back to haunt borrowers, banks
The bill is coming due for many homeowners on a type of loan that was widely popular in the run-up to the housing bust, causing a rise in delinquencies at banks. More homeowners are missing payments on their home-equity lines of credit, or Helocs, a type of loan that allows borrowers to withdraw cash from their house to pay for renovations, college tuition or almost any other expense. These loans typically require interest-only payments for the first 10 years, but then principal payments kick in for the next 15 or 20 years. Borrowers who signed up for Helocs in early 2006 were at least 30 days late on $2.8 billion of balances four months after principal payments kicked in this year, according to Equifax  Roughly 840,000 Helocs taken out in 2006 are resetting this year, with principal payments on an additional nearly one million loans expected to hit in 2017.

Reverse Mortgage Calculator ---
http://reversemortgageguides.org/?leadint_source=BingPPC


From the CFO Journal's Morning Ledger on August 12, 2016

GM continues to seek shield from ignition-switch suits
General Motors Co. sought a rehearing of an appeals court ruling that exposes it to hundreds of potential lawsuits and some $10 billion in liabilities from faulty ignition switches. Lawyers for the nation’s largest auto maker said the court made two “fundamental errors” last month when it ruled against the company’s efforts to use its 2009 bankruptcy to shield itself from the litigation over the ignition switches. GM said the court’s decision, if not reversed, would permanently damage the bankruptcy process that saved it from collapse in 2009.


Reminds me of the 1990s when companies reported bartering of Website advertising as revenue

From the CFO Journal's Morning Ledger on August 11, 2016

Comscore delays quarterly report on accounting probe, names new leadership
ComScore Inc. on Wednesday said it needs more time to file its June quarterly report, as the media measurement and analytics company completes an internal investigation into its accounting. Separately, comScore named a new management team, including replacing its chief executive Serge Matta, who has been accused of benefiting from the company’s boosted results from the recording of “nonmonetary” revenue. This reflects revenue from barter agreements, where actual cash doesn’t change hands. As the WSJ’s Anne Steele writes, comScore replaced finance chief Melvin Wesley with chief revenue officer David Chemerow. Mr. Chemerow was CFO for Rentrak Corp., which ComScore bought in January.

Bob Jensen's threads on bartering and other creative accounting ploys to jack up revenues ---
http://faculty.trinity.edu/rjensen/ecommerce/eitf01.htm 


From the CFO Journal's Morning Ledger on August 10, 2016

Tipsters are poised for big payouts
U.S. government settlements with State Street Corp. and Bank of New York Mellon Corp. could produce a windfall for three former employees who blew the whistle on the banks’ alleged mistreatment of foreign-currency-trading clients. The awards could exceed a combined $100 million, the largest such awards on record, according to an analysis by The Wall Street Journal. Harry Markopolos, the forensic accountant who repeatedly blew the lid off Bernard Madoff’s Ponzi scheme, assembled the group and advised them.  He could reap a slice of any payouts awarded to the whistleblowers, according to people familiar with the matter.

Bob Jensen's threads on whistle blowing ---
http://faculty.trinity.edu/rjensen/FraudConclusion.htm#WhistleBlowing


From the CFO Journal's Morning Ledger on August 4, 2016

Age is more than just a number for the U.S. economy.

New research by Harvard economists shows that an aging population not only reduces the labor force, it also robs U.S. companies of critical knowledge and experience as skilled workers retire. And that, in turn, undermines productivity across the whole economy.

As the WSJ’s Greg Ip reports, demographics could be a crucial factor in why the current economic expansion is the weakest on record. The new paper by Nicole Maestas of Harvard University and Kathleen Mullen and David Powell of the Rand Corp. think tank, was able to analyze the impact of aging on economic growth, because the 50 states are aging at different rates.

On average, every 10% increase in the share of a state’s population over the age of 60 reduced per capita growth in gross domestic product by 5.5%, it found.

There were two reasons for this. First, as more workers retire, the labor force grows more slowly, accounting for one-third of the 5.5% hit to growth. The bigger effect, however, resulted from the lower productivity of the remaining workers. This couldn’t be explained by emigration, mortality or an influx of younger, inexperienced workers. Rather, the researchers found that everyone became less productive in an aging state. “An older worker’s experience increases not only his own productivity but also the productivity of those who work with him,” the authors noted. By applying their state-level findings to the whole country, the authors estimate that aging will reduce growth by 1.2 percentage points between 2010 and 2020, with two-thirds of the effect attributable to reduced productivity.

 


From the CFO Journal's Morning Ledger on August 3, 2016

IASB pressed to fix 'wishy-washy' accounting rules
The Australian Accounting Standards Board is urging the international accounting standards watchdog to tighten up the language used for global regulations, which the local body says is injecting ambiguity into the rules. Following research in conjunction with its South Korean counterpart, the AASB is urging the International Accounting Standards Board to fix indecisive language that leaves too much room for interpretation. According to AASB research director Angus Thomson, increasing use of terms like "probable", "likelihood" and "remote" creates confusion on when firms should recognize assets and liabilities. Researchers picked 13 out of about 30 different terms used in international accounting standards to infer the likelihood of an event occurring or not.

 


From the CFO Journal's Morning Ledger on August 3, 2016

Washington State files $100 million lawsuit against Comcast
Washington State Attorney General Bob Ferguson has filed a $100 million lawsuit against Comcast Corp. saying the cable giant deceived customers into paying tens of millions of dollars in fees for a “near-worthless” service protection plan. Mr. Ferguson also accused Philadelphia-based Comcast of committing more than 1.8 million violations of the state’s Consumer Protection Act, by charging improper service call fees and using improper credit screening practices. “This case is a classic example of a big corporation systematically deceiving Washington state consumers and putting profits above those consumers,” said Mr. Ferguson.

Bob Jensen's Fraud Updates ---
 http://faculty.trinity.edu/rjensen/FraudUpdates.htm


A Billion Here a Billion There:  Facebook May Owe an Additional $3-$5 Billion in Taxes

From the CFO Journal's Morning Ledger on July 29, 2016

Speaking of Facebook
Facebook Inc. said it could be on the hook for $3 billion to $5 billion in additional taxes as a result of an Internal Revenue Service investigation into how the social network transferred assets overseas. The company said in a quarterly filing that the IRS had issued a “statutory notice of deficiency” saying Facebook owes more taxes for 2010. The IRS earlier this month sued Facebook for documents related to the transfer, saying it suspected that Facebook’s accountants had undervalued some of those assets by “billions of dollars.”


A Billion Here a Billion There:  Amazon Doubles Profit

From the CFO Journal's Morning Ledger on July 29, 2016

Amazon doubles profit
Amazon.com Inc.
 on Thursday reported in its third consecutive record profit, nearly doubling its prior high-water mark, and its fifth straight quarter in the black. Amazon’s revenue jumped by almost a third, and it also more than doubled its operating margin, which historically has been razor thin, and issued a cheery outlook for the coming quarter. The results show Amazon moving toward investors’ long-held hope of consistent profitability after a lengthy period of heavy investments and quarterly losses. The Seattle company hasn’t had five consecutive profitable quarters since 2012.

 


From the CFO Journal's Morning Ledger on July 27, 2016

FASB proposes tax-reporting tweaks
The Financial Accounting Standards Board has proposed a new accounting standards update that would require companies to change the way they report income taxes, Accounting Today reports. Companies would have to disclose more about the differences between foreign and domestic taxes, plus more surrounding decisions about indefinitely reinvested foreign profits and the effects of new tax laws, plus a better breakdown of where cash is parked among foreign subsidiaries.


We can blame democracy for the high risk of public-sector pension plans.
The Economist Magazine
July 26, 2016
http://www.economist.com/news/business-and-finance/21702623-rules-encourage-public-sector-pension-plans-take-more-risk-putting-it-all

Jensen Comment
It turns out that pension investing risk relies heavily on investment and accounting rules where public-sector pension fund managers are allowed to get their funds into riskier investments, including junk bonds.

The enormous TIAA/CREF and some other pension funds give investors risk choices. TIAA bond funds are doing worse due to the Fed's low-interest policy such that teachers in TIAA/CREF are choosing more risky funds. Deals are no longer as good for fixed-annuity plans on the date of retirement relative to when I retired in 2006 (blind luck rather than brilliant strategy).

Sadly, riskier public-sector pension plans increase the expectation of future taxpayer bailouts. Public-sector pension plans would probably not be as risky if government declared there was zero chance of future bailouts. But then what legislators seeking office are going to promise zero chance of a public-sector pension bailout? Hence we can blame democracy for the high risk of public-sector pension plans.

One definition of democracy is gambling with taxpayer dollars.
Bankers as well as K-12 teachers helped to invent the taxpayer bailout idea along with municipal workers. Public-sector workers opposed to gambling probably don't even know they are gambling with taxpayer dollars.

 

 




"The New York Times uses the same accounting techniques the paper critiques,' by Francine McKenna, May 5, 2016 ---
http://www.marketwatch.com/story/the-new-york-times-uses-the-same-accounting-techniques-the-paper-critiques-2016-05-04

The New York Times has highlighted the use of made-up financial metrics that have resulted in “phony-baloney financial reports.” However, even the New York Times Company can’t resist using a few non-GAAP numbers each quarter to present its earnings in a flattering way.

In its press release accompanying first-quarter earnings The New York Times Company says that the measures “provide useful information to investors.”

Continued in article

Teaching Case
From The Wall Street Journal Weekly Accounting Review on July 29, 2016

Understanding Disclosure Controls over Non-GAAP Measures
by: Deloitte CFO Journal Editor
Jul 22, 2016
Click here to view the full article on WSJ.com

TOPICS: Financial Reporting, Financial Accounting, GAAP, Internal Controls, Non-GAAP

SUMMARY: As part of its current focus on non-GAAP measures, the SEC has questioned whether companies and audit committees have implemented appropriate controls regarding the disclosure of such measures. The article discusses the types of controls that could be established and provides high-level examples of control issues and related responses for consideration in connection with non-GAAP measures.

CLASSROOM APPLICATION: This article addresses the increased concerns regarding popular non-GAAP/pro forma financial reporting articles by discussing the use of internal controls.

QUESTIONS: 
1. (Introductory) What is GAAP? How is it determined? What entities use GAAP?

2. (Advanced) What is non-GAAP reporting? Why do companies engage in non-GAAP reporting? What are the benefits of this type of reporting?

3. (Advanced) What are internal controls? What are the benefits of establishing and enforcing good internal controls?

4. (Advanced) How can internal controls be used for non-GAAP reporting? What benefits does it offer?

5. (Advanced) What is ICFR? What are DCPs? How do they differ? How do they relate to controls over non-GAAP measures?

6. (Advanced) What does the SEC say about Section 302 of the Sarbanes-Oxley Act? How does this affect companies that use non-GAAP measures? What procedures should companies consider?

Reviewed By: Linda Christiansen, Indiana University Southeast

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Online Exclusive

 

"Understanding Disclosure Controls over Non-GAAP Measures," by Deloitte CFO Journal Editor, The Wall Street Journal, July 22, 2016  ---
http://deloitte.wsj.com/cfo/2016/07/22/understanding-disclosure-controls-over-non-gaap-measures/?mod=djem_jiewr_AC_domainid

As part of its current focus on non-GAAP measures, the SEC has questioned whether companies and audit committees have implemented appropriate controls regarding the disclosure of such measures.* Deloitte’s Heads Up newsletter discusses the types of controls that could be established and provides high-level examples of control issues and related responses for consideration in connection with non-GAAP measures. In addition, the Heads Up outlines a sample approach for consideration. Following is an excerpt from the full newsletter.

Disclosure Controls and Procedures versus Internal Control over Financial Reporting

Before diving into a detailed discussion about types and examples of controls, the stage should be set by clarifying whether controls over non-GAAP measures are related to disclosure controls and procedures (DCPs), to internal control over financial reporting (ICFR) or to both.

ICFR, which is defined in both SEC and PCAOB rules (see Appendix B in the full Heads Up newsletter), focuses on controls related to the “reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.” DCPs, on the other hand, are more broadly defined and pertain to all information required to be disclosed by the company (see Appendix B).

Because the starting point for a non-GAAP measure is a GAAP measure, ICFR would be relevant to consider up to the point at which the GAAP measure that forms the basis of the non-GAAP measure has been determined. However, regarding controls over the adjustments to the GAAP measure and the related calculation of the non-GAAP measure—including the oversight and monitoring of the non-GAAP measure—it is appropriate to consider such controls within the realm of DCPs.

For a discussion of controls over non-GAAP measures in which the Committee of Sponsoring Organizations (COSO) Internal Control—Integrated Framework is considered, see Appendix A.

Non-GAAP Measures, Earnings Releases and DCPs

The SEC’s final rule on certifications states that Section 302 of the Sarbanes-Oxley Act of 2002 requires management to certify on a quarterly basis that DCPs are effective “to ensure that information required to be disclosed by the issuer in the reports filed or submitted by it under the Exchange Act [footnote omitted] is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.” Earnings releases containing non-GAAP measures are often furnished on Form 8-K, which does not require certifications of the effectiveness of DCPs. However, the final rule also indicates that “[d]isclosure controls and procedures . . . are required to be designed, maintained and evaluated to ensure full and timely disclosure in current reports.”

Therefore, registrants that use non-GAAP measures in earnings releases furnished on Form 8-K—or those that use them in Forms 10-Q and 10-K (outside the financial statements), which would be explicitly covered by Section 302 certifications—should consider the appropriateness of their DCPs in the context of their non-GAAP information. Registrants should, at a minimum, consider designing DCPs to ensure that procedures are in place regarding:

1. Compliance—Non-GAAP measures are presented in compliance with SEC rules, regulations and guidance.

2. Consistency of preparation—Non-GAAP measures are presented consistently each period, and potential non-GAAP adjustments are evaluated on an appropriate, consistent basis each period.

3. Data quality—Non-GAAP measures are calculated on the basis of reliable inputs that are subject to appropriate controls.

4. Accuracy of calculation—Non-GAAP measures are calculated with arithmetic accuracy, and the non-GAAP measures in the disclosure agree with the measures calculated.

5. Transparency of disclosure—Descriptions of the non-GAAP measures, adjustments and any other required disclosures are clear and not confusing.

6. Review—Non-GAAP disclosures are reviewed by appropriate levels of management to confirm the appropriateness and completeness of the non-GAAP measures and related disclosures.

7. Monitoring—The registrant’s monitoring function (e.g., internal audit, disclosure committee or audit committee) appropriately reviews the DCPs related to non-GAAP disclosures. The audit committee is involved in the oversight of the preparation and use of non-GAAP measures.

A critical aspect of such DCPs is the involvement of the appropriate levels of management and those charged with governance. Depending on the registrant, this may include reviewing the selection and determination of non-GAAP measures with a disclosure committee, the audit committee or both.

Establishing a written policy that clearly describes the nature of allowable adjustments to GAAP measures, defines the non-GAAP measure(s) to be used under the policy, and explains how potential changes in the inputs, calculation or adjustments will be evaluated and approved may help management identify its DCPs.

For example, a policy might describe qualitatively the types of adjustments that are nonrecurring and abnormal and thus within the defined policy. It may also outline specific quantitative thresholds for which income or expense items might be evaluated in the determination of whether they should be included in non-GAAP adjustments. This could help ensure that appropriate non-GAAP measures are used as well as eliminate the need for numerous immaterial adjustments in the reconciliation that may confuse investors.

Disclosure Committee Considerations

Some companies may find it helpful to use a disclosure committee to assist the CEO, CFO and audit committee in preparing and overseeing disclosures, including those related to non-GAAP measures. Disclosure committees are typically management committees, although some companies prefer that the disclosure committee function as a subcommittee of the board and audit committee.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on July 29, 2016

Congratulations on the Summer Job! Here's What You Owe the Government
by: Laura Saunders
Jul 23, 2016
Click here to view the full article on WSJ.com

TOPICS: Individual Taxation

SUMMARY: This article offers information regarding the tax issues students should know about their summer jobs. Beyond the basics, the article includes: being employed by a parent, employment status, taking care of the W-4, shifting an education tax break, and funding an IRA.

CLASSROOM APPLICATION: This article is a nice addition to an individual tax class for its content, but also because it is full of helpful information for all of our students, regardless of class or major.

QUESTIONS: 
1. (Introductory) What are the basic requirements for filing a tax return? What is the threshold of earned income required to file? Who must pay Social Security and Medicare taxes?

2. (Advanced) What are the rules regarding parents employing their children? Do the tax rules offer advantages or cause disadvantages for this situation? Is this something parents should consider doing?

3. (Advanced) What is an employee? What is an independent contractor? How do they differ for tax purposes?

4. (Advanced) What is a W-4? What should a student choose on a the W-4?

5. (Advanced) What are education tax breaks are available? What options should parents and students consider to maximize tax benefits?

6. (Advanced) What is an IRA? What are the types of IRAs? How can students fund an IRA to maximize the tax benefits?

Reviewed By: Linda Christiansen, Indiana University Southeast

 

"Congratulations on the Summer Job! Here's What You Owe the Government," byLaura Saunders, The Wall Street Journal, July 23, 2016 --- 
http://www.wsj.com/articles/congratulations-on-the-summer-job-heres-what-you-owe-the-government-1469179802?mod=djem_jiewr_AC_domainid

Some children’s returns are as complicated as their parents’

Summertime living is supposed to be easy, but for those who take seasonal jobs the taxes can be tricky.

Now is a good time for a checkup if you are a student with a summer job or have a young worker in the family.

“Some children’s returns are almost as complex as their parents’, even though they don’t have much income,” says Ken Rubin, a certified public accountant with RubinBrown in St. Louis.

One common complication is the need for multiple state returns if a child’s home is in one state, a college or on-campus job is in another and a summer job is in a third.

Slip-ups can mean aggravation later or lost opportunities, so here are tax tips for summer earners.

Know the basics. For many young workers who are dependents—meaning that someone else provides more than half their support—the threshold for federal income tax in 2016 will be $6,300 of earned income. That’s the amount of the standard deduction.

Employees typically owe 7.65% in Social Security and Medicare tax on all earned income, while self-employed workers generally owe 15.3% for these levies on earned income above about $430, according to Troy Lewis, a CPA who practices in Draper, Utah.

If the employee is your child. Parents who hire children under 18 to work in a sole proprietorship, a spousal partnership or a single-member limited-liability company can deduct the child’s pay, and no payroll taxes are due.

Payroll taxes are due if the child is 18 or older, but children under 21 who are employed by a parent are exempt from federal unemployment taxes and possibly state unemployment taxes as well.

Parents who plan to deduct a child’s pay should pay fair wages for real work, says Mr. Lewis, and be sure to keep careful records. Many tech-savvy teens have expertise in building or maintaining business websites or marketing via social media.

Check employment status. Young workers may not know whether they are employees or independent contractors, but there’s a big difference. Contractors don’t have income or payroll taxes withheld, so these workers could have a surprise tax bill if a 1099 form arrives next spring.

Independent contractors should also track deductible expenses for mileage, special uniforms or equipment used in their work, says Mr. Lewis, because such expenses can be hard to reconstruct.

Take care with the W-4. If an employee won’t have taxable income for 2016, the W-4 form should say “exempt” on line 7, to avoid having to file a return next spring. Payroll taxes due will still be withheld.

Consider shifting an education tax break. Last year, Congress made permanent the American Opportunity Tax Credit, which is often the best college tax break. Those claiming it can use up to $4,000 of college expenses for tuition, books and equipment to reduce their income taxes by as much as $2,500.

The catch: This benefit isn’t available to most couples who have more than $160,000 of adjusted gross income or singles with more than $80,000.

If the parents have too much income to claim the American Opportunity Credit for college costs, the young worker may be able claim it instead, says Mr. Rubin, even if the employee is still a dependent of his or her parents. Often families are unaware of this option, according to Mr. Rubin.

In this case, neither the parents nor the child claim the personal exemption for the child. This benefit may be of little value to the parents because of a phaseout for affluent taxpayers.

The student then claims the American Opportunity Credit on his or her own return, which offsets up to $2,500 of taxes. The student doesn’t have to pay the college costs to use this benefit.

Mr. Rubin adds that the credit can apply to the student’s “unearned” income (as from investments or a trust) as well as his or her earned income, even if the unearned income is taxed at the parents’ rate due to a provision known as the “kiddie tax.”

Fund an IRA. Summer workers can contribute their earned income up to $5,500 this year to either a traditional or a Roth individual retirement account. Assets in either account compound tax free.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on July 29, 2016

SEC Proposes to Eliminate Outdated and Duplicative Disclosure Requirements
by: Deloitte Risk Journal Editor
Jul 22, 2016
Click here to view the full article on WSJ.com

TOPICS: Disclosures, Financial Accounting, GAAP, IFRS, SEC

SUMMARY: The SEC issued a proposed rule that would amend some of its disclosure requirements that may be redundant, duplicative or outdated, or may overlap with other SEC, U.S. GAAP or IFRS disclosure requirements. The proposal also seeks comment on whether certain SEC disclosure requirements that overlap with U.S. GAAP requirements should be retained, modified, eliminated or referred to the FASB for potential incorporation into U.S. GAAP. The proposed amendments are the next step in the SEC's ongoing disclosure effectiveness initiative, which is a broad-based review of the commission's disclosure, presentation and delivery requirements for public companies.

CLASSROOM APPLICATION: This summary of the SEC's proposal is appropriate for use in a financial accounting class when covering disclosure requirements.

QUESTIONS: 
1. (Advanced) What is the SEC? What are it areas of authority? What types of disclosures does it require?

2. (Introductory) What is GAAP? What is its purpose? What body determines GAAP? To what companies does it apply?

3. (Introductory) What is IFRS? What is its purpose? To what companies does it apply?

4. (Advanced) What new rule is the SEC proposing? What is the reason for this new rule? What issues is the SEC attempting to address?

5. (Advanced) What are the details of the new proposal? What companies would be affect by these changes?

6. (Advanced) Why do some reporting requirements overlap? Is this overlap beneficial for users of this information or is the overlap burdensome for companies?

Reviewed By: Linda Christiansen, Indiana University Southeas

 

"SEC Proposes to Eliminate Outdated and Duplicative Disclosure Requirements," by Deloitte Risk Journal Editor, The Wall Street Journal, July 22, 2016 --- 
http://deloitte.wsj.com/riskandcompliance/2016/07/22/sec-proposes-to-eliminate-outdated-and-duplicative-disclosure-requirements/?mod=djem_jiewr_AC_domainid

The SEC issued a proposed ruleą that would amend some of its disclosure requirements that may be redundant, duplicative or outdated, or may overlap with other SEC, U.S. GAAP or IFRS disclosure requirements. The proposal, issued on July 13, also seeks comment on whether certain SEC disclosure requirements that overlap with U.S. GAAP requirements should be retained, modified, eliminated or referred to the FASB for potential incorporation into U.S. GAAP.

Following is an excerpt from the latest Deloitte Heads Up newsletter covering the SEC proposal, which includes a table summarizing some of the proposed changes.

The proposed amendments are the next step in the SEC’s ongoing disclosure effectiveness initiative, which is a broad-based review of the commission’s disclosure, presentation and delivery requirements for public companies. As part of the initiative, the SEC also issued a concept release˛ in April of this year that sought feedback on modernizing certain business and financial disclosure requirements of Regulation S-K as well as a request for commentł last September on the effectiveness of certain financial disclosure requirements in Regulation S-X.⁴

The proposed amendments to the disclosure requirements would affect U.S. issuers, foreign private issuers (FPIs), investment advisers, investment companies, broker-dealers and nationally recognized statistical rating organizations. The effect on each type of issuer varies depending on the amendment proposed. The SEC intends to improve the disclosure requirements and simplify registrants’ compliance efforts without significantly altering the total mix of information that is ultimately provided to investors.

The proposal’s request for comment on overlapping requirements notes that “proposals related to some topics would result in the relocation of disclosures from outside to inside the financial statements, subjecting this information to annual audit and/or interim review, internal control over financial reporting, and XBRL tagging requirements.”

For example, the requirements in Regulation S-K, Item 103,⁵ to disclose certain legal proceedings can in certain cases be more expansive than those in U.S. GAAP, under which loss contingencies must be disclosed. The commission is seeking input on whether incorporation of Item 103, among other requirements, into U.S. GAAP may impose greater burdens on issuers and auditors related to the development and auditing of additional estimates and disclosures. The SEC also notes that the location of some disclosures in a filing could change as a result of the proposal to address overlapping requirements, which might affect users by changing the prominence of the disclosures.

The proposal may result in the removal or addition of a bright-line disclosure threshold (i.e., a threshold below which no disclosure is required), which may change the disclosure burden on issuers and the amount of information disclosed to investors. For example, unlike U.S. GAAP, Regulation S-K&⁶ requires disclosure of the amount of revenue from any class of similar products and services that account for 10% or more of revenue.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on July 29, 2016

tDeloitte Resigns as 1MDB Auditor
by: Michael Rapoport
Jul 27, 2016
Click here to view the full article on WSJ.com

TOPICS: Accounting, Auditing, Big Four, Fraud

SUMMARY: The departure of a third auditor for a Malaysian government investment fund is putting focus on another global company that apparently failed to raise questions about what investigators are calling a large-scale fraud. The fund, 1Malaysia Development Bhd. or 1MDB, said that its auditor, Deloitte Touche Tohmatsu Ltd., resigned in February. Earlier disputes over the fund's accounts led to the firing of 1MDB's previous auditors, KPMG and Ernst & Young. The fund also said its 2013 and 2014 financial statements, which were audited by Deloitte, should no longer be relied on. Deloitte joins a long list of financial firms that have worked with 1MDB without identifying the alleged fraud there.

CLASSROOM APPLICATION: This article is appropriate for an auditing class or as part of a discussion on these topics in a financial accounting class.

QUESTIONS: 
1. (Introductory) What is auditing? What is it purpose? What companies are audited?

2. (Introductory) What are the Big Four firms? What services do they offer? Geographically, where do they offer these services?

3. (Introductory) What is 1MDB? What are the facts of the legal issues facing 1MDB?

4. (Advanced) What Big Four firms have worked with 1MDB? What services did they provide? Why did they fail to detect the fraud? Should they have done additional work to detect it? Should they have reported the issues they found?

5. (Advanced) What are auditor responsibilities for fraud detection? Should the auditors in this case have detected the fraud? Could they be found liable for not finding it? Why or why not?

6. (Advanced) Why were these U.S. firms auditing a Malaysian government investment firm? If they had not taken on the audit engagement, who would have done the auditing? Should U.S. firms do this kind of work?

Reviewed By: Linda Christiansen, Indiana University Southeast

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"Deloitte Resigns as 1MDB Auditor," by Michael Rapoport, The Wall Street Journal, July 27, 2016 --- 
http://www.wsj.com/articles/deloitte-resigns-as-1mdb-auditor-1469579900?mod=djem_jiewr_AC_domainid

Malaysian government investment fund says Deloitte Touche Tohmatsu resigned in February

The departure of a third auditor for a Malaysian government investment fund is putting focus on another global company that apparently failed to raise questions about what investigators are calling a large-scale fraud.

The fund, 1Malaysia Development Bhd. or 1MDB, said Tuesday that its auditor, Deloitte Touche Tohmatsu Ltd., resigned in February. Earlier disputes over the fund’s accounts led to the firing of 1MDB’s previous auditors, KPMG and Ernst & Young, according to a Malaysian auditor general’s report last year.

The fund also said its 2013 and 2014 financial statements, which were audited by Deloitte, should no longer be relied on.

Deloitte joins a long list of financial firms that have worked with 1MDB without identifying the alleged fraud there. These include Goldman Sachs Group, Swiss private banks Falcon Private Bank Ltd. and BSI SA, and other banks such as DBS Bank Ltd, Standard Chartered PLC and UBS Group AG. All have said they were unaware of the alleged fraud at 1MDB, though investigators have said they could have done more to spot it.

The Swiss attorney general’s office said earlier this year it suspected $4 billion had been misappropriated from 1MDB. Last week, the U.S. Justice Department filed a civil lawsuit aiming to seize assets that it said were bought with $3.5 billion misappropriated from the fund. The Wall Street Journal has reported that hundreds of millions of dollars originating with 1MDB flowed into the personal bank account of Malaysian Prime Minister Najib Razak .

Deloitte said in a statement Tuesday that the information in the Justice Department lawsuit against 1MDB “would have impacted the financial statements and affected the audit reports” if it had been known at the time, and so its audit reports for 2013 and 2014 should no longer be relied upon.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on July 29, 2016

Videogames: Knowing What Really Sells
by: Dan Gallagher
Jul 26, 2016
Click here to view the full article on WSJ.com

TOPICS: Deferred Revenues, Financial Accounting, GAAP, Non-GAAP, Revenue Recognition

SUMMARY: Most videogames these days have online functions that demand continual upgrades and, hence, bear costs for publishers. So accounting rules require some of the revenue generated from the sale of such games to be deferred over several months, and even more than a year in some cases. Videogame publishers have gotten around this by reporting a form of adjusted revenue every quarter that includes the effect of deferrals. The practice doesn't alter reported cash flows of the businesses. But those days are ending as regulators cast a more critical eye on metrics that don't conform to generally accepted accounting principles, or GAAP.

CLASSROOM APPLICATION: This fact situation is a good example to use when covering deferred revenues and non-GAAP reporting.

QUESTIONS: 
1. (Introductory) What revenue recognition issues do videogame companies face? How do these differ from revenue recognition of most products and services?

2. (Introductory) What is GAAP? How is it determined? What entities use GAAP?

3. (Advanced) What is non-GAAP reporting? Why do companies engage in non-GAAP reporting? What are the benefits of this type of reporting?

4. (Advanced) What has Electronic Arts announced it will do regarding its financial reporting? Why did the company make this decision? What impact will this decision have on the company's financial reporting?

5. (Advanced) The article says that the differences tend to smooth over time. What does that mean? What differences? What was does the smoothing do for financial reporting purposes? How are users of the financial statements affected?

Reviewed By: Linda Christiansen, Indiana University Southeast

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"Videogames: Knowing What Really Sells," by Dan Gallagher, The Wall Street Journal, July 26, 2016 ---
http://www.wsj.com/articles/videogames-knowing-what-really-sells-1469460997?mod=djem_jiewr_AC_domainid

Revenue recognition rules make tracking videogame sales activity a challenge

Many things about the videogame business have changed in the past decade. One very important thing hasn’t: Gamers still need to actually buy the games.

But tracking this important activity has become rather difficult, and not just because fewer games are being sold at retail stores. Most games these days have online functions that demand continual upgrades and, hence, bear costs for publishers. So accounting rules require some of the revenue generated from the sale of such games to be deferred over several months, and even more than a year in some cases.

Videogame publishers have gotten around this by reporting a form of adjusted revenue every quarter that includes the effect of deferrals. The practice doesn’t alter reported cash flows of the businesses. But those days are ending as regulators cast a more critical eye on metrics that don’t conform to generally accepted accounting principles, or GAAP.

Electronic Arts said last week that it will stop including such non-GAAP figures in its quarterly reports. Other videogame publishers are likely to follow suit. EA, Activision Blizzard and Take-Two Interactive will all report quarterly results next week.

To be sure, there are plenty of good reasons to be suspicious of non-GAAP numbers. But one problem in the videogame business is that revenue recognition rules tend to obfuscate how much game content is actually sold in a given period. This is an important metric, given that it is the economic activity on which the entire industry is based.

Take the case of EA, which has been reporting adjusted revenue in the same way for the past nine years. Online-enabled games have grown to account for the majority of its business, which still follows the seasonal fluctuations common in the industry. So the spread between GAAP and non-GAAP revenue can be wide in quarters when the release of a big game like “Madden NFL” causes more revenue to be deferred.

But these differences tend to smooth out over time. For EA, the difference between annual GAAP and non-GAAP revenues has averaged only 4% over the last nine years.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016

Crisis-Era Lawsuits Winding Down? Not for PricewaterhouseCoopers
by: Michael Rapoport
Aug 01, 2016
Click here to view the full article on WSJ.com

TOPICS: Auditing, Bankruptcy, Forensic Accounting, Fraud, Liability

SUMMARY: PricewaterhouseCoopers LLP faces a lawsuit over civil claims that it failed to catch signs of fraud that helped lead to one of the biggest U.S. bank collapses during the Great Recession. The closely watched case could lead to billions of dollars in damages depending on how a jury answers a fundamental question in accounting: How much responsibility do auditors have for catching fraud? A bankruptcy trustee for Taylor Bean & Whitaker Mortgage Corp., once one of the nation's biggest privately held mortgage companies, is suing PwC, seeking $5.5 billion in damages. The trustee alleged in the 2013 suit that PwC was negligent in not detecting a massive fraud scheme that brought down Taylor Bean and helped trigger the 2009 collapse of a Montgomery, Ala. bank with $25 billion in assets. The Taylor Bean trustee contends that PwC should have found the fraud even though it wasn't Taylor Bean's auditor. PwC was the outside auditor for Colonial's holding company. Taylor Bean's auditor, Deloitte & Touche LLP, reached a confidential settlement with the trustee in 2013 over related allegations. PwC argues that it was deceived, and shouldn't have been expected to catch the Taylor Bean fraud when neither bank regulators nor Colonial or Taylor Bean did.

CLASSROOM APPLICATION: This is an excellent article to use when discussing whether auditors have a responsibility to detect fraud. It would also be good for coverage of fraud or in a forensic accounting class.

QUESTIONS: 
1. (Introductory) What are the facts of this lawsuit? Who is the plaintiff and who is the defendant?

2. (Advanced) What is PricewaterhouseCoopers? Who was its client? What work was it doing for the client in this case? What is the firm's response to being sued?

3. (Advanced) What are the rules regarding an auditor's responsibility to detect fraud? In what situations could the auditor be liable?

4. (Advanced) Why aren't auditors responsible to detect fraud in many cases? Should they be? Why or why not?

5. (Advanced) Why did the plaintiff choose to sue PwC in this case? Should this be one of those situations in which auditors are responsible to detect fraud?

6. (Advanced) Why isn't the plaintiff recovering all of the damages from the parties who perpetrated the frauds? Was PwC one of the perpetrators?

Reviewed By: Linda Christiansen, Indiana University Southeast

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"Crisis-Era Lawsuits Winding Down? Not for PricewaterhouseCoopers," by Michael Rapoport The Wall Street Journal, August 1, 2016 ---
http://www.wsj.com/articles/crisis-era-lawsuits-winding-down-not-for-pricewaterhousecoopers-1469817636?mod=djem_jiewr_AC_domainid

Banks, housing agencies, bond raters and many others have faced legal action over the 2008 financial crisis. Now, an accounting giant is taking its turn.

PricewaterhouseCoopers LLP faces a trial starting Monday over civil claims that it failed to catch signs of fraud that helped lead to one of the biggest U.S. bank collapses during the Great Recession. The trial in Florida state court in Miami is one of the few allegations of wrongdoing during the financial crisis that has reached a courtroom.

The closely watched case could lead to billions of dollars in damages depending on how a jury answers a fundamental question in accounting: How much responsibility do auditors have for catching fraud?

The bankruptcy trustee for Taylor Bean & Whitaker Mortgage Corp., once one of the nation’s biggest privately held mortgage companies, is suing PwC, seeking $5.5 billion in damages. The trustee alleged in the 2013 suit that PwC was negligent in not detecting a massive fraud scheme that brought down Taylor Bean and helped trigger the 2009 collapse of Colonial Bank, a Montgomery, Ala., bank with $25 billion in assets.

The trial is expected to last about six weeks. Such a trial isn't only rare—most crisis-related legal probes have ended in settlements at most—but it is also one of the few attempts to hold auditors liable for events stemming from the meltdown.

“This is basically holding an auditor responsible for its failure to do its job,” said Steven W. Thomas, an attorney representing Neil Luria, the Taylor Bean trustee.

But Elizabeth Tanis, an attorney for PwC, said the accounting firm did its job properly, and is “confident that a jury will understand the applicable rules and standards in this case and decide accordingly.”

The Taylor Bean trustee contends that PwC should have found the fraud even though it wasn’t Taylor Bean’s auditor. PwC was the outside auditor for Colonial’s holding company, Colonial BancGroup Inc. Taylor Bean’s auditor, Deloitte & Touche LLP, reached a confidential settlement with the trustee in 2013 over related allegations. Deloitte declined to comment.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016

Facebook May Owe Billions More in Taxes
by: Deepa Seetharaman
Jul 29, 2016
Click here to view the full article on WSJ.com

TOPICS: Asset Transfer, Asset Valuation, Corporate Taxation, IRS

SUMMARY: Facebook Inc. said it could be on the hook for $3 billion to $5 billion in additional taxes as a result of an Internal Revenue Service investigation into how the social network transferred assets overseas. The company said in a quarterly filing that the IRS had issued a "statutory notice of deficiency" a day earlier saying Facebook owes more taxes for 2010. The July 27 notice came the same day that Facebook said second-quarter profit nearly tripled to $2.06 billion.

CLASSROOM APPLICATION: This article would be a good example to use in a corporate tax class or when covering the topic of asset valuation.

QUESTIONS: 
1. (Introductory) What did Facebook announce regarding the IRS allegations? What is Facebook's possible tax liability?

2. (Advanced) Why is the IRS suing Facebook? What is the timeline of actions and events related to the lawsuit?

3. (Advanced) What is Facebook's relationship with Ireland? Why did it transfer assets? What is the company hoping to do?

4. (Advanced) What is the IRS alleging in this case? What is Facebook's response to the allegations?

5. (Advanced) How does the tax assessment amount compare to the company's revenues? If the company had to pay the taxes, what would be the impact on its financial statements?

Reviewed By: Linda Christiansen, Indiana University Southeast

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"Facebook May Owe Billions More in Taxes," by Deepa Seetharaman, The Wall Street Journal, July 29 , 2016 ---
http://www.wsj.com/articles/facebook-gets-tax-notice-over-transfer-of-assets-overseas-1469750400?mod=djem_jiewr_AC_domainid

Facebook Inc. said it could be on the hook for $3 billion to $5 billion in additional taxes as a result of an Internal Revenue Service investigation into how the social network transferred assets overseas.

The company said in a quarterly filing Thursday that the IRS had issued a “statutory notice of deficiency” a day earlier saying Facebook owes more taxes for 2010. The July 27 notice came the same day that Facebook said second-quarter profit nearly tripled to $2.06 billion.

The notice flows from an investigation that started in 2013 into the company’s treatment of assets it transferred to Ireland in 2010.

The IRS earlier this month sued Facebook for documents related to the transfer, saying it suspected that Facebook’s accountants had undervalued some of those assets by “billions of dollars.” But neither the agency nor Facebook had said before Thursday what the company’s potential tax liability could be.

The IRS notice applies only to the 2010 tax year, but if the IRS takes a similar position for other years it is investigating and wins in court, it could result in an additional federal tax liability of between $3 billion and $5 billion, plus any interest or penalties.

Facebook said it disagrees with the IRS’s position and plans to file a petition in U.S. Tax Court challenging the notice. If the IRS prevails, it would have a “material adverse impact to Facebook’s finances,” the company said in the filing. Tax Court cases can take years to conclude and can be appealed into other federal courts.

If Facebook were required to pay an additional $5 billion in taxes, that amount would exceed its entire tax cost for 2014 and 2015 combined.

Other major companies like Microsoft Corp. , Amazon.com Inc. and Coca-Cola Co. have tangled with the IRS over the issue of attributing profits to foreign subsidiaries. Last year, Coke received notice of a potential $3.3 billion federal income-tax liability and is challenging that in tax court. Amazon, like Coke, is also challenging the IRS in tax court. Microsoft said in a securities filing Thursday that its audit is continuing and could have a “significant” impact on the company’s finances.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016

Some Healthcare Companies Adjust Earnings Too Much, Mizuho Says
by: Tatyana Shumsky
Jul 29, 2016
Click here to view the full article on WSJ.com

TOPICS: Financial Reporting, GAAP, Non-GAAP

SUMMARY: There's too much adjusting going on when it comes to healthcare earnings, according to analysts at Mizuho Securities USA Inc. Several companies in the sector report adjusted earnings that are too far afield from the results they report based on U.S. Generally Accepted Accounting Principles, analysts Ann Hynes and Sheryl Skolnick wrote in a report. The companies then go on to provide investors guidance using those adjusted figures alone. The Securities and Exchange Commission requires U.S. listed companies to compile their financial reports using GAAP figures. While companies may supplement their reports with non-GAAP metrics, the SEC clarified that GAAP figures should be given prominence and that any adjustments should be kept to a minimum.

CLASSROOM APPLICATION: This article is appropriate for use in financial accounting classes.

QUESTIONS: 
1. (Introductory) What is GAAP? How is it determined? What entities use GAAP?

2. (Advanced) What is non-GAAP reporting? Why do companies engage in this type of reporting? What are the benefits of non-GAAP reporting?

3. (Advanced) Why do some companies adjust their financial statements? What are the main areas of adjustments? Which of these adjustments are most common? Why?

4. (Introductory) What is Mizuho Securities? What did its analysts announce?

5. (Advanced) According to this article, what companies are adjusting their financial reporting? What adjustments are they making? Why?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
Accounting Choices Blur Profit Picture
by Tatyana Shumsky and Theo Francis
Jun 28, 2016
Online Exclusive

U.S. Corporations Increasingly Adjust to Mind the GAAP
by Theo Francis and Kate Linebaugh
Dec 14, 2015
Online Exclusive

What Exactly are Non-GAAP Numbers? Well, That Depends
by Tatyana Shumsky
Jul 05, 2016
Online Exclusive

"Some Healthcare Companies Adjust Earnings Too Much, Mizuho Says," by Tatyana Shumsky,  The Wall Street Journal, July 29, 2016 ---
http://blogs.wsj.com/cfo/2016/07/28/some-healthcare-companies-adjust-earnings-too-much-mizuho-says/?mod=djem_jiewr_AC_domainid

There’s too much adjusting going on when it comes to healthcare earnings, according to analysts at Mizuho Securities USA Inc.

Several companies in the sector report adjusted earnings that are too far afield from the results they report based on U.S. Generally Accepted Accounting Principles, analysts Ann Hynes and Sheryl Skolnick wrote in a report. The companies then go on to provide investors guidance using those adjusted figures alone, the report said.

The Securities and Exchange Commission requires U.S. listed companies to compile their financial reports using GAAP figures. While companies may supplement their reports with non-GAAP metrics, the SEC in May clarified that GAAP figures should be given prominence and that any adjustments should be kept to a minimum.

In light of renewed scrutiny of these practices, the Mizuho analysts said they expect companies in the healthcare sector to make changes in their financial reporting.

“It’s probably taking them a little longer to prepare their earnings releases and their commentary around earnings,” said Ms. Skolnick, director of research at Mizuho. “We do anticipate that there are several companies…that will need to change their guidance basis,” she added.

Several companies have already changed tack. Pharmacy chain Walgreens Boots Alliance Inc. furnished investors with a revamped earnings release on July 6, placing GAAP results up front and reducing the use of non-GAAP figures. By contrast, the company’s April 5 earnings release focused on adjusted earnings.

The changes were made in response to the SEC guidance and to further enhance disclosure to investors, a company spokesman said in an email. However, Walgreens Boots has not made any changes to how it adjusts its earnings, he said.

Similarly, Quest Diagnostics Inc. said it moved its GAAP earnings per share higher in the layout of its second quarter earnings release on July 21 compared with April’s release in response to the SEC guidelines.

“We carefully considered the latest [SEC] guidance as part of our normal process of developing our quarterly earnings release,” a Quest Diagnostics spokesman said in an email.

However, Mizuho analysts outlined other issues with the non-GAAP reporting practices of several healthcare companies, including Kindred Healthcare Inc., Amedisys Inc., and Quest Diagnostics.

Amedisys, which the report describes as undergoing a turnaround, adjusts its earnings per share from GAAP by adding back legal fees, which appear to be an ongoing expense due to a regulatory investigation. Amedisys also adds back restructuring charges, “without which the turnaround wouldn’t be possible,” the bank said.

Amedisys finance chief Ronald LaBorde said the company aspires to ensure its adjusted and GAAP results are as close together as possible.

Adjusted results are “not meant to substitute, in any way, for GAAP results,” Mr. LaBorde said. Rather, the adjusted numbers should give investors a deeper understanding of Amedisys’ business, he added. Amedisys is scheduled to report its second quarter earnings on August 2.

Meanwhile, Quest Diagnostics’ adjusted earnings exclude restructuring and integration charges which relate to “integration and restructuring efforts of acquisitions that closed years ago,” Mizuho says.

Quest Diagnostics hasn’t changed the way it adjusts its earnings for the company’s most recent earnings report, a spokesman said in an email.

“Since 2013 our cumulative reported (GAAP) earnings per share are essentially the same as our cumulative adjusted earnings per share,” he added.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016

Data Helps Government Target Fraud, Abuse
by: Deloitte CIO Journal Editor
Jul 28, 2016
Click here to view the full article on WSJ.com

TOPICS: data analytics, Fraud, Governmental Accounting, Internal Controls

SUMMARY: Awareness of fraud, waste, and abuse in government benefits programs has risen markedly during the past decade. The U.S. Government Accountability Office found $137 billion in improper payments in 2015. That's up from $38 billion in 2005, or 197 percent in inflation-adjusted dollars - and those figures do not even account for waste. Demand for government benefits such as Medicaid, Medicare, and disability compensation is increasing, as are health care costs, which comprise 17 percent of U.S. GDP and continue to grow. Advanced analytics techniques give the government greater opportunity to dig into the data and understand where fraud, waste, and abuse problems lie and what processes can help address those issues. A broad array of analytics techniques can be used in tandem to detect improper and wasteful activity, establish effective compliance programs, and recover funds as appropriate. The article discusses some of these techniques.

CLASSROOM APPLICATION: This article discusses controls and data analytic techniques government and businesses can use to reduce fraud waste, while increasing compliance and recovery of funds. It could be used in governmental or financial accounting classes, and when covering fraud prevention and detection.

QUESTIONS: 
1. (Introductory) What types of frauds occur against the government? What is the extent of the fraud? What are similar frauds that occur in the business world?

2. (Advanced) What is data analytics? What are some of the tools and benefits provided by these analytics?

3. (Advanced) How can data analytics be used to prevent and detect fraud? Discuss how some specific techniques have an impact in the battle against fraud.

4. (Advanced) What are some limitations of using data analytics to prevent and detect fraud? What other actions should accountants and others take to fill in the gaps data analytics leaves?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
2016 Federal Government Industry Outlook
by Deloitte CIO Journal Editor
Jan 27, 2016
Online Exclusive

Compliance Analytics: A Proactive Approach
by Deloitte CIO Journal Editor
Sep 10, 2015
Online Exclusive

"Data Helps Government Target Fraud, Abuse," by Deloitte CIO Journal Editor, The Wall Street Journal, July 28, 2016 ---
http://deloitte.wsj.com/cio/2016/07/28/data-helps-government-target-fraud-abuse/?mod=djem_jiewr_AC_domainid

Government agencies are increasingly using advanced analytics techniques to confront instances of fraud, waste, and abuse in their benefits programs.

The first hint that something was amiss in the city of Klamath Falls, Oregon, came in 2012, when a food stamp recipient told a state Department of Human Services caseworker that a local market was making fraudulent sales to beneficiaries in return for cash payouts.ą State officials began examining these small-scale food stamp infractions. The investigation eventually led law enforcement to a criminal ring linked to Mexican drug cartels that was laundering an estimated $20,000 each month in food stamp benefits. Two years later, police arrested 65 people in connection with the case.˛

This is not an isolated instance—far from it, in fact. Awareness of fraud, waste, and abuse in government benefits programs has risen markedly during the past decade. The U.S. Government Accountability Office found $137 billion in improper payments in 2015.ł That’s up from $38 billion in 2005,⁴ or 197 percent in inflation-adjusted dollars⁵—and those figures do not even account for waste.

“There is not necessarily more fraud, waste, and abuse than in the past. Rather, our ability to use analytics to discover it has increased,” said Brien Lorenze, a principal at Deloitte Advisory, during a Deloitte Dbriefs webcast in June. According to the webcast presenters, fraud is illegal and intentional, abuse is improper but not necessarily illegal, and waste is driven by inefficient or ineffective management, vague policy, and poor decision-making.

As a result of this enhanced awareness, “There is a growing call today among government leaders, the media, the public, politicians, and other stakeholders to identify, report, and mitigate acts of fraud, waste, and abuse in the public sector,” says William Eggers, a public sector research director at Deloitte Services LP and author of the recent Deloitte University Press book “Delivering on Digital: The Innovators and Technologies That Are Transforming Government.”

Demand for government benefits such as Medicaid, Medicare, and disability compensation is increasing, as are health care costs, which comprise 17 percent of U.S. GDP and continue to grow.⁶ “Containing fraud, waste, and abuse is therefore essential if we wish to improve access to and timeliness of care as well as other benefits,” Lorenze says.

Fraud, waste, and abuse can take many forms. For instance, according to Rachel Frey, a principal at Deloitte Consulting LLP, service providers may record inaccurate information about recipients or accidentally double-bill for services. Service recipients might intentionally falsify or incorrectly report eligibility information. Agency employees could even collude with service recipients. All of these cases may lead to government agencies improperly disbursing funds, then expending time and energy to recover them, a “pay-and-chase” model that government increasingly looks to avoid, Frey says. Additionally, agencies are looking to uncover waste in their internal operations, such as the misallocation of employees, she says.

Enter Analytics

Government agencies, of course, have been trying to provide cheaper, faster, better service for many years. Advanced analytics techniques are now giving them the ability to examine and draw conclusions from large volumes of information. “Analytics gives the government greater opportunity to dig into the data and understand where fraud, waste, and abuse problems lie and what processes can help address those issues,” Lorenze said during the webcast.

A broad array of analytics techniques can be used in tandem to detect improper and wasteful activity, establish effective compliance programs, and recover funds as appropriate, says Dan Olson, a senior manager at Deloitte Transactions and Business Analytics LLP. Examples of these techniques include:

Rules-based monitoring for known risks. This entails building business rules based on policies and regulations to identify recognized patterns in data typically associated with fraud, waste, and abuse.

Anomaly detection to locate potential new risks. This requires using statistical profiling and outlier detection to identify patterns inconsistent with normal activity.

Statistical modeling, including machine learning, to predict future events. This involves uncovering patterns in historical data to determine where and how compliance violations may emerge.

Text analytics to examine documents such as electronic health records for insights buried in unstructured data. For example, text analytics enables the comparison of doctors’ patient case notes and billed procedure or diagnosis codes to determine if abuse is occurring.

Network analytics to identify links across entities. This leads to discovering unlikely relationships between groups to recognize potential fraud networks and uncover collusion or kickback activities.

Visual analytics and dashboards to create visual representations. This can allow stakeholders to more easily identify suspicious patterns hidden in data.

Fraud is dynamic, Olson says, so each of these analytics approaches plays an important role in a broader compliance program. “By using data-driven analytics, we can increase awareness of bad actors,” he says.

Government Analytics in Action

During the webcast, speakers shared agency case studies illustrating the value of analytics in government fraud, waste, and abuse programs.

In one case, the New Mexico Department of Workforce Solutions was striving to prevent improper payments in its unemployment insurance program. The state combined advanced analytics and behavioral analysis and recognized the value in “nudging,” or prompting, certain program recipients—through carefully worded communications on initial applications and ongoing weekly certifications—to report more reliable, timely eligibility information. As a result, the state can now identify and, more importantly, prevent potential overpayments rather than chase the money after it has already been paid, Frey says.

Continued in article

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016

U.S. Proposes Rule Clamping Down on Estate-Tax Dodge
by: Richard Rubin
Aug 02, 2016
Click here to view the full article on WSJ.com

TOPICS: Asset Valuation, Business Valuation, Discounting, Estate Tax, Gift Tax

SUMMARY: The Treasury Department and Internal Revenue Service proposed making it harder for wealthy business owners to transfer assets to heirs without paying estate and gift taxes with plans to place new limits on a common technique used to transfer interests in illiquid businesses.

CLASSROOM APPLICATION: This article is a useful update for an estate and gift tax class, as well as for any class that covers business valuations.

QUESTIONS: 
1. (Advanced) What are the current tax rules regarding discounting the value of fractional interests in closely held businesses or land? Why has this been effective? What benefits does it offer? Who benefits?

2. (Introductory) What has the Treasury Department and Internal Revenue Service proposed regarding to limit use of a common technique used to transfer interests in illiquid businesses?

3. (Advanced) Why did the government make this proposal? How will the change affect taxpayers?

4. (Advanced) What are the liquidity issues with a partial interest in a closely held business? Are there control issues? Are there any legitimate reasons for a discount in fair market value? Why or why not?

Reviewed By: Linda Christiansen, Indiana University Southeast

"U.S. Proposes Rule Clamping Down on Estate-Tax Dodge," by Richard Rubin, The Wall Street Journal, August 2, 2016 ---
http://www.wsj.com/articles/government-aims-to-limit-technique-for-lowering-estate-gift-taxes-1470155292?mod=djem_jiewr_AC_domainid

WASHINGTON—The U.S. government on Tuesday proposed making it harder for wealthy business owners to transfer assets to heirs without paying estate and gift taxes.

The plan from the Treasury Department and Internal Revenue Service would place new limits on a common technique used to transfer interests in family businesses.

The regulations address the practice of discounting the value of ownership stakes in closely held businesses or land. The discounts are permitted because some stakes are worth less since they are harder to sell or represent a minority interest. The reduced values allow wealthy families to pack assets inside the $10.9 million lifetime exclusion from estate and gift taxes for married couples.

A typical strategy would place, say, $14 million worth of assets—stock, a business, real estate or even cash—into a company with restrictions on some of the owners’ ability to sell their pieces, said David Scott Sloan, a partner at Holland & Knight LLP in Boston who advises high-net-worth families. Those restrictions could allow the owners to get an appraisal saying that the actual value of those assets was about $10 million.

“By taking advantage of these tactics, certain taxpayers or their estates owning closely held businesses or other entities can end up paying less than they should in estate or gift taxes,” Mark Mazur, the assistant secretary for tax policy, said in a statement. “Treasury’s action will significantly reduce the ability of these taxpayers and their estates to use such techniques.”

The government’s proposal would make it harder for taxpayers to claim valuation discounts that taxpayers typically have used to reflect the diminished value of minority interests, said Richard Dees, a partner at McDermott Will and Emery in Chicago. “This is going to be a major problem for all family-owned businesses,” Mr. Dees said. “This all boils down to the question of whether a family business should be valued as if it’s owned by one person.”

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016

A New Medicare Charge Is Coming: Here's How to Lessen the Blow
by: Laura Saunders
Aug 06, 2016
Click here to view the full article on WSJ.com

TOPICS: AGI, Individual Taxation, Modified AGI, Tax Planning

SUMMARY: For high-income Americans covered by Medicare, now is the time to make tax moves to minimize an increase in premium surcharges. For those in that expanding pool of Medicare premium surcharge payers, the premium can often be reduced with careful planning. The key number for planning is "modified adjusted gross income," which in this case usually means a person's adjusted gross income (AGI) plus any tax-exempt interest income.

CLASSROOM APPLICATION: This article is appropriate for an individual taxation class.

QUESTIONS: 
1. (Introductory) What is the Medicare surcharge? Who pays this charge?

2. (Advanced) Who pays the Medicare surcharge? How is the surcharge calculated?

3. (Advanced) What is AGI? What is modified adjusting gross income? How is it calculated? What can taxpayers do to reduce it? If it is reduced, what impact could it have on a taxpayer's tax liability?

4. (Advanced) Of the planning ideas listed in the article, which is available to most taxpayers? Which would be easiest to accomplish?

5. (Advanced) Which planning options require planning in advance of the current tax year? Which options do not require advance planning and could be accomplished within the year savings are desired?

Reviewed By: Linda Christiansen, Indiana University Southeast

 

"A New Medicare Charge Is Coming: Here's How to Lessen the Blow," byLaura Saunders, The Wall Street Journal, August 6, 2016 ---
http://www.wsj.com/articles/how-rich-americans-can-lessen-the-hit-from-a-jump-in-medicare-premiums-1470394801?mod=djem_jiewr_AC_domainid

For high-income Americans covered by Medicare, now is the time to make tax moves to minimize an increase in premium surcharges.

These surcharges apply because Congress has decided the top 5% or so of Medicare recipients should contribute more for their coverage than lower earners. Last year, about 3 million Americans owed extra premiums for Part B coverage for medical services, such as doctors, and about 2 million owed them for Part D coverage for drugs.

This year’s combined Part B and D surcharges range from $737 to $4,090 per person above the base annual premium of $1,462 per person. They begin above income of $85,000 for singles and $170,000 for couples.

Soon, those numbers could rise further, as Congress decided last year that some recipients will pick up an even greater share of the costs starting in 2018. For example, the total annual Part B premium for a single person with income between $133,500 and $160,000 is expected to rise 30% in 2018—from $2,856 to $3,720, according to research by the Kaiser Family Foundation, a nonpartisan health-policy nonprofit based in Menlo Park, Calif.

The overall number of Medicare recipients who owe these fees will also rise because the income thresholds aren’t indexed for inflation. Last year, 5.7% of Part B recipients owed the surcharges compared with 3.5% in 2011, and the number is expected to grow to 8.3% by 2019, according to Kaiser.

For those in that expanding pool of surcharge payers, the premium can often be reduced with careful planning.

“A very modest effort can result in real savings,” says David Roberts, a professor of accounting at DePaul University in Chicago.

In part, that is because the surcharges have a unique structure: an extra dollar of income can incur a much higher premium. Thus, a single person with $107,000 of income this year owes a $584 surcharge for Part B, compared with $1,462 for someone earning $107,001.

And this year’s planning will affect 2018 Medicare premiums, because surcharges are based on the recipient’s income earned two years before.

The key number for planning is “modified adjusted gross income,” which in this case usually means a person’s adjusted gross income (AGI) plus any tax-exempt interest income. AGI is the number at the bottom of the front page of the 1040 form. It doesn’t include itemized deductions such as those for mortgage interest, property taxes or charitable donations, so raising such deductions won’t help lower surcharges.

Here are moves that could help, especially for people close to a surcharge threshold.

*Revamp charitable contributions. Charitably-minded taxpayers who usually give cash should consider donating appreciated assets such as stock shares instead. Donors of such assets often get to skip capital-gains tax and to deduct the full market value of the donation, and the gift doesn’t raise AGI.

Taxpayers age 70 1/2 and older should also consider making direct donations of individual retirement account assets to charity instead of cash. Each IRA owner is allowed to give a total of $100,000 a year from his IRA to certified charities and have the donations count as part of their required annual withdrawal.

There is no deduction for such donations, but they don’t count as income either—which lowers AGI.

*Look to a Roth IRA. Payouts from Roth IRAs often aren’t taxable, so they don’t raise AGI. Assets shifted from a traditional IRA into a Roth IRA are taxable in the year of the conversion, however, and that does raise income.

*Manage capital gains and losses. Taxable capital gains raise AGI, but capital losses can offset gains plus $3,000 of other income a year.

“Passive” investments, such as broad-based index funds, tend to pay out less annually in capital gains than actively managed funds.

*Time the receipt of income. It may be possible to time the sale of an asset or payment of income so that it is split over two years, keeping AGI below a threshold. If not, it could make sense to bunch income so that some years have lower surcharges than others.

*Look to work-related savings. Medicare participants who are still employed can lower their AGI by contributing to 401(k) plans or traditional IRAs, says Ed Mendlowitz, a CPA with WithumSmith+Brown. Those who are self-employed can often deduct Medicare premiums for themselves and their spouse as a health insurance cost.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016

Zynga User Base Shrinks Further, Loss Narrows on Accounting Change
by: Lisa Beilfuss
Aug 05, 2016
Click here to view the full article on WSJ.com

TOPICS: Cost Behavior, Accounting Change, Financial Accounting

SUMMARY: Videogame developer Zynga Inc.'s second-quarter loss narrowed despite a shrinking user base and revenue decline, thanks mostly to an accounting change. The company has been trying to shore up cash, announcing layoffs last year that brought its staff to about half its peak and this year saying it would sell its seven-story San Francisco headquarters. It has also worked to cut marketing costs. The second-quarter improvement was driven by lower expenses, primarily because of a benefit stemming from a change in the estimated fair value of recent acquisition's liability.

CLASSROOM APPLICATION: This article is appropriate for financial accounting classes.

QUESTIONS: 
1. (Introductory) What is Zynga's financial situation? What changes and trends has it been experiencing?

2. (Advanced) What is an accounting change? What must companies do when they have one?

3. (Advanced) What was Zynga's accounting change? How did the change affect the company's financial statements? How would this be reported by the company?

4. (Advanced) What are some causes of these changes in Zynga's financial results? Which of these are under Zynga's control? Which are not controllable by the company? How should management handle both types of causes?

5. (Advanced) State the cost behavior of each of the changes Zynga has done or is considering. What are the benefits of changes in variable costs? Of changes in fixed costs? What are the possible problems of the variable cost changes? Of the fixed cost changes?

Reviewed By: Linda Christiansen, Indiana University Southeast

 

"Zynga User Base Shrinks Further, Loss Narrows on Accounting Change," by Lisa Beilfuss, The Wall Street Journal, August 5, 2016 ---
http://www.wsj.com/articles/zynga-user-base-shrinks-further-loss-narrows-on-accounting-change-1470341109?mod=djem_jiewr_AC_domainid

Videogame developer Zynga Inc. ’s second-quarter loss narrowed despite a shrinking user base and revenue decline, thanks mostly to an accounting change.

Zynga said its loss would widen in the current quarter, with revenue coming in below expectations. Shares dropped 8.1% in after hours trading.

The San Francisco company, known for its social games Farmville and Words with Friends, has been trying to steady its business. Zynga had a meteoric rise, thanks largely to a marketing relationship with Facebook in its early days, but since the company went public in late 2011 the stock has tumbled. Shares made their debut at $11 and most recently closed at less than $3.

The company has been trying to shore up cash, announcing layoffs last year that brought its staff to about half its peak and this year saying it would sell its seven-story San Francisco headquarters. It has also worked to cut marketing costs.

“We have more work to do in our turnaround,” said Chief Executive Frank Gibeau, though he expressed optimism over steps the company has taken to “do more with less.”

The second-quarter improvement was driven by lower expenses, primarily because of a benefit stemming from a change in the estimated fair value of recent acquisition’s liability. Zynga bought the social casino Rising Tide Games last year. Mr. Gibeau said lower marketing costs also helped. Such expenses declined 1.2%.

During the quarter, Zynga’s user base continued to shrink. The company reported 61 million average monthly users—down 26% from a year earlier and 11% from the first quarter. Most of those users play Zynga’s games on mobile devices. Average monthly mobile users dropped 23% year-over-year and 11% from the first quarter. Users who play daily fell 15% from last year’s quarter to 18 million.

As the company’s user base declined, so did revenue. Total sales slid 9.1% to 181.7 million, with online game revenue down 16%. Advertising jumped 22% from a year earlier, though from the first quarter it fell 8%.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016

One More Reason for Investors to Worry About 'Earnings Before Bad Stuff'
by: Michael Rapoport
Aug 04, 2016
Click here to view the full article on WSJ.com

TOPICS: Financial Accounting, Financial Reporting, GAAP, Non-GAAP

SUMMARY: Companies that report significantly stronger earnings by using tailored figures like "adjusted net income" or "adjusted operating income" are more likely to encounter some kinds of accounting problems than those that stick to standard measures. The research suggests that heavy use of metrics outside of generally accepted accounting principles - sometimes referred to derisively as "earnings before bad stuff" - could be a warning sign. Just 3.8% of those exclusively using standard GAAP metrics had formal earnings restatements from 2011 to 2015. Among heavy users of non-GAAP measures-those whose non-GAAP earnings were at least twice as high as their GAAP net income-the rate was 6.5%. Similarly, 7.5% of the GAAP-only group had material weaknesses in internal controls - flaws in their procedures to prevent financial errors and fraud - versus 11% of the non-GAAP group.

CLASSROOM APPLICATION: This article is appropriate for financial accounting classes.

QUESTIONS: 
1. (Introductory) What is GAAP? How is it determined? What entities use GAAP?

2. (Advanced) What is non-GAAP reporting? Why do companies engage in non-GAAP reporting? What are the benefits of this type of reporting?

3. (Advanced) How many companies use non-GAAP reporting? Why? Name some examples of differences between GAAP and non-GAAP reporting.

4. (Advanced) What issues or problems can non-GAAP reporting present to users of the financial statements? What do the statistics reveal regarding the contrast of companies using non-GAAP reporting versus those not using non-GAAP reporting?

5. (Advanced) Should non-GAAP reporting be regulated? If so, how?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
U.S. Corporations Increasingly Adjust to Mind the GAAP
by Theo Francis and Kate Linebaugh
Dec 14, 2015
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What Exactly are Non-GAAP Numbers? Well, That Depends
by Tatyana Shumsky
Jul 05, 2016
Online Exclusive

Accounting Choices Blur Profit Picture
by Tatyana Shumsky and Theo Francis
Jun 28, 2016
Online Exclusive

"One More Reason for Investors to Worry About 'Earnings Before Bad Stuff'," by Michael Rapoport,The Wall Street Journal, August 4, 2016 ---
http://www.wsj.com/articles/one-more-reason-for-investors-to-worry-about-earnings-before-bad-stuff-1470261290?mod=djem_jiewr_AC_domainid

Regulators and investors are increasingly wary when companies overemphasize their own customized earnings metrics. New research shows they may have a point.

Companies that report significantly stronger earnings by using tailored figures like “adjusted net income” or “adjusted operating income” are more likely to encounter some kinds of accounting problems than those that stick to standard measures, according to research by consulting firm Audit Analytics.

The rules allow companies to report such tailored figures, and the research, conducted for The Wall Street Journal, doesn’t necessarily mean such companies are less scrupulous in their bookkeeping. But it does suggest that heavy use of metrics outside of generally accepted accounting principles—sometimes referred to derisively as “earnings before bad stuff”—could be a warning sign.

“I would say an overprominent user of non-GAAP metrics would justify more attention and is a red flag,” said Olga Usvyatsky, Audit Analytics’s vice president of research. Heavy use of non-GAAP metrics may indicate a company’s accounting is “more aggressive,” she said.

The study focused on companies in the S&P 1500 index. It found that just 3.8% of those exclusively using standard GAAP metrics had formal earnings restatements from 2011 to 2015. Among heavy users of non-GAAP measures—those whose non-GAAP earnings were at least twice as high as their GAAP net income—the rate was 6.5%.

Similarly, 7.5% of the GAAP-only group had material weaknesses in internal controls—flaws in their procedures to prevent financial errors and fraud—versus 11% of the non-GAAP group.

Some of the numbers are small, and the use of non-GAAP metrics didn’t specifically cause or relate directly to the companies’ accounting flaws. Audit Analytics cautioned more research is needed.

Still, the results suggest companies using non-GAAP metrics heavily “may be somewhat less rigorous in other accounting areas” than companies using only GAAP, said Robert Pozen, a senior lecturer at the MIT Sloan School of Management.

Two examples are Valeant Pharmaceuticals International Inc. and LendingClub Corp. Both companies have been heavy users of pro forma metrics, and both have run into accounting and other problems that have hammered their shares.

Valeant restated earnings earlier this year over revenue-booking issues and said it had material weaknesses relating to its “tone at the top,” or the commitment by a company’s leadership to doing business ethically. Valeant has used non-GAAP metrics for years, often benefiting significantly. In 2015, the company had a GAAP loss of $291.7 million but an “adjusted” non-GAAP profit of $2.84 billion after stripping out amortization of intangible assets, acquisition costs and other expenses.

Valeant spokeswoman Laurie Little said the company believes its non-GAAP measures “are useful to investors in their assessment of our operating performance and the valuation of our company.”

Online lender LendingClub forced its chief executive to resign in May after it found disclosure problems on some loans, and it too cited a “tone at the top” material weakness. The company had a 2015 GAAP loss of $5 million but non-GAAP net income of $56.8 million. LendingClub declined to comment.

Neither company was in the pool Audit Analytics examined.

Companies are allowed to use nonstandard metrics as long as they also provide GAAP numbers and show the differences between the two. The tailored measures strip out unusual or noncash items to present what companies say is a clearer picture of performance.

Even critics acknowledge the tailored metrics can sometimes be helpful—showing a company’s results in constant currency is a legitimate adjustment, for instance, Mr. Pozen said.

But there is also a concern they are being abused, that companies are stripping out normal, ongoing costs to make themselves look healthier.

Continued in article


 

Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016

U.S. May Finally Get a Peek at the Books of Alibaba, Baidu
by: Kathy Chu, Chao Deng, and Michael Rapoport
Aug 07, 2016
Click here to view the full article on WSJ.com

TOPICS: Auditing, Finance, Financial Markets, International Business, Investing, PCAOB

SUMMARY: A long-running dispute between the U.S. and China over the ability to vet auditors of Chinese companies listed on American exchanges could be edging toward a breakthrough. Two big U.S.-listed Chinese companies - Alibaba Group Holding Ltd. and Baidu Inc. - and their outside auditors are preparing for audit inspections by officials from the Public Company Accounting Oversight Board. The PCAOB is expected to gain access in coming months to audit firms' records of the work they did to review Alibaba's and Baidu's books. That could be a prelude to fuller PCAOB inspections of the audit firms, a move long blocked by the Chinese government. PricewaterhouseCoopers' Hong Kong affiliate is Alibaba's auditor; Ernst & Young's Beijing affiliate is Baidu's auditor. The ability to check auditors of foreign firms listed in the U.S. is important to ensure auditing standards are upheld and investors in U.S. markets are protected.

CLASSROOM APPLICATION: This article is useful for auditing courses, and courses dealing with financial markets.

QUESTIONS: 
1. (Introductory) What is the PCAOB? What is its purpose and function? When was it created? Why?

2. (Advanced) What is Alibaba? Where is it based? How is it connected to the United States?

3. (Advanced) What have been the auditing issues related to Alibaba? Who is concerned or should be concerned? What are their concerns?

4. (Advanced) What are the possible new developments that could occur with the auditing of Chinese firms? How could a change like this affect American markets? How could they affect auditing? Should these changes be made? Why or why not?

5. (Advanced) Should Alibaba and other companies similarly situation be subject to U.S. regulations or jurisdiction? Why or why not?

6. (Advanced) The article states the companies' auditors are affiliates of U.S. Big Four firms. What does that mean? How much control do the U.S. firms have in those audits? How could that be handled to ensure proper audits?

Reviewed By: Linda Christiansen, Indiana University Southeast

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"U.S. May Finally Get a Peek at the Books of Alibaba, Baidu," Kathy Chu, Chao Deng, and Michael Rapoport,The Wall Street Journal, August 7, 2016 ---
http://www.wsj.com/articles/u-s-regulator-expected-to-get-access-to-alibaba-baidu-financials-1470377222?mod=djem_jiewr_AC_domainid

A long-running dispute between the U.S. and China over the ability to vet auditors of Chinese companies listed on American exchanges could be edging toward a breakthrough.

Two big U.S.-listed Chinese companies— Alibaba Group Holding Ltd. and Baidu Inc. —and their outside auditors are preparing for audit inspections by officials from the Public Company Accounting Oversight Board, the U.S. audit-industry regulator. The PCAOB is expected to gain access in coming months to audit firms’ records of the work they did to review Alibaba’s and Baidu’s books, according to people familiar with the situation. That could be a prelude to fuller PCAOB inspections of the audit firms, a move long blocked by the Chinese government.

PricewaterhouseCoopers’ Hong Kong affiliate is Alibaba’s auditor; Ernst & Young’s Beijing affiliate is Baidu’s auditor.

The ability to check auditors of foreign firms listed in the U.S. is important to ensure auditing standards are upheld and investors in U.S. markets are protected, experts say. U.S. regulators have been particularly eager to vet how Chinese companies have been audited, after a wave of alleged accounting fraud and investor complaints about lack of financial transparency at smaller U.S.-listed Chinese firms starting around 2011.

“It’s critical for investors in the U.S. market that the PCAOB is able to inspect Chinese audit firms,” said Joseph Carcello, a University of Tennessee accounting professor.

The PCAOB has long attempted to inspect the performance of China-based firms that audit many U.S.-traded Chinese companies, the way the accounting board regularly inspects other audit firms. But to date, the Chinese government has refused to allow the inspections, citing sovereignty concerns: The Chinese government has indicated the information contained in audits of Chinese companies could be considered “state secrets.”

The new developments may be a move toward resolving that yearslong dispute, which has been marked by seeming steps toward agreement followed by reversals. Most recently, the PCAOB last year said publicly it was close to an agreement to proceed with inspections, only to have negotiations break down.

One person at a Big Four accounting firm said that the firm has been preparing for years for the possibility that the PCAOB will inspect its working papers for U.S.-listed Chinese companies. The firm has been conducting mock reviews of PCAOB audits for the past few years, going over questions and grading the employees on how well they answered, the person said.

It is still possible the Alibaba- and Baidu-related inspections might not proceed. The audit documents provided to the PCAOB may be heavily redacted and the board may face other restrictions in conducting the inspections, said the people familiar with the situation, raising questions about whether the board will be allowed to conduct the thorough inspections it is seeking.

The move toward inspections is a “good first step” in thawing relations between U.S. and Chinese regulators, said Paul Gillis, an accounting professor at Peking University’s Guanghua School of Management. “But that doesn’t mean that the inspections will be meaningful.”

Mr. Gillis says he expects audit work papers to be moved to Hong Kong for inspection, a way to ease the Chinese government’s concerns about foreign regulators working on Chinese soil.

The PCAOB wouldn’t confirm the move toward inspections, saying only that it continues “to work toward obtaining access to the information we need in order to conduct the necessary inspections of registered firms in China and Hong Kong.” The auditing regulator said it doesn’t comment on specific audits.

PwC in Hong Kong didn’t immediately respond to a request for comment. E&Y’s affiliate in Beijing declined to comment. The China Securities Regulatory Commission had no immediate comment.

PCAOB inspections are meant to assess the performance and compliance with auditing rules of firms that audit U.S.-traded companies. They are done on a regular basis and aren’t a sign the auditors or the companies have done anything wrong. But an inspection would come at a sensitive time for Alibaba in particular, as the U.S. Securities and Exchange Commission is investigating the accounting practices of the e-commerce giant.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 9, 2016

Chief Audit Executives Cite Major Skills Gaps, Lack of Impact: Global Study
by: Deloitte Risk Journal Editor
Aug 08, 2016
Click here to view the full article on WSJ.com

TOPICS: Audit, Internal Audit

SUMMARY: Only 13% of more than 1,200 chief audit executives (CAEs) surveyed in 29 countries across eight industries are "very satisfied" that their functions have the skills to meet expectations of stakeholders. The top five skills gaps are cyber, cloud computing and other specialized information technology skills, cited by 42% of respondents, followed by data analytics (41%); risk modeling (27%), innovation (26%) and fraud detection (24%). CAEs also indicate risk anticipation (39%) and data analytics (34%) as the two innovations most likely to impact internal audit over the next three to five years.

CLASSROOM APPLICATION: This article provides excellent information for an audit class, as well as for coverage of the internal audit function in any class.

QUESTIONS: 
1. (Introductory) What is a CAE? What does a CAE do?

2. (Advanced) What are the top five skills discussed in the article? What do CAEs think about these skills? How are they ranked?

3. (Advanced) What is internal audit? What are the responsibilities and areas of authority of the internal audit function?

4. (Advanced) What do CAEs think about their internal audit functions?

5. (Advanced) What are analytics? How could analytics be used by the internal audit function? What purpose would they serve? What benefits would they offer? What costs are involved?

Reviewed By: Linda Christiansen, Indiana University Southeast

 

"Chief Audit Executives Cite Major Skills Gaps, Lack of Impact: Global Study," by Deloitte Risk Journal Editor,The Wall Street Journal, August 8, 2016 ---
http://www.wsjsmartkit.com/wsj_redirect.asp?key=AC20160811-07&mod=djem_jiewr_AC_domainid

Only 13% of more than 1,200 chief audit executives (CAEs) surveyed in 29 countries across eight industries are “very satisfied” that their functions have the skills to meet expectations of stakeholders, according to a global study, Evolution or Irrelevance? Internal Audit at a Crossroads, by Deloitte Touche Tohmatsu Limited (DTTL).

The top five skills gaps are cyber, cloud computing and other specialized information technology skills, cited by 42% of respondents, followed by data analytics (41%); risk modeling (27%), innovation (26%) and fraud detection (24%). CAEs also indicate risk anticipation (39%) and data analytics (34%) as the two innovations most likely to impact internal audit over the next three to five years.

Meanwhile, 72% of surveyed CAEs believe their internal audit functions do not have a strong impact and influence on their organizations. Further, 16% of respondents believe that their internal audit function has little to no impact and influence over the board of directors, executive team and other key personnel.

“These findings are concerning and indicate a need for internal audit groups to substantially increase their relevance within their organizations,” says Terry Hatherell, Global Internal Audit leader for DTTL. “Internal audit plays a critical role in effective corporate governance within an organization. The apparent lack of impact and influence is surprising and represents a clear call to action for change,” he adds.

The study also found that 57% of CAEs are not satisfied that their internal audit groups have the skills and expertise to deliver on stakeholder expectations for efficient audits, insightful reports and effective decision support. The majority of respondents say they use analytics in fieldwork, but fewer do so in annual planning and audit scoping.

Over the next three to five years, 58% of respondents expect to be using analytics in at least half of their audits. Thirty-seven percent expect to move to high usage—employing analytics in at least 75% of their audits. The survey revealed gaps in stakeholders’ expectations for more forward-looking, predictive activities (e.g., risk anticipation) from internal audit―the kind of activities enabled by analytics.

“The need to enhance analytics tools and techniques stands out among the most urgent priorities for internal audit,” says Neil White, an Advisory partner and internal audit analytics leader for Deloitte & Touche LLP. “While using analytics to deliver audits more efficiently is an important goal, the survey results lead us to believe internal audit should capitalize on the wealth of available data to deliver more insightful views of business issues and risks to stakeholders.”

Sixty-four percent of respondents believe it will be important to have strong impact and influence in their organizations over the next three to five years.  While about one-third of internal audit groups have evaluated their organization’s strategic planning process in the past three years, over half expect to do so in the next three years. In the next three years, 70% expect to evaluate their organization’s risk management process, up from 54% over the past three years.

Other Report Highlights

—The current use of analytics is largely at basic levels: While 86% of respondents use analytics, only 24% use them at an intermediate level and 7% at an advanced level. Most (66%) use basic, ad hoc analytics (e.g., spreadsheets) or no analytics.

Dynamic reporting is poised to increase: Use of static text documents and presentations to communicate with stakeholders will decrease as usage of dynamic visualization tools, such as those used to generate heat maps, bubble charts, interactive graphs and other easy-to-grasp representations of data, is anticipated to increase from 7% to 35% among respondents.

—CAEs expect to expand advisory services: More than half of respondents (55%) expect the proportion of advisory services they provide internally to expand over the next three to five years.

—Alternative resourcing for talent will likely expand: The percentage of respondents with formal rotation programs is expected to double over the next three to five years, from 10% to 20%. The percentage with guest auditor programs also will likely increase from 20% to 29%, and respondents expect the use of cosourcing to rise as well.

­—Budgets are expected to remain stable, which may present challenges: In a time when internal audit may need to make significant investments to strengthen its impact and influence, half of CAEs expect their budgets to remain stable, and another third expect them to increase somewhat. Only 10% expect budget decreases.

Considerations for CAEs

The business environment demands that organizations develop certain capabilities over the next several year, such as the ability to anticipate risks and implement responses. Organizations might find the following considerations useful:

—Seek ways to increase impact and influence.

—Embed analytics into internal audit activities.

—Streamline and visualize communications and reports.

—Assess and address talent and skills gaps.

—Review strategic planning and risk management.

—Promote a culture of innovation within the organization.

—Marshall senior-level support.

 “Organizations —especially the audit committee and the executive team—need internal audit to inform them about the future rather than report on the past, and they are seeking insights as well as information and advice as well as assurance,” says Mr. White. “Increased investment in analytics presents major opportunities for CAEs to increase efficiency, value and, perhaps most important, the impact of internal audits on their organizations.”

Related Resources

Evolution or Irrelevance? Internal Audit at a Crossroads

Driving Innovation in Audit: Joseph Ucuzoglu, Chairman and CEO, Deloitte & Touche LLP

As Cyberthreats Mount, Internal Audit Can Help Play Defense

Compliance Risks: What You Don’t Contain Can Hurt You

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 19 2016

Good News for M.B.A. Students: Tuition Is Now More Deductible
by: Laura Saunders
Aug 13, 2016
Click here to view the full article on WSJ.com

TOPICS: Deduction, Individual Taxation, Tax Court

SUMMARY: A specialized court's decision should embolden more students enrolled in M.B.A. programs across the country to deduct their tuition - especially if they are getting an executive M.B.A. A married couple deducted $18,879 for tuition, commuting and other expenses on their 2011 tax return that the IRS disallowed, in part because he was unemployed for several months of the year. But the judge disagreed with the IRS, saving the taxpayers $2,111 in taxes - and providing more ammunition to M.B.A. students who want to deduct education expenses in the future. The decision was released earlier this month by the Tax Court, a specialized tribunal. Although the case is of a type that can't be appealed or formally cited as precedent, experts say such cases often are influential both inside and outside the IRS. Many M.B.A. students qualify for a deduction, however, because they have worked before enrolling in a program and are seeking to "maintain or improve" their skills, as the law requires. In addition, the degree doesn't lead to a license.

CLASSROOM APPLICATION: This is an excellent article to use in individual tax classes, and also for the information it provides our students who may be in graduate school or considering graduate school in the future.

QUESTIONS: 
1. (Introductory) What is Tax Court? How does it differ from other courts?

2. (Advanced) What was the ruling in this case? What is the reasoning behind that decision? What tax rules support the decision?

3. (Advanced) Why did the IRS fight the deduction in this case? What was the reasoning the IRS was asserting? What are the merits of the IRS's position?

4. (Advanced) What is precedent? How is the decision treated for precedent purposes? Why? How will that impact tax planning for other taxpayers?

5. (Advanced) What makes earning an MBA different from earning other degrees? Does the graduate vs. undergraduate distinction make a difference? For what programs or courses is a taxpayer most likely to deduct the costs? For what courses or programs are education expenses are not allowed? In what situations would MBA expenses be less likely to be deductible?

Reviewed By: Linda Christiansen, Indiana University Southeast

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"Good News for M.B.A. Students: Tuition Is Now More Deductible," by Laura Saunders,The Wall Street Journal, August 13, 2016 ---
http://www.wsj.com/articles/good-news-for-m-b-a-students-tuition-is-now-more-deductible-1471013805?mod=djem_jiewr_AC_domainid

A specialized tax court’s decision seen as a win for M.B.A. students.

A specialized court’s decision should embolden more students enrolled in M.B.A. programs across the country to deduct their tuition—especially if they are getting an executive M.B.A.

In the case, Kopaigora v. Commissioner, the Internal Revenue Service had hoped to collect thousands of dollars from Alex Kopaigora, a 42-year-old who came to the U.S. from Ukraine in 1994 on a Mormon mission and later became a citizen. In 2011, he was employed at a hotel in Los Angeles and commuted to Brigham Young University in Salt Lake City, for its executive M.B.A. program.

Mr. Kopaigora and his wife, Elizabeth, deducted $18,879 for tuition, commuting and other expenses on their 2011 tax return that the IRS disallowed, in part because he was unemployed for several months of the year.

But the judge disagreed with the IRS, saving the Kopaigoras $2,111 in taxes—and providing more ammunition to M.B.A. students who want to deduct education expenses in the future.

“This case is a big win for all M.B.A. students,” says Robert Willens, a tax expert who teaches at Columbia University’s business school and has advised hundreds of M.B.A. students on the ins and outs of deducting tuition.

The decision was released earlier this month by the Tax Court, a specialized tribunal. Although the case is of a type that can’t be appealed or formally cited as precedent, experts say such cases often are influential both inside and outside the IRS.

According to the Department of Education’s most recent data, about 110,000 students were pursuing graduate degrees in business in 2014. About 12,000 students were enrolled in executive M.B.A. programs in the U.S. in 2015, according to the Executive MBA Council, and three-quarters of them paid all or part of their own expenses.

To see why the case has broad implications, it is necessary to grapple with intricacies in the tax law. The rules allow deductions for education costs as “unreimbursed business expenses” on Schedule A (for employees) and on Schedule C (for the self-employed)—but not if the courses prepare the student for a new type of business or license, such as for law or nursing.

In practice, this requirement often precludes taxpayers from taking deductions for both undergraduate and graduate education expenses, although other tax benefits may help with these costs.

Continued in article

Jensen Comment
Most students in other graduate programs will find this MBA student favoritism by the IRS to be discriminatory.


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 19 2016

ComScore Delays Quarterly Report on Accounting Probe, Names New Leadership
by: Anne Steele
Aug 11, 2016
Click here to view the full article on WSJ.com

TOPICS: Audit Committee, Executive Compensation, Financial Reporting, Revenue Recognition

SUMMARY: ComScore Inc. said it needs more time to file its June 2016 quarterly report, as the media measurement and analytics company completes an internal investigation into its accounting. ComScore said in a regulatory filing with the government that its investigation is "substantially complete," and that its audit committee has identified "certain areas of potential concern, including with respect to certain accounting and disclosure practices and controls that the company...is further analyzing."

CLASSROOM APPLICATION: This article is appropriate for coverage of revenue recognition and internal investigations.

QUESTIONS: 
1. (Introductory) What accounting-related issues ComScore is investigating? What reporting has the investigation delayed?

2. (Advanced) The article discusses "nonmonetary" revenue. What is that? What were the issues regarding this kind of revenue? How should the company account for it?

3. (Advanced) What is an audit committee? What are its duties and areas of authority? How would it be involved in a case like this?

4. (Advanced) How has the investigation affected the company's stock price? Why can stock price affected by this kind of investigation?

Reviewed By: Linda Christiansen, Indiana University Southeast

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"ComScore Delays Quarterly Report on Accounting Probe, Names New Leadership," by Anne Steele, The Wall Street Journal, August 11, 2016 ---
http://www.wsj.com/articles/comscore-delays-quarterly-report-on-accounting-probe-names-new-leadership-1470834765?mod=djem_jiewr_AC_domainid

Analytics company said audit committee identified ‘certain areas of potential concern’

ComScore Inc. on Wednesday said it needs more time to file its June quarterly report, as the media measurement and analytics company completes an internal investigation into its accounting.

Separately, comScore named a new management team, including replacing its chief executive, who has been accused of benefiting from the company’s boosted results from the recording of “nonmonetary” revenue. This reflects revenue from barter agreements, where actual cash doesn’t change hands.

ComScore said in a regulatory filing with the government that its investigation is “substantially complete,” and that its audit committee has identified “certain areas of potential concern, including with respect to certain accounting and disclosure practices and controls that the company…is further analyzing.”

Last August, The Wall Street Journal called attention to comScore’s practice of reporting nonmonetary revenue, which appeared to have helped boost the compensation of comScore’s top executives. The company said in the filing Wednesday that it hasn’t concluded whether any transactions were incorrectly recorded.

In a news release, comScore said it named a slate of new executives, continuing a shake-up at the company. Co-founder Gian Fulgoni will become chief executive, replacing Serge Matta, who will stay on as executive vice chairman and adviser to Mr. Fulgoni.

Mr. Matta was among the executives receiving the special market-based equity awards. ComScore has said Mr. Matta’s awards were consistent with the company’s equity-incentive plan for all employees.

On a call with investors Wednesday comScore said its revenue for the first half of 2016 was about $214 million to $218 million, including $10 million of “nonmonetary” revenue. The company said this was about $20 million below what it expected and​gave three reasons for the shortfall: distraction related to the investigation; challenges with the speed of scaling its mobile measurement panels; and sales to clients that were delayed because of the clients’ own deal-making activity.

ComScore said it had about $150 million of cash and marketable securities on its balance sheet as of June 30. The company declined to provide further details on its accounting investigation on the call, but it offered a nonfinancial update on its various measurement products.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 19 2016

FASB Standard Set to Change Accounting for Credit Losses
by: Deloitte Risk Journal Editor
Aug 12, 2016
Click here to view the full article on WSJ.com

TOPICS: Credit Impairment, Credit Losses, FASB, Financial Accounting, GAAP

SUMMARY: New guidance from the FASB is set to significantly change the accounting for credit impairment. Banks and certain asset portfolios (e.g., loans, leases, debt securities) likely will need to modify their current processes for establishing an allowance for loan and lease losses and other-than-temporary impairments to ensure that they comply with the standard's new requirements. To do so, organizations should consider making changes to their operations and systems associated with credit modeling, regulatory compliance and technology. ASU 2016-13 adds to U.S. GAAP an impairment model (known as the current expected credit loss (CECL) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The ASU is also intended to reduce the complexity of U.S. GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments.

CLASSROOM APPLICATION: This article would be appropriate for discussions of accounting for credit losses, as well as for coverage of FASB and GAAP in general.

QUESTIONS: 
1. (Introductory) What is FASB? What is its area of authority?

2. (Advanced) What is credit impairment? Why is it reported? What does it tell users of the financial statements?

3. (Advanced) What is an ASU? What changes is this ASU making? What were the previous rules? Why were these changes made?

4. (Advanced) What is the impairment allowance? How is it determined?

Reviewed By: Linda Christiansen, Indiana University Southeast

"FASB Standard Set to Change Accounting for Credit Losses," by Deloitte Risk Journal Editor,The Wall Street Journal, August 12, 2016 ---
http://deloitte.wsj.com/riskandcompliance/2016/08/12/fasbs-final-standard-set-to-change-accounting-for-credit-losses/?mod=djem_jiewr_AC_domainid

New guidance from the FASB is set to significantly change the accounting for credit impairment, as discussed in a recently released Heads Up newsletter from Deloitte & Touche LLP. Banks and certain asset portfolios (e.g., loans, leases, debt securities) likely will need to modify their current processes for establishing an allowance for loan and lease losses and other-than-temporary impairments to ensure that they comply with the standard’s new requirements. To do so, organizations should consider making changes to their operations and systems associated with credit modeling, regulatory compliance and technology.

For public business entities that meet the U.S. GAAP definition of an SEC filer, the ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For public business entities that do not meet the U.S. GAAP definition of an SEC filer, the ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.

Following is an excerpt from the full Heads Up newsletter which provides details on the new guidance known as ASU 2016-13.ą

ASU 2016-13 adds to U.S. GAAP an impairment model (known as the current expected credit loss (CECL) model)˛ that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The ASU is also intended to reduce the complexity of U.S. GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments.

The CECL Model

Scope

The CECL model applies to mostł debt instruments (other than those measured at fair value), trade receivables, lease receivables, reinsurance receivables that result from insurance transactions, financial guarantee contracts⁴ and loan commitments. However, available for-sale (AFS) debt securities are excluded from the model’s scope and will continue to be assessed for impairment under the guidance in ASC 320⁵ (the FASB moved the impairment model for AFS debt securities from ASC 320 to ASC 326-30 and has made limited amendments to the impairment model for AFS debt securities, as discussed in the full Heads Up newsletter).

Recognition of Expected Credit Losses

Unlike the incurred loss models in existing U.S. GAAP, the CECL model does not specify a threshold for the recognition of an impairment allowance. Rather, an entity will recognize its estimate of expected credit losses for financial assets as of the end of the reporting period. Credit impairment will be recognized as an allowance—or contra-asset—rather than as a direct write-down of the amortized cost basis of a financial asset. However, the carrying amount of a financial asset that is deemed uncollectible will be written off in a manner consistent with existing U.S. GAAP.

Measurement of Expected Credit Losses

The ASU describes the impairment allowance as a “valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset.” An entity can use a number of measurement approaches to determine the impairment allowance. Some approaches project future principal and interest cash flows (i.e., a discounted cash flow method) while others project only future principal losses. Regardless of the measurement method used, an entity’s estimate of expected credit losses should reflect those losses occurring over the contractual life of the financial asset.

When determining the contractual life of a financial asset, an entity is required to consider expected prepayments either as a separate input in the determination or as an amount embedded in the credit loss experience that it uses to estimate expected credit losses. The entity is not allowed to consider expected extensions of the contractual life unless it reasonably expects to execute a troubled debt restructuring with the borrower by the reporting date.

An entity must consider all available relevant information when estimating expected credit losses, including details about past events, current conditions and reasonable and supportable forecasts and their implications for expected credit losses. That is, while the entity is able to use historical charge-off rates as a starting point for determining expected credit losses, it has to evaluate how conditions that existed during the historical charge-off period may differ from its current expectations and accordingly revise its estimate of expected credit losses. However, the entity is not required to forecast conditions over the contractual life of the asset. Rather, for the period beyond the period for which the entity can make reasonable and supportable forecasts, the entity reverts to historical credit loss experience.

Continued in article


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 19 2016

Military Contractor Orbital ATK to Restate Financials
by: Doug Cameron and Austen Hufford
Aug 11, 2016
Click here to view the full article on WSJ.com

TOPICS: Accounting Errors, Materiality, Revenue Recognition

SUMMARY: Orbital ATK Inc. said that accounting errors obscured losses of up to $450 million on a Pentagon arms contract, forcing the aerospace and defense company to restate its financials. The company said it didn't believe there was any fraud involved. Orbital ATK said the misstatements overestimated revenue by $100 million to $150 million in total and that a forward loss provision, related to the unprofitable contract, would reduce previously reported pretax operating income by about $400 million to $450 million.

CLASSROOM APPLICATION: This article would be appropriate for financial accounting classes.

QUESTIONS: 
1. (Introductory) What did Orbital ATK Inc. announce regarding its financial statements? Why did the problems occur?

2. (Advanced) What are the details of the accounting errors? How did the correction of the errors affect the company's financial statements?

3. (Advanced) What is immateriality? Were the errors material for the company's financial position?

4. (Advanced) How did the report of errors affected the company's stock price? Why?

Reviewed By: Linda Christiansen, Indiana University Southeast

 

"Military Contractor Orbital ATK to Restate Financials," by Doug Cameron and Austen Hufford,The Wall Street Journal, August 11, 2016 ---
http://www.wsj.com/articles/aerospace-contractor-orbital-atk-to-restate-financials-1470829385?mod=djem_jiewr_AC_domainid

Company says accounting errors obscured losses of up to $450 million on a Pentagon arms contract.

Orbital ATK Inc. said Wednesday that accounting errors obscured losses of up to $450 million on a Pentagon arms contract, forcing the aerospace and defense company to restate its financials.

The company said it had failed to meet cost-cutting targets at an ammunition plant it manages for the Army in Missouri that left it nursing a loss rather than breaking even on the fixed-price contract won in 2012.

Orbital ATK shares fell by almost a fifth in early trade following the announcement as the company said it would delay its quarterly filings with regulators for around 45 days.

The company said it didn’t believe there was any fraud involved. “We don’t think there was any misbehavior,” said Orbital ATK Chief Executive David Thompson on a call with analysts after the company reported forecast-beating quarterly earnings.

The problems were uncovered as the company installed new enterprise systems and relate primarily to a $2.3 billion contract with the U.S. Army to manufacture and supply ammunition at the Lake City Army Ammunition Plant in Independence, Mo., for an initial period of seven years and up to 10 years total.

Mr. Thompson said the problems had been “obscured” by a combination of unusual factors and called the incident “very distressing.” A review of other large and midsize contracts hadn’t revealed any material problems.

Orbital ATK said the misstatements overestimated revenue by $100 million to $150 million in total and that a forward loss provision, related to the unprofitable contract, would reduce previously reported pretax operating income by about $400 million to $450 million.

The contract accounts for around 5% of group sales and was inherited from Alliant Techsystems Inc., which merged last year with Orbital Sciences Corp. to form Orbital ATK.

Deloitte & Touche LLP audited the company through March 31, 2015, with the role then taken by PricewaterhouseCoopers LLP. Both are assisting with the continuing probe.

Orbital ATK shares were recently down 18% at $73.43.

Continued in article

Bob Jensen's threads on Deloitte & Touche LLP scandals are at
http://faculty.trinity.edu/rjensen/Fraud001.htm

Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm


Teaching Case
From The Wall Street Journal Weekly Accounting Review on August 19 2016

Wal-Mart Deal Could Jeopardize Jet.com's Sales-Tax Advantage
by: Rolfe Winkler and Sarah Nassauer
Aug 11, 2016
Click here to view the full article on WSJ.com

TOPICS: sales tax, Wal-Mart

SUMMARY: Wal-Mart Stores Inc. signed a $3.3 billion deal to buy web retailer Jet.com Inc., bringing in some outside help to jump-start growth at the retail giant's e-commerce operations. Jet.com Inc. pitches itself as a lower-priced alternative to Amazon.com Inc., partly by not tacking on sales taxes in most states. But tax experts say Jet's proposed $3.3 billion sale to retail giant Wal-Mart Stores Inc. could jeopardize that price advantage by forcing it to collect taxes nationwide. A 1992 Supreme Court ruling allows online retailers to avoid collecting sales taxes in states where they don't have a physical presence like a warehouse, a local store or office.

CLASSROOM APPLICATION: This is a rare and good article to save for coverage of sales tax.

QUESTIONS: 
1. (Introductory) What is sales tax? How is it collected and remitted?

2. (Advanced) What is Jet.com? Why did Wal-Mart purchase Jet.com? What strategy was involved?

3. (Advanced) What are the sales tax issues associated with Wal-Mart's purchase of Jet.com? What problems could the acquisition pose for either company?

4. (Advanced) Should Wal-Mart management be concerned about the sales tax issues? Should they have considered this before the acquisition? Could it have been a factor leading them to decide against the acquisition? Why or why not?

5. (Advanced) How do companies determine where they are required to collect sales tax? Why aren't companies required to collect sales tax in every state? How could that change?

6. (Advanced) Should companies be required to collect sales tax in all states? Please state reasons supporting companies collecting sales tax: (1) in all states, (2) in no states, and (3) in states under the current rules.

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
Wal-Mart to Acquire Jet.com for $3.3 Billion in Cash, Stock
by Sarah Nassauer
Aug 09, 2016
Online Exclusive

 

"Wal-Mart Deal Could Jeopardize Jet.com's Sales-Tax Advantage." by Rolfe Winkler and Sarah Nassauer ,The Wall Street Journal, August 11, 2016 ---
http://www.wsj.com/articles/wal-mart-deal-could-jeopardize-jet-coms-sales-tax-advantage-1470855873?mod=djem_jiewr_AC_domainid

Isn’t yet clear how Wal-Mart will handle tax collections on Jet.com

Jet.com Inc. pitches itself as a lower-priced alternative to Amazon.com Inc., partly by not tacking on sales taxes in most states.

But tax experts say Jet’s proposed $3.3 billion sale to retail giant Wal-Mart Stores Inc. could jeopardize that price advantage by forcing it to collect taxes nationwide.

A 1992 Supreme Court ruling allows online retailers to avoid collecting sales taxes in states where they don’t have a physical presence like a warehouse, a local store or office.

With far more distribution centers nationwide, Seattle-based Amazon collects sales taxes in 28 states covering most of the U.S. population.

New York-based Jet collects taxes in just seven states, avoiding big ones like California and Texas.

On Wednesday, Amazon and Jet each listed a Le Creuset French oven for $319.95. But an Amazon shopper in Chicago, for example, would have to pay sales taxes of $32.79, unlike the Jet shopper.

Wal-Mart has a physical presence in every state, according to a spokesman, so it does collect sales taxes for items it sells on Walmart.com in all states that impose them.

Once the acquisition is closed, it isn’t clear how Wal-Mart will handle tax collections on Jet.com. Tax experts say it will depend on how ownership and operational integrations are structured.

If Jet uses Wal-Mart stores for returns or in-store pickup, or its parent company’s warehouses to store inventory, then it should have to collect sales taxes in those states, says Diane Yetter, who runs a namesake sales-tax consulting firm.

With far more distribution centers nationwide, Seattle-based Amazon collects sales taxes in 28 states covering most of the U.S. population.

New York-based Jet collects taxes in just seven states, avoiding big ones like California and Texas.

On Wednesday, Amazon and Jet each listed a Le Creuset French oven for $319.95. But an Amazon shopper in Chicago, for example, would have to pay sales taxes of $32.79, unlike the Jet shopper.

Wal-Mart has a physical presence in every state, according to a spokesman, so it does collect sales taxes for items it sells on Walmart.com in all states that impose them.

Once the acquisition is closed, it isn’t clear how Wal-Mart will handle tax collections on Jet.com. Tax experts say it will depend on how ownership and operational integrations are structured.

If Jet uses Wal-Mart stores for returns or in-store pickup, or its parent company’s warehouses to store inventory, then it should have to collect sales taxes in those states, says Diane Yetter, who runs a namesake sales-tax consulting firm.

Continued in article



 

Teaching Case
Cost Accounting and Inventory Valuation
by Bob Jensen: 
Differences Between Mark-to-Market Accounting for Derivative Contracts Versus Commodity Inventories
---
http://faculty.trinity.edu/rjensen/Mark-to-MarketCorn.htm

Double Counting Commodity Mark-to-Market Inventories?
Suppose that a dry summer doubles the prices of corn in both local and international markets. Further suppose that this increase in corn is passed along to hog inventories in Fred Farmer's hog confinement inventory. Suppose that the doubling of corn corn inventory values in Fred Farmer's corn bins correlates to a 25% increase in his hog inventories because increases in feed prices are passed along to hog buyers.

Question
Is there double counting of mark-to-market inventory adjustments of both Fred Farmer's hog feed inventory (corn he raised and stores) and his hog inventory?




 

Humor for August 2016

A Big Super Cut of Saturday Night Live Cast Members Breaking Character and Cracking Up ---
http://www.openculture.com/2016/08/a-big-super-cut-of-saturday-night-live-cast-members-breaking-character-and-cracking-up.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OpenCulture+%28Open+Culture%29

Robin Williams Delivers a Hastings College of Law Commencement Speech in 1983 ---
http://www.openculture.com/2016/08/robin-williams-uses-his-stand-up-comedy-genius-to-deliver-a-law-school-commencement-speech-1983.html
Poking fun at lawyers


You can get a free flight to Iceland if you agree to stay ---
http://www.businessinsider.com/wow-air-is-offering-free-flights-to-iceland-2016-8
Jensen Question
Wonder if that same idea would succeed in the USA?


Harvard Business Review Blog Cartoons ---
https://hbr.org/2016/08/strategic-humor-cartoons-from-the-september-2016-issue?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date


Forwarded by Paula

BAGPIPES

I love this story. Lay down what's bothering you, breath in the fresh air and LISTEN to this story.

Time is like a river. You cannot touch the water twice, because the flow that has passed will never pass again.

Enjoy every moment of life.

As a bagpiper,I play many gigs.

Recently I was asked by a funeral director to play at a graveside service for a homeless man. He had no family or friends,

so the service was to be at a pauper's cemetery in the

Nova Scotia back country.

As I was not familiar with the backwoods, I got lost and, being a typical man, I didn't stop for directions.

I finally arrived an hour late and saw the funeral guy had evidently gone and the hearse was nowhere in sight.

There were only the diggers and crew left and they were eating

lunch. I felt badly and apologized to the men for being late.

I went to the side of the grave and looked down and the vault lid was already in place. I didn't know

what else to do, so I started to play.

The workers put down their lunches and began to gather around. I played out my

heart and soul for this man with no family and friends.

I played like I've never played before for this homeless man.

And as I played "Amazing Grace", the workers began to weep. They wept, I wept, we all wept together.

When I finished, I packed up my bagpipes and started for my car.

Though my head was hung low, my heart was full.

As I opened the door to my car, I heard one of the workers say, "I never seen anything like that before,

and I've been putting in septic tanks for twenty years."

Apparently, I'm still lost....it's a man thing.

 

 

 

 

 

 

 




 

Humor August  2016 --- http://faculty.trinity.edu/rjensen/book16q3.htm#Humor083116.htm

Humor July  2016 --- http://faculty.trinity.edu/rjensen/book16q3.htm#Humor0716.htm  

Humor June  2016 --- http://faculty.trinity.edu/rjensen/book16q2.htm#Humor063016.htm

Humor May  2016 --- http://faculty.trinity.edu/rjensen/book16q2.htm#Humor053116.htm

Humor April  2016 --- http://faculty.trinity.edu/rjensen/book16q2.htm#Humor043016.htm

Humor March  2016 --- http://faculty.trinity.edu/rjensen/book16q1.htm#Humor033116.htm

Humor February  2016 --- http://faculty.trinity.edu/rjensen/book16q1.htm#Humor022916.htm

Humor January  2016 --- http://faculty.trinity.edu/rjensen/book16q1.htm#Humor013116.htm

Humor December 1-31,  2015 --- http://faculty.trinity.edu/rjensen/book15q4.htm#Humor123115.htm.htm

Humor November 1-30,  2015 --- http://faculty.trinity.edu/rjensen/book15q4.htm#Humor113015.htm

Humor October 1-31,  2015 --- http://faculty.trinity.edu/rjensen/book15q4.htm#Humor103115

Humor September 1-30,  2015 --- http://faculty.trinity.edu/rjensen/book15q3.htm#Humor093015

Humor August 1-31,  2015 --- http://faculty.trinity.edu/rjensen/book15q3.htm#Humor081115

Humor July 1-31,  2015 --- http://faculty.trinity.edu/rjensen/book15q3.htm#Humor073115

Humor June 1-30,  2015 --- http://faculty.trinity.edu/rjensen/book15q2.htm#Humor043015

Humor May 1-31,  2015 --- http://faculty.trinity.edu/rjensen/book15q2.htm#Humor043015

Humor April 1-30, 2015 --- http://faculty.trinity.edu/rjensen/book15q2.htm#Humor043015

Humor March 1-31, 2015 --- http://faculty.trinity.edu/rjensen/book15q1.htm#Humor033115

Humor February 1-28, 2015 --- http://faculty.trinity.edu/rjensen/book15q1.htm#Humor022815

Humor January 1-31, 2015 --- http://faculty.trinity.edu/rjensen/book15q1.htm#Humor013115

 




And that's the way it was on August 31, 2016 with a little help from my friends.

 

Bob Jensen's gateway to millions of other blogs and social/professional networks ---
http://faculty.trinity.edu/rjensen/ListservRoles.htm

Bob Jensen's Threads --- http://faculty.trinity.edu/rjensen/threads.htm

Bob Jensen's Blogs --- http://faculty.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called New Bookmarks --- http://faculty.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called Tidbits --- http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called Fraud Updates --- http://faculty.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's past presentations and lectures --- http://faculty.trinity.edu/rjensen/resume.htm#Presentations   

Free Online Textbooks, Videos, and Tutorials --- http://faculty.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
Free Tutorials in Various Disciplines --- http://faculty.trinity.edu/rjensen/Bookbob2.htm#Tutorials
Edutainment and Learning Games --- http://faculty.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses --- http://faculty.trinity.edu/rjensen/000aaa/updateee.htm#OKI

Bob Jensen's Resume --- http://faculty.trinity.edu/rjensen/Resume.htm
 

Bob Jensen's Homepage --- http://faculty.trinity.edu/rjensen/

Accounting Historians Journal --- http://www.libraries.olemiss.edu/uml/aicpa-library  and http://clio.lib.olemiss.edu/cdm/landingpage/collection/aah
Accounting Historians Journal
Archives--- http://www.olemiss.edu/depts/general_library/dac/files/ahj.html
Accounting History Photographs --- http://www.olemiss.edu/depts/general_library/dac/files/photos.html

 

 

 

 

 

 

 

July 2016

 

 

Bob Jensen's New Additions to Bookmarks

July 2016 

Bob Jensen at Trinity University 


For earlier editions of Fraud Updates go to http://faculty.trinity.edu/rjensen/FraudUpdates.htm
For earlier editions of Tidbits go to http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm
For earlier editions of New Bookmarks go to http://faculty.trinity.edu/rjensen/bookurl.htm 
Bookmarks for the World's Library --- http://faculty.trinity.edu/rjensen/bookbob2.htm 

Click here to search Bob Jensen's web site if you have key words to enter --- Search Box in Upper Right Corner.
For example if you want to know what Jensen documents have the term "Enron" enter the phrase Jensen AND Enron. Another search engine that covers Trinity and other universities is at http://www.searchedu.com/

Bob Jensen's Blogs --- http://faculty.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called New Bookmarks --- http://faculty.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called Tidbits --- http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called Fraud Updates --- http://faculty.trinity.edu/rjensen/FraudUpdates.htm

 

Bob Jensen's Pictures and Stories
http://faculty.trinity.edu/rjensen/Pictures.htm

 

All my online pictures --- http://www.cs.trinity.edu/~rjensen/PictureHistory/

David Johnstone asked me to write a paper on the following:
"A Scrapbook on What's Wrong with the Past, Present and Future of Accountics Science"
Bob Jensen
February 19, 2014
SSRN Download:  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2398296 




Misleading Statistical Significance Reporting
Statisticians Found One Thing They Can Agree On: It’s Time To Stop Misusing P-Values ---
http://fivethirtyeight.com/features/statisticians-found-one-thing-they-can-agree-on-its-time-to-stop-misusing-p-values/

How many statisticians does it take to ensure at least a 50 percent chance of a disagreement about p-values? According to a tongue-in-cheek assessment by statistician George Cobb of Mount Holyoke College, the answer is two … or one. So it’s no surprise that when the American Statistical Association gathered 26 experts to develop a consensus statement on statistical significance and p-values, the discussion quickly became heated.

It may sound crazy to get indignant over a scientific term that few lay people have even heard of, but the consequences matter. The misuse of the p-value can drive bad science (there was no disagreement over that), and the consensus project was spurred by a growing worry that in some scientific fields, p-values have become a litmus test for deciding which studies are worthy of publication. As a result, research that produces p-values that surpass an arbitrary threshold are more likely to be published, while studies with greater or equal scientific importance may remain in the file drawer, unseen by the scientific community.

The results can be devastating, said Donald Berry, a biostatistician at the University of Texas MD Anderson Cancer Center. “Patients with serious diseases have been harmed,” he wrote in a commentary published today. “Researchers have chased wild geese, finding too often that statistically significant conclusions could not be reproduced.” Faulty statistical conclusions, he added, have real economic consequences.

“The p-value was never intended to be a substitute for scientific reasoning,” the ASA’s executive director, Ron Wasserstein, said in a press release. On that point, the consensus committee members agreed, but statisticians have deep philosophical differences1 about the proper way to approach inference and statistics, and “this was taken as a battleground for those different views,” said Steven Goodman, co-director of the Meta-Research Innovation Center at Stanford. Much of the dispute centered around technical arguments over frequentist versus Bayesian methods and possible alternatives or supplements to p-values. “There were huge differences, including profoundly different views about the core problems and practices in need of reform,” Goodman said. “People were apoplectic over it.”

The group debated and discussed the issues for more than a year before finally producing a statement they could all sign. They released that consensus statement on Monday, along with 20 additional commentaries from members of the committee. The ASA statement is intended to address the misuse of p-values and promote a better understanding of them among researchers and science writers, and it marks the first time the association has taken an official position on a matter of statistical practice. The statement outlines some fundamental principles regarding p-values.

Among the committee’s tasks: Selecting a definition of the p-value that nonstatisticians could understand. They eventually settled on this: “Informally, a p-value is the probability under a specified statistical model that a statistical summary of the data (for example, the sample mean difference between two compared groups) would be equal to or more extreme than its observed value.” That definition is about as clear as mud (I stand by my conclusion that even scientists can’t easily explain p-values), but the rest of the statement and the ideas it presents are far more accessible.

One of the most important messages is that the p-value cannot tell you if your hypothesis is correct. Instead, it’s the probability of your data given your hypothesis. That sounds tantalizingly similar to “the probability of your hypothesis given your data,” but they’re not the same thing, said Stephen Senn, a biostatistician at the Luxembourg Institute of Health. To understand why, consider this example. “Is the pope Catholic? The answer is yes,” said Senn. “Is a Catholic the pope? The answer is probably not. If you change the order, the statement doesn’t survive.”

A common misconception among nonstatisticians is that p-values can tell you the probability that a result occurred by chance. This interpretation is dead wrong, but you see it again and again and again and again. The p-value only tells you something about the probability of seeing your results given a particular hypothetical explanation — it cannot tell you the probability that the results are true or whether they’re due to random chance. The ASA statement’s Principle No. 2: “P-values do not measure the probability that the studied hypothesis is true, or the probability that the data were produced by random chance alone.”

Nor can a p-value tell you the size of an effect, the strength of the evidence or the importance of a result. Yet despite all these limitations, p-values are often used as a way to separate true findings from spurious ones, and that creates perverse incentives. When the goal shifts from seeking the truth to obtaining a p-value that clears an arbitrary threshold (0.05 or less is considered “statistically significant” in many fields), researchers tend to fish around in their data and keep trying different analyses until they find something with the right p-value, as you can see for yourself in a p-hacking tool we built last year.

Continued in article

Bob Jensen's threads on how accountics scientists in accounting research have been worshiping the false idols of p-values for decades ---
http://faculty.trinity.edu/rjensen/theory01.htm#WhatWentWrong


Ted Talks --- https://en.wikipedia.org/wiki/TED_(conference)

Allegedly the Top Five TED Talks for CPAs ---
http://www.journalofaccountancy.com/newsletters/2016/jun/ted-talks-to-inspire-cpas.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=30Jun2016


"4 Big Economic Questions Now Facing the EU,' by Fernando Fernandez, Harvard Business Review Blog, June 28, 2016 ---
https://hbr.org/2016/06/4-big-economic-questions-now-facing-the-eu?referral=00209&cm_mmc=email-_-newsletter-_-finance-_-finance_date&utm_source=newsletter_finance&utm_medium=email&utm_campaign=finance_date


Big Data Analysis Versus Cluster Analysis

Big Data --- https://en.wikipedia.org/wiki/Big_data

. . .

Analysis of data sets can find new correlations to "spot business trends, prevent diseases, combat crime and so on."[2] Scientists, business executives, practitioners of medicine, advertising and governments alike regularly meet difficulties with large data sets in areas including Internet search, finance and business informatics. Scientists encounter limitations in e-Science work, including meteorology, genomics,[3] connectomics, complex physics simulations, biology and environmental research.[

"As Big Data Comes to College, Officials Wrestle to Set New Ethical Norms," by By Goldie Blumenstyk, Chronicle of Higher Education, June 28, 2016 ---
http://chronicle.com/article/As-Big-Data-Comes-to-College/236934?cid=at&utm_source=at&utm_medium=en&elqTrackId=21fea4cb4e564b27a086d1b0bac37d20&elq=f0600a68e23f4857bca9ccc0913c2eae&elqaid=9631&elqat=1&elqCampaignId=3438

Cluster Analysis --- https://en.wikipedia.org/wiki/Cluster_analysis

Jensen Comment
In the prime of my research years I devoted many, many hours seeking to improve cluster analysis. I think there is an interesting similarity between Big Data Analysis and Cluster Analysis. That similarity is what is tantamount to stirring the pot of a data set to look for lumps. Traditional empirical research entails forming hypotheses in advance, building testing models (often regression models of some type or time series models), and then testing these models in a database.

Big Data Analysis and Cluster Analysis take a different tack. Instead of forming hypotheses and building testing models in advance, BD and CA analyses stir the pot searching for hypotheses to test. For example, at a conference I listened to a speaker who had a child diagnosed with a rare disease. The doctors though this was one disease. The speaker went around the world and collected all sorts of data on the small number diagnosed with this disease.

The speaker then used cluster analysis on the data he'd collected. What he found is that the patients tended to cluster into three groups. This suggested two hypetheses that might be tested. Hypothesis 1 is that what doctors were calling one disease was really three separate diseases. Hypothesis 2 was that this was one disease with three distinct sub-types.

The begs the question of whether cluster analysis can become a type of Big Data Analysis in the 21st Century.
My opinion is negative. In my research years cluster analysis was never practical for large databases due to computer limitations. Computers have greatly improved but not to a point, in my opinion, where cluster analysis is practical for Big Data. Of course in retirement I've not tracked advances in cluster analysis. But cluster analysis faded from the scene largely due to computing nightmares.

Here are some of Bob Jensen's earlier papers on cluster analysis ---
http://faculty.trinity.edu/rjensen/Resume.htm

"A Dynamic Programming Algorithm for Cluster Analysis," The Journal of Operations Research,
Vol. 17, No. 6, November-December 1969.

"A Dynamic Programming Algorithm for Cluster Analysis," Mathematical Programming in Statistics,
Edited by Arthanari and Dodge, New York, John Wiley & Sons.

"A Cluster Analysis Study of Financial Performance of Selected Business Firms," The Accounting Review,
Vol. XLVI, No. 1, January 1971, 36-56.

"Isotropic Scaling of the Interior Components Inside Joiner Scaler Block Clusterings of Entities (Cases) and Variates (Attributes): An Application to United Nations Voting Records,"
University of Manchester, England
, October 3, 1988.

Seminar on cluster analysis, sponsored by The Institute for Advanced Technology,
January 10 and 11, 1972, New York City.

COMPARISONS OF EIGENVECTOR, LEAST SQUARES, CHI SQUARE, AND LOGARITHMIC LEAST SQUARES
METHODS OF SCALING A RECIPROCAL MATRIX ---
http://faculty.trinity.edu/rjensen/127wp/127wp.htm

Added Jensen Comment
I said I spent many, many hours of time in cluster analysis. including one summer on a research grant at the University of Waterloo in Canada.  Much of this became wasted time looking for more efficient ways to perform cluster analysis on larger databases.
Sigh!


"Tenure/Teaching: The Pendulum Swings (away from teaching performance)," by Joseph Asch, Dartmouth Daily Blog, July 21, 2016 ---
http://www.dartblog.com/data/2016/07/012717.php

Faculty hired 5-7 years ago were told explicitly that a couple of peer-reviewed articles and a book contract with a well-respected academic press was sufficient for tenure. I often used the word “humane” to describe the requirements for tenure, in that they rewarded both scholarship of a high caliber and teaching prowess. Dartmouth had a reputation as a place where work-life balance was valued, and the inconveniences associated with its rural location were offset by the benefits of raising children within a close-knit community.

Professors hired at that time are now coming up for tenure, having been mentored by department members whose curriculum vitae were far less impressive when they initially made associate. Some of my peers were pressured into service commitments that would have no bearing on tenure, and encouraged to take on projects (writing for anthologies and organizing conferences, for example) that would be time-consuming yet not lead to professional advancement. Recent tenure decisions have many members of my cohort scrambling for the exits—going on the market and taking on visiting appointments elsewhere—now that they understand that they were given a false impression of how different aspects of their trajectories would be evaluated.

I hate to say this, but many younger colleagues express regret at having agonized over their lesson plans and expended so much effort on honing their skills as classroom instructors, when a talent for teaching simply does not factor into tenure decisions. Phil Hanlon’s recent remarks on education only confirm what we already know, that Dartmouth is moving toward a corporate state university model wherein professors are retained for their “productivity”—quantity of publication over quality—and ability to bring in large grants, while underpaid adjuncts teach undergraduates.

The standalone graduate school announced in October cements Dartmouth’s movement in this direction, since teaching experience is mandatory for professionalization, and what are graduate students but an easily exploitable workforce?

I hope readers appreciate this carefully thought through and well expressed opinion. That Phil has tightened up tenure standards is a good thing — we have noted in the past that Jim Wright and his gang often granted tenure for political loyalty and social ties (to people who will be in Hanover for 30+ years stuck at the associate professor level) — but Phil’s search for prestige has gone too far: the word is out there now among tenure-track faculty members that Phil and Carolyn are looking only for prestige and publications, and teaching and mentoring students count for little or nothing.

Continued in article

Jensen Comment
I think this article is probably a bit too broad brush. Firstly, I don't think you can paint quite such a broad brush across all schools and departments of a power university like Dartmouth. Secondly, I don't think you can paint such a broad brush across all tenure cases.

For example, the medical school is probably an outlier that places more value on clinical reputation within the medical school than external reputation. It would be very hard expensive to hang on to an extremely skillful surgeon with a national or international reputation. Perhaps the medical school must suffice with more emphasis on internal and opposed to external reputation.

Prestigious universities like Dartmouth tend to place high value on a combination of internal and external reputation. A tenure candidate with an extremely high reputation for teaching across various departments is not exactly like a tenure case for a lesser-known teacher. A strong researcher with a miserable teaching reputation across various departments is not exactly like a strong researcher with a better (not necessarily) stellar teachingt reputation.

Also Dartmouth is not exactly immune from diversity and affirmative action concerns. For example Dartmouth has a well-funded program to attract native American students at both the graduate and undergraduate levels. I can't imagine denying tenure to a native American tenure candidate with a strong teaching reputation who has slightly fewer hits in top journals than a white male tenure candidate.

Having said this I do know that times have changed in prestigious schools of business. Four decades ago some Harvard Business School faculty were not necessarily known for their research publications in top business academic journals. They sometimes built their reputations of their writings of textbooks and teaching case books where they were also known for their consulting in the boardrooms of huge multinational business firms. Reputation among corporate CEOs trumped having ten multivariate regression studies in The Accounting Review or the Journal of Marketing Research.

Those days have changed somewhat in that the 21st Century new tenure awards at prestigious universities go to rising faculty stars with reputations in consulting who also have their names on 20 or more business research journal where their names are alongside three or more co-authors who maybe did a lot of the data mining in each published paper.

Having said this, I would be very shocked if the Harvard Business School or Tuck School of Business (at Dartmouth) put a lousy teacher in front of an MBA class. I do know of one lousy teacher in the Harvard Business School who was a renowned international writer of cases, but I don't think the HBS put him in front of MBA students, at least not in front of the typically large classes in the MBA program at Harvard. He has since left Harvard. Actually I don't hear anything about him anymore, but I'm told he's not yet fully retired. I think he got tenure at Harvard when tenure hurdles were different than they are in the 21st Century. Now he would have to be a stellar teacher with 20 or more published multiple regression studies (co-authored of course).

Harvard by the way has a ten-year tenure track, unlike most universities that follow the traditional AAUP seven-year track.


Thomas Kuhn --- https://en.wikipedia.org/wiki/Thomas_Kuhn

Paradigm Shift --- https://en.wikipedia.org/wiki/Paradigm_shift

"What Is A Paradigm Shift, Anyway?" by Tania Lombrozo, NPR, July 18. 2016 ---
 http://www.npr.org/sections/13.7/2016/07/18/486487713/what-is-a-paradigm-shift-anyway

Thomas Kuhn, the well-known physicist, philosopher and historian of science, was born 94 years ago today. He went on to become an important and broad-ranging thinker, and one of the most influential philosophers of the 20th century.

Kuhn's 1962 book, The Structure of Scientific Revolutions, transformed the philosophy of science and changed the way many scientists think about their work. But his influence extended well beyond the academy: The book was widely read — and seeped into popular culture. One measure of his influence is the widespread use of the term "paradigm shift," which he introduced in articulating his views about how science changes over time.

Inspired, in part, by the theories of psychologist Jean Piaget, who saw children's development as a series of discrete stages marked by periods of transition, Kuhn posited two kinds of scientific change: incremental developments in the course of what he called "normal science," and scientific revolutions that punctuate these more stable periods. He suggested that scientific revolutions are not a matter of incremental advance; they involve "paradigm shifts."

Talk of paradigms and paradigm shifts has since become commonplace — not only in science, but also in business, social movements and beyond. In a column at The Globe and Mail, Robert Fulford describes paradigm as "a crossover hit: It moved nimbly from science to culture to sports to business."

But what, exactly, is a paradigm shift? Or, for that matter, a paradigm?

The Merriam-Webster dictionary offers the following:

Simple Definition of paradigm:

Accordingly, a paradigm shift is defined as "an important change that happens when the usual way of thinking about or doing something is replaced by a new and different way."

More than 50 years after Kuhn's famous book, these definitions may seem intuitive rather than technical. But do they capture what Kuhn actually had in mind in developing an account of scientific change?

It turns out this question is hard to answer — not because paradigm has an especially technical or obscure definition, but because it has many. In a paper published in 1970, Margaret Masterson presented a careful reading of Kuhn's 1962 book. She identified 21 distinct senses in which Kuhn used the term paradigm. (That's right: 21.)

Consider a few examples.

First, a paradigm could refer to a special kind of achievement. Masterson quotes Kuhn, who introduces a paradigm as a textbook or classic example that is "sufficiently unprecedented to attract an enduring group of adherents away from competing modes of scientific activity," but that is simultaneously "sufficiently open-ended to leave all sorts of problems for the redefined group of practitioners to resolve." Writes Kuhn: "Achievements that share these two characteristics I shall henceforth refer to as 'paradigms.' "

But in other parts of the text, paradigms cover more ground. Paradigms can offer general epistemological viewpoints, like the "philosophical paradigm initiated by Descartes," or define a broad sweep of reality, as when "Paradigms determine large areas of experience at the same time."

Given this bounty of related uses, Masterson asks a provocative question:

Is there, philosophically speaking, anything definite or general about the notion of a paradigm which Kuhn is trying to make clear? Or is he just a historian-poet describing different happenings which have occurred in the course of the history of science, and referring to them all by using the same word "paradigm"?

Continued in article

Jensen Comment
Ask your accounting theory students if there have been any paradigm shifts in accounting?
Were these shifts tided to the paradigm shifts in finance?

On its 50th anniversary, Thomas Kuhn’s "The Structure of Scientific Revolutions" remains not only revolutionary but controversial.
 "Shift Happens," David Weinberger, The Chronicle Review, April 22, 2012 ---
 http://chronicle.com/article/Shift-Happens/131580/?sid=cr&utm_source=cr&utm_medium=en

From the Stanford University Encyclopedia of Philosophy
Science and Pseudo-Science --- http://plato.stanford.edu/entries/pseudo-science/

Enter "Paradigm Shift" as a search phrase in MAAW ---
http://www.maaw.info/Searchmaaw.htm
Keep scrolling down

  • I hope Jim K will comment on how "research in business schools is becoming increasingly distanced from the reality of business"
    "In 2008 Hopwood commented on a number of issues," by Jim Martin, MAAW Blog, June 26, 2013 ---
    http://maaw.blogspot.com/2013/06/in-2008-hopwood-commented-on-number-of.html

    The first issue below is related to the one addressed by Bennis and O'Toole. According to Hopwood, research in business schools is becoming increasingly distanced from the reality of business. The worlds of practice and research have become ever more separated. More and more accounting and finance researchers know less and less about accounting and finance practice. Other professions such as medicine have avoided this problem so it is not an inevitable development.

    Another issue has to do with the status of management accounting. Hopwood tells us that the term management accountant is no longer popular and virtually no one in the U.S. refers to themselves as a management accountant. The body of knowledge formally associated with the term is now linked to a variety of other concepts and job titles. In addition, management accounting is no longer an attractive subject to students in business schools. This is in spite of the fact that many students will be working in positions where a knowledge of management control and systems design issues will be needed. Unfortunately, the present positioning and image of management accounting does not make this known.

    Continued in article

    Avoiding applied research for practitioners and failure to attract practitioner interest in academic research journals ---
    "Why business ignores the business schools," by Michael Skapinker
    Some ideas for applied research ---
    http://faculty.trinity.edu/rjensen/theory01.htm#AcademicsVersusProfession

    Essays on the (mostly sad) State of Accounting Scholarship ---
    http://www.cs.trinity.edu/~rjensen/temp/AccounticsDamn.htm#Essays


Accounting History Corner
"REFLECTIONS ON THE USES OF ACCOUNTING HISTORY," by S. Paul Garner, Accounting Historians Journal, 1974 ---
http://130.74.92.202:82/articles/1000774.1828/1.PDF 

As our new organization of accounting historians begins its endeavors, we might pause for a moment and reflect on just what uses might be accomplished by efforts to attract more interest in account - ing history. Each new member of The Academy, in his natural enthusiasm for the subject area, could easily outline several responses to the editorial question raised by this introductory note. would like to offer the following suggestive views on this matter.

1. Every profession should take modest pride in its background and development. In fact, one of the attributes of any recognized profession is relative concern for, and its energy in, ferreting out items concerning its origin and evolution. Accounting should be no exception to this general prospective.

2. Study and research in accounting history are open to almost everyone having an accounting bent. The eagle eyes and ears of accounting historians will find few limits to possible surprise find - ings and important discoveries. In other words, everyone has an opportunity to make a contribution to the filling in of unknown details. Accounting history research is somewhat similar to the search for oil, that is, information regarding accounting history is where one finds it.

3. Many newcomers to the profession of accounting and corporate reporting, when they read the frequent comments in the literature of today concerning accounting problems and challenges, may not be aware that the current situation is so much better than the “old days” as to be almost shocking. Therefore, the study of accounting history should tend to overcome the discouragement with the present status of this field of endeavor. Analogies from the past might even assist in curing some of the present imponderables

Continued in article

Go to http://130.74.92.202:82/record=b1000774
Click the tiny font "View Searchable PDF" for a Table of Contents
If that does not work try a different Internet browser


Accounting History Corner
"HAZY HISTORY: FACT AND FOLKLORE IN ACCOUNTING," by Gary John Previts, Accounting Historians Journal, 1974 ---
http://130.74.92.202:82/articles/1000774.1828/1.PDF 

We have, as accounting historians, all been subjected to some form of intellectual affrontery by non-historians who question the value of our pursuits. This is a rather uncomfortable feeling, and places us on the defensive—when indeed non - historians are the ones who may well have tarnished history’s name. It is they, being so desperate for clever historical material about accounting, that have promoted and perpetuated apocryphal items in order to pro - vide historical background in support of contemporary illustrations. The time has clearly arrived for us to take the offensive in citing these loose items and at the same time conduct research to develop valid replace men ts.

For example, the excellent bit of research by our colleague Mr. Albert Newgarden entitled “Goodbye, Mr. Hubbard” ( The Arthur Young Journal , Spring/Summer 1969) destroys the mythical descrip - tion of the “typical auditor” attributed to Elbert Hubbard. Haven’t we all heard it? “ . . .[A] man past middle life, tall, spare . . . with eyes like a codfish . . . as damnably composed as a concrete post. . . . ." But as Newgarden shows, it is fiction—or folklore, for Hubbard did not write or say it at all. Indeed the quote refers to “The Buyer” (Volume Ill, Selected Writings of Elbert Hubbard, 1922).

Yet modern comments on the image of accountants (“Young Man Be An Accountant,” Esquire , Sept. 1961, p. 71) and writings dating back more than a quarter century (Theodore Lang, N.A.C.A. Bulle- tin, Sec. 1, July 15, 1947, p. 1,377) relish the use of this fable.

Even Professor Horngren along with Professors Burns and Hendrickson have been “taken in” during the last decade using Hubbard’s “quote.” Horngren is victimized twice however, his most recent edition (Chapter 6, p. 174, item 14) as well as a previous edition (Chapter 9, p. 291, item 15) both carry on the tale. While Burns and Hendrickson include the story from Esquire in their 1967 edition of The Accounting Sampler , (p. 296) they make no reference to it in their 1972 revision. Of one point there should be no question,

Continued in article

 

Go to http://130.74.92.202:82/record=b1000774
Click the tiny font "View Searchable PDF" for a Table of Contents
If that does not work try a different Internet browser


Harvard Business Review:  How Amazon Adapted Its Business Model to India ---
https://hbr.org/2016/07/how-amazon-adapted-its-business-model-to-india?referral=00202&cm_mmc=email-_-newsletter-_-weekly_hotlist-_-hotlist_date&utm_source=newsletter_weekly_hotlist&utm_medium=email&utm_campaign=hotlist_date


The SEC's Role in International Accounting

Developing International Accounting Standards — The SEC's 20-Year Journey (June 1995‒December 2015): Part 2 (August 2006‒December 2015)
SSRN, July 15, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2810302
Journal of Accounting, Ethics and Public Policy, Vol. 17, No. 3, 2016 

Author

Helen M. Roybark Radford University - College of Business and Economics

Abstract

Cross-border investment opportunities soared in the late 1980s and 1990s, resulting in a call to harmonize accounting standards. For the past twenty years, the U.S. Securities and Exchange Commission (SEC or Commission) has invested significant resources in support of achieving a high quality set of global accounting standards that could be used in cross-border transactions.

In March 1996, more than 750 foreign issuers, representing over 45 countries, were registered with the SEC (Sutton, 1996). The U.S. Congress also was interested and engaged in the international accounting standards debate. In 1996, the Congress directed the SEC to respond to the expanding global securities markets by supporting the development of a high quality set of global accounting standards as soon as realistically possible.

The purpose of this study is to evaluate the SEC, and specifically, the Office of the Chief Accountant and its Chief Accountants because accounting standards generally are established and enforced by the SEC's Chief Accountant, and these individuals' actions and relationships primarily with three external standard-setting bodies (FASB, IASC, and IASB) — across two decades (June 1995‒December 2015) — for the purpose of assessing the Commission's actions and furtherance of a high quality set of global accounting standards that can be used for cross-border transactions in the United States and across other global markets. This study was presented as a two-part series. Part 1 covered the period of June 1995 to August 17, 2006, while Part 2 covers the period August 18, 2006 through December 2015.

Bob Jensen's threads on accounting standard setting ---
http://faculty.trinity.edu/rjensen/theory01.htm#MethodsForSetting


Rethinking Financial Reporting: Standards, Norms and Institutions
SSRN, April 22, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2809719

Author

Shyam Sunder Yale University - School of Management

Abstract

Since the passage of the US federal securities laws more than eight decades ago, much regulatory effort has been devoted to Improving financial reports of business, government and not-for-profit organizations. Yet, evidence on improvements, or abatement of misreporting by error or intent remains scarce. It is useful to explore what we might mean by better financial reporting, and how we might define and implement processes to move in that direction. A broad agreement on which way is ahead seems necessary to make progress.

Creating and sustaining institutions that follow a stable and conservative process for gradually adjusting the prevailing practices toward any long-term shifts may help evolve a better financial reporting environment. This approach departs from the tendency to issue new rules, often disregarding the lessons of practice that has created much confusion and failures in financial reporting over the past half-a-century. The eagerness to deal with transaction innovations through new pronouncements ends up fueling the cycle of more innovations, misrepresentations and abuse and calls for yet newer rules. The enormous resources and attention devoted to written rules have been accompanied by waning professional responsibility for good judgment and regard for practice and practicality. We argue for targeting a better balance between top-down written rules and emergent social norms as reflected in business and accounting practice through restraining activist institutions of accounting. Suggestions on whether and how better social norms can be engineered are only preliminary at this time.

Jensen Comment
Shyam is a long-time friend of mine and has been a leader in the American Accounting Association.
Shyam also led the resistance movement among academics to the replacement of US GAAP by IFRS. His main objection was a fear of giving the FASB a global monopoly on the setting of accounting standards. Shyam is mostly an economist with a history of academic research opposing monopoly powers in the economy.

I also resisted this replacement largely in fear that America's detractors (in the EU) and enemies in many USA-hating nations that have voices in setting of IFRS would use this as another lever to hurt the USA economy ---
http://faculty.trinity.edu/rjensen/theory01.htm#MethodsForSetting

In reality I don't think academics, including Shyam and I, were very prominent in the total resistance movement in the USA against replacing US GAAP with IFRS. The primary resistance came from business firms of all sizes that just did not want to incur the enormous cost and the enormous implementation problems (including training and software conversion) of the replacement process. That is not to say that most multinational firms and multinational CPA firms did not do their best in trying to persuade the SEC to not put off adoption of IFRS.


"As Dual Enrollments Swell, So Do Worries About Academic Rigor," by Katherine Mangan, Chronicle of Higher Education, July 22, 2016 ---
http://chronicle.com/article/As-Dual-Enrollments-Swell-So/237220?cid=at&utm_source=at&utm_medium=en&elqTrackId=88ff3b6b967d4768aa30a44690ae9dd8&elq=040eca75a0ba44aeb7cf94488a83963f&elqaid=9954&elqat=1&elqCampaignId=3664

Jensen Comment
The enormous difference between college education in Europe versus the USA is that in Europe going to college is a competitive process based upon academic rigor and less than half of the Tier 2 graduates are allowed into colleges. In the USA, especially under the initiatives of Sanders and Hillary Clinton, college will be free to almost everybody and colleges wanting the money will admit students that would never get into college in Europe. What college education in the USA will become is like a kindergarten pet competition. Every person will get a top blue ribbon (diploma), and nobody will be denied admission.

Already the median college grade in the USA is an A-. It can go higher. Soon the median grade will be an A+.


Can We Predict Success in the First Intermediate Accounting Course From Sophomore-Level Performance?
SSRN, July 14, 2016 ---
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2809994
Journal of Accounting, Ethics and Public Policy, Vol. 17, No. 3, 2016

 

Authors

Marvin Lynn Bouillon Central Washington University

Clemense Edmond Ehoff Central Washington University

 

Abstract

The purpose of this study was to determine potential predictors of success for transfer and nontransfer students in their first intermediate accounting class. Data was collected on the grades in the sophomore-level accounting classes, cumulative GPA, transfer status and student’s gender for 251 students completing the first intermediate accounting class. The data further identified students with the main campus and two teaching centers offering the intermediate accounting course. Further analysis was done on the 76 students that took the course at the main campus because the two teaching centers enrolled mostly transfer students. The cumulative GPA and the grades in the sophomore-level classes were highly correlated to the grade in the first intermediate accounting course. Overall, we found that the managerial accounting class was the best predictor of a student’s grade in the first intermediate accounting class when we focused on the main campus sample. The transfer status and student gender were generally not significantly associated with the grade.

Jensen Comment
Do students with weak gpa performance take intermediate 1 accounting? I think those few weak students are probably outliers who affect the outcomes of such a study.

What about transfer students with high gpa performance?

My experience, as Chair of the Accounting Department at Florida State University, when we were forced to accept transfer students from 33 two-year community colleges is that the community college gpa performances were severely inflated. We experienced high Intermediate 1 accounting failure rates from the transfer students who were mislead by their high gpa transfer grades.

Of course there were exceptions for very good transfer students, but these tended to be outliers.

The FSU policy of having to admit transfer students into Intermediate 1 accounting if they chose to do so led to an extremely large number of sections of Intermediate I relative to Intermediate 2 because of the filtering that took place in Intermediate 1.

Because we had to staff so many sections of Intermediate 1 the first two courses in accounting at FSU (before our own students took Intermediate 1 as juniors) the two sophomore accounting principles courses were taught by adjunct faculty in very large lecture halls plus recitation sections run mostly by accounting doctoral students. In the four years I was at FSU the wife (Debbie) of our doctoral student Chuck Mulford taught our first Principles 1 lecture sections having hundreds of non-transfer students. Debbie had CPA experience but was not in our doctoral program. The Principles 2 course was taught by an adjunct (Jan) who eventually married Jim Hasselback

In my opinion, the high-gpa non-transfer students in their second year at FSU who moved on into Intermediate 1 tended to do much better on average than the high-gpa transfer students that necessitated the large number of Intermediate 1 sections to be staffed by me as department chair.

After those four years as an administrator in my eventually 40 years as a full-time faculty member I never wanted to again be in administration. I truly admire and respect the faculty who sacrifice a lot to be administrators. I do want to thank KPMG alumni of FSU who contributed a salary supplement during my experiment at being an administrator. Those were tough years because there was almost no money for faculty raises among my staff while I was at FSU.

 I think the Marvin Lynn Bouillon and Ehoff study cited above is probably misleading for any universities that accept large

 

July 17, 2016 reply from Hossein Nouri

Bob:

In a study we conducted (HOW DO TRANSFER STUDENTS IN ACCOUNTING COMPARE ACADEMICALLY TO “NATIVE” STUDENTS?), we found a different results and found difference between native and transfer students in intermediate I. See the article at:

http://gpae.bryant.edu/~gpae/Vol13/Transfer Students Compare Academically.pdf 

Hossein Nouri

July 18, 2018 reply from Bob Jensen

Perhaps one difference is that you could selectively choose which transfer students to admit.

Florida's senior state universities like Florida State University cannot deny admission to any state-supported community college graduates.


Medicare Fraud is Rampant ---
 http://townhall.com/columnists/stevesherman/2016/02/05/medicare-fraud-is-rampant-n2115375?utm_source=thdaily&utm_medium=email&utm_campaign=nl&newsletterad=

Feds break up $1 billion (with a "b") Medicare scam in Miami — biggest in U.S. history ---
http://www.miamiherald.com/news/local/community/miami-dade/article91231277.html#storylink=cpy


The Cartoon Introduction to Economics: Volume One: Microeconomics
by Yoram Bauman (Author), Grady Klein (Illustrator)
https://www.amazon.com/gp/product/0809094819/ref=pe_848010_200569600_em_1p_0_ti

ISBN-13: 978-0809094813
ISBN-10: 0809094819

 

 

********************************************************************************

Economix: How Our Economy Works (and Doesn't Work), in Words and Pictures
by Michael Goodwin and David Bach
https://www.amazon.com/Economix-Economy-Works-Doesnt-Pictures/dp/0810988399/ref=sr_1_1?s=books&ie=UTF8&qid=1469268641&sr=1-1&keywords=how+our+economy+works

ISBN: 978-0-8100-8839-2

Jensen Comment
I bought the Goodwin and Bach book out of curiosity. It is a book of rather, but not completely, disappointing cartoons. It's not a textbook with end-of-chapter material and does not have footnote referencing. It does have a reasonably good index.

Jensen Comment
Are there any comparable "cartoon" books for accounting education?
Note that "cartoon" education books are not usually humorous.

Shutterstock does have images that you can paste into your own books and articles ---
In email messaging it's best not to take up file size with graphics and pictures unless they serve a justifiable purpose.

http://www.shutterstock.com

July 23, 2016 Reply from Elliot Kamlet

Not for free but

http://www.glasbergen.com/accountant-cartoons/

 

https://www.andertoons.com/search-cartoons/accounting

 

https://www.cartoonstock.com/directory/a/accounting.asp

 

http://dilbert.com/search_results?terms=Accounting
 


 

https://www.pinterest.com/explore/accounting/?from_navigate=true
 

 


From Bob Herz, Former Director of the FASB

Measuring What Matters: Industry Specificity Helps Companies and Investors Gain Traction on Sustainability
SSRN, Spring 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2808222 
Journal of Applied Corporate Finance, Vol. 28, Issue 2, pp. 34-38, 2016

Authors

Bob Herz (Sustainability) Accounting Standards Board

Jean Rogers (Sustainability) Accounting Standards Board

Abstract

Financial analysts interpret the performance of companies and their securities through an industry lens. Just as an industry approach is critical in financial analysis, it's also critical in helping investors evaluate sustainability performance, since sustainability issues differ from one industry to the next - in large because of differences in how companies use natural and other social resources when bringing their goods and services to market, and how they impact society and the environment in the process. The Sustainability Accounting Standards Board (SASB) was created in 2012 to deliver a full set of sustainability accounting standards that can be used to guide industry‐specific corporate sustainability disclosure to the capital markets. SASB has now issued provisional standards for 79 industries, thereby enabling companies and investors for the first time to identify patterns of sustainability risks and opportunities both across and within industries. Although high‐level issues such as climate change, product safety, and resource intensity and scarcity have material impacts across a variety of sectors, those impacts often vary greatly from one industry to the next. Thus, although the risk may be ubiquitous, it is also differentiated to the point that each industry has its own distinct sustainability profile. Understanding these unique profiles can help companies better manage the issues that are most likely to present material risks to their industries.


Tax Lawyers Say Proposed Debt/Equity Regulations Exceed Treasury Department's Statutory Authority ---
http://taxprof.typepad.com/taxprof_blog/2016/07/tax-lawyers-say-proposed-debtequity-regulations-exceed-treasury-departments-statutory-authority.html 


 

SEC Accuses KPMG Partner, Two Others With Insider Trading ---
Business Insider, July 8, 2016
http://www.businessinsider.com/r-sec-accuses-kpmg-partner-in-atlanta-two-others-of-insider-trading-2016-7

Remember how we were all shocked when KPMG's Los Angeles managing partner Scott London went to the slammer (14 months) for insider trading ---
http://www.latimes.com/business/money/la-fi-mo-kpmg-scott-london-sentencing,0,3315282.story#axzz2zuM77Xjv

This is on the heels of one of the felonious partner (Scott London) insider trading scandal:
"Another 'Rogue' Audit Partner; Another 'Duped' Audit Firm," by Francine McKenna, Forbes, April 10, 2013 ---
http://www.forbes.com/sites/francinemckenna/2013/04/10/another-rogue-audit-partner-another-duped-audit-firm/

What is it with KPM$ partners?


Chrysler vehicles (Jeep, RAM, and Fiat) are rated by Consumer Reports as the least reliable vehicles on the road.
Now Chrysler'z revenue reporting is voted by the SEC as the least reliable in finance ---

http://www.bloomberg.com/news/articles/2016-07-18/fiat-chrysler-said-to-face-u-s-justice-department-fraud-probe


"Auditor PwC said to be under investigation in biotech fund embezzlement case," by Francine McKenna, MarketWatch, July 18, 2016 ---
http://www.marketwatch.com/story/auditor-pwc-said-to-be-under-investigation-in-biotech-fund-embezzlement-case-2016-07-18


University Of Memphis Gives Adjuncts 40% Raise; Adjunct Teaching Full Load Would Earn Less Than Minimum Wage
(But No Adjuncts Teach Full Load Because Of ObamaCare)
http://taxprof.typepad.com/taxprof_blog/2016/07/university-of-memphis-gives-adjuncts-40-raise-adjunct-teaching-full-load-would-earn-less-than-minimu.html

Jensen Comment
First let me say that this pay is exceptionally low. I can't imagine it attracts quality adjuncts who need the money. Those going for the money must be financially desperate. Or it could be desperation to add a few lines to a resume.

Secondly the pay is so low that it discourages time commitment outside the classroom.


"Why Land and Homes Actually Tend to Be Disappointing Investments," by Robert J. Schiller, The New York Times, July 15, 2016 ---
http://www.nytimes.com/2016/07/17/upshot/why-land-may-not-be-the-smartest-place-to-put-your-nest-egg.html?_r=1

Jensen Comment
This article is yet another example of how to mislead with statistics. Making money in land parcels and homes is exactly like making money in the stock market --- you've got to have picked the right ones to put into your portfolio. I sold an Iowa farm that more than doubled in value after I sold it. One reason was the idiotic decision to subsidize corn farmers by requiring upwards of 10% corn ethanol in every gallon of gas. North Dakota farmers made a lot of money selling oil rights. Owners of condos in Manhattan and San Francisco made small fortunes on tiny bits of property. Houses purchased for less than $50,000 in 1980 in Silicon Valley may be worth more than $5 million in 2016.

But what looks like good deals in stocks and real estate in hindsight is just that --- hindsight! There are no guarantees of high returns without taking risks unless you are in the Mafia where you can force your own returns. Expectations of higher returns means acquiring more financial risk for most of us.

There are some serious advantages to investing as much as you can in a home when you anticipate owning it for more than 10 years. Firstly, you get the added non-financial enjoyment of living in a wonderful home. Secondly, there are some tax breaks for the the 50% of taxpayers that really pay taxes. But there are a drawbacks. Property taxes are the primary way the USA funds its K-12 schools as well as pay for county and municipal services. In most instances growth rates for property taxes outpaced the capital gains since the real estate bubble burst in 2007.

There are also some wonderful instances where owners have successful rental properties such as owning a duplex where the rent from one half of the house pays all the expenses of the entire house. A friend of mine, Tom Selling, says that when he moved from Dartmouth it was a good decision to continue to rent his condo rather than sell it at the time. That is probably true of nearly all rental property close to college campuses if the property was purchased before the real estate bubble burst in 2007. There are some tax breaks of rental housing such as depreciation and maintenance expense write-offs. For example, half the cost of the roof on a duplex might be expensed.

Don't get carried away investing in land that has no serious annual cash inflow. Of course there are exceptions, but in general the taxes and maintenance fees (e.g., mowing) plus the eventual cost of selling the land take all the fun out of trying to eventually make a profit.

With bank savings deposits earning virtually zero interest it's tempting to take on more financial risks with your savings. Each investor is unique. I advise getting "free" advice from reputable mutual funds like Vanguard or Fidelity or TIAA. I don't advise paying dearly for it at your local investment advisor service. Find out the range of alternatives from long-term tax exempt mutual funds to diversified real estate fund to a variety of long-term and short term equity alternatives. Learn enough to become your own adviser.

Bob Jensen's helpers for investors (free because that may be more than they're worth) ---
http://faculty.trinity.edu/rjensen/bookbob1.htm#InvestmentHelpers


Hedge Accounting (scroll down) --- http://faculty.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#H-Terms

Will the FASB's proposed change in FAS 133 increase the use of derivatives for risk management?
WILL PLANNED DERIVATIVES ACCOUNTING CHANGES STEM FLOW OF RESTATEMENTS, IMPROVE RISK MANAGEMENT? ---
http://www.bna.com/planned-derivatives-accounting-b73014444911/

An oft-stated truism has it that accounting shouldn’t drive economics—the business practices of companies. The deals they make. The transactions they enter into.

However, as the vice chairman of the Financial Accounting Standards Board suggested recently, accounting rules for derivatives and hedging may be discouraging use of what otherwise would be sound risk-cutting activities involving the complex financial instruments.

So changes in complex extant accounting standards could lead enterprises back to considering (and actually using) reasonable risk management tools that hinge on derivatives, FASB sub-chief Jim Kroeker signaled recently.

And the perceived improvements might even stem the flow of costly and not-so-useful restatements caused by “application of the strict guidance in hedge accounting,” Kroeker suggested at FASB’s July 13 meeting. For chapter-and-verse quoters, the rules at issue are ASC 815, or the old FAS 133, vintage 1998.

A bit paradoxically, it seems, investors seem to find more useful the originally accounted-for numbers than those that resulted from (millions of dollars in spending for corrective reporting later) the restatement.

Worth a Long Quote.

Kroeker’s observations–drawn from years as an auditor at Deloitte and as chief accountant (and, before that, deputy chief accountant) at a certain regulatory agency that goes by the initials SEC—warrant lengthy quoting.

He offered them in laying out what he sees as the benefits of FASB’s package of streamlining and improvement— provisions for hedge accounting. (FASB hopes to issue its multi-front proposal on hedge accounting in September. Final rules are expected in early 2017.)

Kroeker, as does his board colleagues, sees improvements in financial reporting for investors and other users of financial statements. However, he also sees a beneficial tuning of prescribed accounting practices “in a way that I think is going to be operationally easier for many companies to achieve financial reporting that is more consistent with the risk management that they’re employing.”

He continued: “Even though we say—and I fully agree—accounting should not drive what transactions you get into, we certainly hear that the challenges of matching the reporting with the economics and hedge accounting has actually driven people away from engaging in what they think is otherwise reasonable risk management activity.

“That is yet to be seen,” Kroeker said. The accounting “can certainly be an excuse as to why somebody didn’t do something as well.

“But I think this frees up people to do that”—engage in the special deferral accounting more easily—“and to not hide behind that as an excuse if, in fact, they chose not to hedge for economic reasons, but want to blame it on accounting.”

Restatement Problems Mitigated?

Citing another benefit, Kroeker went on to tie the derivatives accounting issues to companies’ restatements of financial reporting. He suggested that FASB’s rulemaking has responded to expressions of concerns it has heard.

“There have been restatements because of the application of the strict guidance in hedge accounting that have actually caused financial reporting results to deviate further from the economics,” he said.

Continued in article

Jensen Comment
There are a lot of details to be fleshed in.before I will comment on this topic. I think the IASB went too far in simplifying accounting for derivatives and hedging activities. I hope the FASB does not take such a giant leap backwards in this era of using derivatives for risk management.

Bob Jensen's free tutorials on accounting for derivatives and hedge accounting ---
http://faculty.trinity.edu/rjensen/caseans/000index.htm

 


"How Accounting Standards Went Insane: It Didn't Start with IFRS Convergence," by Tom Selling, The Accounting Onlon, July 7, 2016 ---
http://accountingonion.com/2016/07/how-accounting-standards-went-insane-it-didnt-start-with-ifrs-convergence.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+typepad%2Ftheaccountingonion+%28The+Accounting+Onion%29

. . .

 

There is, of course, an obvious principles-based solution: to change the accounting for nonmonetary assets from historic cost to current cost (or value). In that way, the gains/losses on the liabilities would be largely balanced out by the losses/gains on assets. But, it is all too obvious why issuers would want none of that either.

Continued in article

Jensen Comment
We've been round and round this horn before so I won't repeat the details here.

First, current (replacement) cost is not valuation and for items subject to depreciation or depletion the same type of arbitrary accruals are required as in historical cost measurement. Also there's the huge problem of technological change. Valuing an aged 1978 Boeing 747 takes enormous subjectivity using the prices of the technologically-advanced and fuel-efficient airliners built in the 2016.

Second, accounting at "exit value" makes sense  for non-going concerns. But only economists in the high clouds can measure "value in use" that requires estimates of the higher order effects (synergies effects) of an asset integrated with other booked and non-booked assets such as human resources and intangibles that are impossible to value with any kind of precision.

Surely you jest about reporting inventories at current cost or value before manufactured items are sold. Firms could make enormous profits without ever selling anything they make. IPOs would love this kind of inventory-profit buildup. I recall that in past Onion articles you came down as being against carrying inventories at current cost or value.

Financial statements today are very difficult to audit and perhaps your arguments about the words "fair" and "true" have merit. But auditing non-financial assets at replacement costs or exit values entails enormous fictional variations in annual earnings that will never be realized in cash flows. And measuring such assets in terms of "value in use" is too expensive to do realistically and too subjective to have much in the way of consensus among management and auditors. Doing so is an open invitation to more fraudulent financial reporting than we have today.

Accounting for non-financial assets like inventories and patents and even factories at current cost or value is more insane that what we report today in the FASB/SEC Funny Farm.

What you have done Tom is propose what theorists since McNeal (exit value) and Canning (current) have proposed while at the same time overlook all the many arguments against the McNeal and Canning theory.

Bob Jensen's threads on fair value accounting theory are at
http://faculty.trinity.edu/rjensen/theory02.htm#FairValue


The great Al Hirschfeld had been supplying his much-loved caricatures to the New York Times for 37 years when, in 1962, tipped over the edge by the newspaper's accounting department, he sent the following amusing letter to the Sunday editor, Lester Markel.
(Keep scrolling down here)
http://www.lettersofnote.com/search?q=+accounting

Letters of Note --- http://lettersofnote.com


For U. of Arkansas’s New Business Dean, It's All About Logistics ---
http://chronicle.com/article/For-U-of-Arkansas-s-New/237148?cid=wb&utm_source=wb&utm_medium=en&elqTrackId=944dac1429244fbe921435752ee7c9c4&elq=e631b62e1e06450881e87d5c8a719559&elqaid=9873&elqat=1&elqCampaignId=3621


Bitcoin --- https://en.wikipedia.org/wiki/Bitcoin

THE BLOCKCHAIN REPORT: Why the technology behind Bitcoin is seeing widespread investment and early application across the finance industry ---
http://www.businessinsider.com/the-blockchain-report-2016-5

Blockchain technology, which is best known for powering Bitcoin and other cryptocurrencies, is gaining steam among finance firms because of its potential to streamline processes and increase efficiency. The technology could cut costs by up to $20 billion annually by 2022, according to Santander.

That's because blockchain, which operates as a distributed ledger, has the ability to allow multiple parties to transfer and store sensitive information in a space that’s secure, permanent, anonymous, and easily accessible. That could simplify paper-heavy, expensive, or logistically complicated financial systems, like remittances and cross-border transfer, shareholder management and ownership exchange, and securities trading, to name a few. And outside of finance, governments and the music industry are investigating the technology’s potential to simplify record-keeping.

As a result, venture capital firms and financial institutions alike are pouring investment into finding, developing, and testing blockchain use cases. Over 50 major financial institutions are involved with collaborative blockchain startups, have begun researching the technology in-house, or have helped fund startups with products rooted in blockchain.

In BI Intelligence’s Blockchain Report, we explain how blockchain works, why it has the potential to provide a watershed moment for the financial industry, and the different ways it could be put into practice in the coming years.

Here are some key takeaways from the report.

 •Spending on capital markets applications of blockchain is expected to grow at a 52% compound annual growth rate (CAGR) through 2019, according to Aite Group, to reach $400 million that year.

 

•Banks and major financial institutions are working both collaboratively and independently to develop blockchain tech. Over 50 major financial institutions are involved with collaborative blockchain startups, like R3 CEV or Chain. And many are investing in the technology on their own as well.

 

•Putting blockchain to use for real-world transactions is likely not that far off. If working groups' tests are successful, firms could be using it to transact real value as early as the end of this year and we could see widespread industry application within the next few years.

In full, the report: •Examines the funding increases that are pouring into blockchain •Assesses why blockchain is becoming so popular and what factors are driving up increased research and development •Explains in full how blockchain technology work and what assets make it valuable and vulnerable •Identifies pain points in the financial industry and profiles how various firms are using blockchain to solve them •Demonstrates the challenges to mainstream adoption and their potential solutions

Continued in article

 


Topology --- https://en.wikipedia.org/wiki/Topology

Unless you’re an aficionado of finance, I’ll bet that you haven’t heard the words “topology” and “2008 financial crisis” in the same sentence ---
http://nautil.us/issue/37/currents/can-topology-prevent-another-financial-crash

Jensen Comment
I have to admit that I know virtually nothing about topology, but this article makes me want to learn more.


"The Rise of Bayesian Econometrics," by David Giles, Econometrics Beat, November 19, 2014 ---
http://davegiles.blogspot.com/2014/11/the-rise-of-bayesian-econometrics.html

Logit Regression --- https://en.wikipedia.org/wiki/Logistic_regression

Probit Model --- https://en.wikipedia.org/wiki/Probit_model

"Choosing Between the Logit and Probit Models," by David Giles, Econometrics Beat, June 25, 2016 ---
http://davegiles.blogspot.com/2016/06/choosing-between-logit-and-probit-models.html

I've had quite a bit say about Logit and Probit models, and the Linear Probability Model (LPM), in various posts in recent years. (For instance, see here.) I'm not going to bore you by going over old ground again.

However, an important question came up recently in the comments section of one of those posts. Essentially, the question was, "How can I choose between the Logit and Probit models in practice?"

I responded to that question by referring to a study by Chen and Tsurumi (2010), and I think it's worth elaborating on that response here, rather than leaving the answer buried in the comments of an old post.

So, let's take a look.

Putting the LPM entirely to one side (where,as far as I'm concerned, it rightly belongs!), the issue is whether a standard normal distribution, or a logistic distribution, is the better choice when it comes to modelling the link between our discrete dependent variable and the regressors (covariates). If we choose the normal distribution we end up with the so-called Probit model; and if we choose the logistic distribution we end up with the Logistic model.

Let's begin by asking, "how much are the results likely to differ when we make one of these choices or the other?"

The short answer is, "not very much, in general." So, this may seem to suggest that we can basically flip a coin when it comes to deciding whether to go the Logit route or the Probit route. However, it's not quite that simple.


Why not?

First,  the answer given above relates to the simple case where we have a binomial Logit or Probit model. That is, there are only two discrete choices for our qualitative variable. As soon as we move to the multinomial case, where there are three or more choices, the story changes fundamentally. In particular, the multinomial Logit  model is computationally simpler to implement than is the multinomial Probit model, and this may factor into our choice. On the other hand, there is the well-known problem associated with the "Independence of Irrelevant Alternatives" that arises with the multinomial Logit model, but not with the multinomial Probit model. So there are pros and cons when it comes to making this choice in the multinomial case.

Second, even when we restrict ourselves to the standard binomial (zero-one) case, there can be some marked differences between Logit and Probit results when we focus on the tails of the underlying distributions (e.g., Cox, 1966) 

So, it's still interesting to think about whether we can come up with some formal statistical procedure to help us to decide between the Logit and Probit models, when we have the same (limited) dependent variable.

These two models are "non-nested", so a natural way to proceed is to use some information criterion or other to discriminate between them. This applies whether we're talking about a binomial model or a multinomial model. Note that this is not an example of hypothesis testing. Rather, we're effectively "ranking" the Probit and Logit models. (For some general comments about the use of information criteria in other contexts, see my earlier posts here and here.)

One of the few studies to evaluate the effectiveness of alternative information criteria to discriminate between Logit and Probit models is that by Chen and Tsurumi (2010). They consider five different criteria, namely:

  1. The deviance information criterion (DIC).
  2. The predictive deviance information criterion (PDIC).
  3. The unweighted sum of squared errors (USSE).
  4. The weighted sum of squared errors (WSSE).
  5. Akaike's information criterion (AIC).

The main conclusions emerging from the Chen-Tsurumi paper are as follows, and they aren't all that encouraging:

If the binary data that are being modelled are "balanced" (i.e., there is roughly a 50-50 split between the zero and one values), then none of the above information criteria are very effective at discriminating properly between the Logit and Probit models.

If the data are "unbalanced", then only the DIC and AIC criteria are effective.

The more information that is available about the higher moments of the underlying distribution of the binary data, the more effective are these criteria in the "unbalanced" case.

Sample sizes of at least 1,000 or more are needed to be able to discriminate between the Logit and Probit models using this approach.

If these information criteria don't help us very much, is there some other way to choose between the Logit and Probit specifications?

Continued in article


Accounting History Corner (I suspect Tom Selling will like this one)
Book Review by Jacob S. Soll
The Accounting Review
Article Volume 91, Issue 4 (July 2016)
http://aaajournals.org/doi/full/10.2308/accr-10493
 

In his prodigiously researched new book, Karthik Ramanna makes a profession of faith in accounting. As he tells the reader, accounting is the grease on the gears of capitalism; the numbers that allow decisions to be made by the public, shareholders, investors, managers, financiers, and the government. Audited financial statements are the representations of companies (and, indeed, often public entities and even individuals), and these numbers are what drive market capitalism. They are the very essence of trust, as decisions of entrepreneurial risk, investment, and management cannot be made without them. This trust is inherent to flourishing capitalism—and capitalism, Ramanna insists, is an “ethic” that “allocates resources” and enables individual economic and even political “freedom” (p. 172). Ramanna is a believer.

It is because of Ramanna's faith in accounting's under-celebrated fundamental role in capitalism that he believes the protection of its reliability and independence is utterly necessary. Yet, according to him, this is less and less the case as accounting standards and laws have come under the “ideological capture” of certain “corporate interests” that undermine market capitalism. Ramanna's work claims to be an academic stress test of the independence, fairness, and function of accounting rules. In his blunt opinion, the industry, in certain cases, is undermining many of its core principles and the market itself by not protecting reliable and accurate valuations due to the interpretive breadth allowed by fair value accounting.

His central argument is that the accounting standard-setters of the FASB have become beholden to corporate interests and their political allies. Ramanna's broader story, as understood with the example of mergers and acquisitions, goes like this: As the financial industry began to make more and more money from advising on mergers and acquisitions in the late 1990s, it became emboldened to argue that amortizing goodwill acquired from target companies was “a drag” (p. 53) on the earnings of acquiring firms. With the rise of tech companies and companies claiming vast intangible assets—think Time Warner Inc.'s disastrous acquisition of an inflated AOL and its subsequent $54 billion write down— these companies, and the banks and auditing firms that did business with them—think Arthur Andersen—pushed for more malleable valuation standards. Yet even after the crash of 2008, banks and managers who oversaw contributory mergers and acquisitions made the case for tailor-made fair value accounting standards to reasonably measure the value of intangible assets, now the prominent assets in tech and many other companies. His evidence highlights the banking industry, in particular, for pushing for accounting metrics with which it could “emphasize” good or bad numbers to their advantage (p. 26).

Until 2009, says Ramanna, the FASB had hewn, at least on paper, to a conceptual framework of financial information in accounting based on “reliability” and “verifiability” (p. 34). But these principles of conservative valuation—concepts essential to accounting since its inception—continued to be seen by some as outmoded vehicles of undervaluation. Indeed, many of the bankers who believed that their mortgage bundles had been undervalued, thus leading to the crash of 2008, lobbied for more creativity and less conservatism. The FASB and its IASB standard-setting cousin were persuaded, and replaced the relatively clear concepts of “reliability” and “verifiability” with the nebulous concept of “faithful representation.” Ramanna's cited research evidence indicates that the new precepts themselves are less reliable than the old conservative ones.

Ramanna ascribes the broken standards process to his ideas of a “thin political market” and “ideological capture” (p. 46). This is the process by which interested companies—his examples include The Goldman Sachs Group, Morgan Stanley, and Merrill Lynch, among others—secure favorable regulatory outcomes through a combination of expertise, ideology, and political power (often drawn from longstanding campaign contributions to influential members of Congress). His data point to a direct correlation between banking representation on the FASB, as well campaign contributions to Congress members, with a successful move to support fair value standards in the name of financial creativity and the “synergy” of mergers. These mergers of aggressively valued companies, Ramanna argues, enables managers, bankers, and lawyers to extract profits from ordinary shareholders.

Not content with anecdotes, Ramanna produces regressions, graphs, and sets of data, often reproduced from his peer-reviewed articles, to make his point that it is common practice for deep-pocketed interested parties to push for standards that are advantageous to them. Due to the complexity and obscurity of proposed laws such as HR 5365, The Financial Accounting for Intangibles Reexamination Act, this type of legislation happens in “a thin political market,” that is to say only between the interested parties and the standard-setters. According to this theory, public debate is largely absent from the process due not only to lack of awareness, but also to the fact that most players, aside from Congress, come from accounting and finance backgrounds where they have been imbued with a particular “ideology” or worldview. This is not easy to prove and surely more complex than Ramanna lets on. Yet, almost no one outside the financial professions would be aware of bills such as HR 5365 and rules such as SFAS 142 and there has been little sustained discussion of them in any serious public forum. And yet they have massive ramifications on the economy and how valuation and performance information flows through the economy at large.

Ramanna's argument that standard-setters are beholden to political interests and cater to industries from which they come is not conclusive, but rather is intriguing and suggestive of a need for internal and public review. He never suggests that FASB members have personally benefitted from the process. His prime example of the process to push for fair value standards focuses on the influence of political action committee (PAC) money and links between congressional oversight and the standard-setting community. In light of Ramanna's claims, many in the industry and, without doubt, the FASB, will take umbrage with Ramanna's assertions, and it is their turn now to rebut his accusations.

Among the questions raised by Ramanna is why FASB members come mostly from the accounting and financial industries and not from a more disinterested track of financial civil servants and experts. The talent is out there. And, there is little doubt that fair value standards need to be further examined for their potential risks. Ramanna's questions merit a very serious public debate. Alas, as Ramanna shows, it seems unlikely that such a debate will happen outside of the industry itself, unless Congress decides to get involved on behalf of the public. One would imagine that, in the long tradition of accounting reform in the U.S., the Big 4 auditing firms would want to follow the lead of the great accounting leader of the 1930s, George O. May, and look into their own affairs before another Enron-Andersen fiasco opens it up to even more litigation and regulation. The industry is both monolithic and fragile. This condition is not sustainable, and to remedy it will take sustained and visionary leadership to address questions surrounding fair value standards.

Continued in article

Reply from Paul Williams

Bob, et al.
At the recent SASE meeting in Berkeley I was on a panel that provided critiques of this book. Professor Ramanna was there as well. My critique will eventually be published in Accounting, Economics and Law: A Convivium, an online journal edited by Yuri Biondi and Shyam Sunder. The book is profoundly ironic. Positive about the book is the assertion that standard setting is incoherent (though the reasons for believing so are not all that convincing), the focus it makes on the importance of public policy re accounting (something the academy ignores because of its preoccupation with navel gazing at the most obscure correlations one can find embedded in archival data sets), and the acknowledgment that the ultimate solution to the problem identified is an ethical, not a technical, one. It seems clear that the book illustrates how much the U.S. academy in accounting has to answer for. How do we undo the Ferengi culture we have made of the accounting discipline? The irony of the book is that to do so would mean giving up the The Methodology that forms the basis of the evidence in the book. I highly recommend the book to anyone interested in accounting and public policy. The academy has lost sight of what Carl Devine used to admonish his students about, "What accountants do, matters." We must be mindful of how true that statement is. PFW

Bob Jensen's threads on accounting standard setting controversies ---
http://faculty.trinity.edu/rjensen/theory01.htm#MethodsForSetting


"Do Accounting Faculty Characteristics Impact CPA Exam Performance? An Investigation of Nearly 700,000 Examinations," by Dennis M. Bline. Stephen Perreault, Xiaochuan Zheng, Issues in Accounting Education, August 2016, Vol. 31, No. 3 ---
 

While many colleges and universities publicize CPA examination pass rates as evidence of having a high-quality accounting program, some have questioned whether program-specific characteristics are legitimate predictors of examination success. To examine this issue, we empirically investigate the link between accounting faculty characteristics and performance on the CPA examination. We examine the results from nearly 700,000 first-time exam sittings taken during the period 2005–2013 and find that faculty research and teaching specialization has a significant impact on CPA exam performance. That is, when a program has a relatively higher percentage of accounting faculty with expertise in a particular content area tested on the exam (e.g., auditing), graduates achieve higher scores on the related exam section (e.g., AUD). We also find that faculty research productivity and CPA certification status are positively related to candidate exam performance. We believe these results contribute to the existing literature on the determinants of CPA exam success and also provide important insights to those responsible for accounting faculty staffing and development

Jensen Caution
I question the independence of variables in the regression models such as the independence of SAT scores and research performance of professors where research professors in R1 universities are apt to have higher SAT students.

There's also an issue of learning attribution such as where one of Tom Selling's sons studied accounting as an undergraduate at Trinity University and as a masters student at Ohio State University.

With such large sample sizes there's a possibility that statistical significant outcomes are not substantively significant.  This has been a common error in most large-sample empirical accounting studies in the past seven decades. As sample sizes increase insignificant differences become statistically significant such as a random sample finding that 826,243 respondents prefer bran flakes versus 826,241 who said they prefer corn flakes.

The Cult of Statistical Significance: How Standard Error Costs Us Jobs, Justice, and Lives ---
http://www.cs.trinity.edu/~rjensen/temp/DeirdreMcCloskey/StatisticalSignificance01.htm

Science editors are often requiring these days that p-values not even be reported in published papers for this and other reasons ---
http://faculty.trinity.edu/rjensen/theory01.htm#WhatWentWrong


"Implementing a “Real-World” Fraud Investigation Class: The Justice for Fraud Victims Project," by Sara M. Kern and Gary J. Weber, Issues in Accounting Education, August 2016, Vol. 31, No. 3, pp. 255-289 ---
http://aaajournals.org/doi/full/10.2308/iace-51287

The Justice for Fraud Victims Project class is an innovative program developed at Gonzaga University as a partnership between the university, local law enforcement, local and federal prosecutors, and the local chapter of the Association of Certified Fraud Examiners (ACFE). The class provides an opportunity for students to utilize their accounting expertise for the benefit of the community while developing an understanding of forensic accounting. At the same time, the course addresses, in some small measure, the injustice arising from the inability of victims to pursue fraudsters due to lack of resources to pay for an examination. We describe the structure and organization of the course, provide statistics from investigated cases (both at Gonzaga and at other universities that have adopted the approach), and share results of participant surveys regarding their experiences. We also describe the many benefits of the class, such as student learning through hands-on experience, positive publicity for the school, and the potential for justice and possible restitution for victims of fraud who cannot afford to pay for a forensic accounting examination. Last, we share advice on how to implement the class, including suggesting potential solutions for some of the unique challenges that may arise.

Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm


A scandal-ridden tech startup is slashing its valuation in half to start over ---
http://qz.com/721936/a-scandal-ridden-tech-startup-is-slashing-its-valuation-in-half-to-start-over/

Bob Jensen's Fraud Updates ---
http://faculty.trinity.edu/rjensen/FraudUpdates.htm


Spread the Word
Fraudsters claiming to be from the Internal Revenue Service ring up college students and demand payment for something they call the “Federal Student Tax.” It’s a variation on a common scam that tries to convince victims that they’re in trouble with the government.
IRS Phone Scam Threatens Students ---
https://www.washingtonpost.com/local/irs-a-new-phone-scam-threatens-college-students/2016/07/06/0ff6fb7a-4380-11e6-8856-f26de2537a9d_story.html

Bob Jensen's Threads on Scams ---
http://faculty.trinity.edu/rjensen/FraudReporting.htm


It's pretty hard to argue that the USA income tax is not progressive in reality ---
https://en.wikipedia.org/wiki/Progressivity_in_United_States_income_tax

In the United States, a progressive tax system is employed which equates to higher income earners paying a larger percentage of their income in taxes. According to the IRS, the top 1% of income earners for 2008 paid 38% of income tax revenue, while earning 20% of the income reported.The top 5% of income earners paid 59% of the total income tax revenue, while earning 35% of the income reported.The top 10% paid 70%, earning 46% and the top 25% paid 86%, earning 67%. The top 50% paid 97%, earning 87% and leaving the bottom 50% paying 3% of the taxes collected and earning 13% of the income reported.[

 

Also note the amount of income tax paid out under the EITC (legitimately and fraudulently) ---
https://en.wikipedia.org/wiki/Earned_income_tax_credit#Cost

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

 

The saddest part is that an estimated $2 trillion in the underground economy is not reported to the IRS. The violators range from the rich to the really poor. While much of that revenue is from criminal enterprise (such as drug dealing) much of it comes from unreported work compensation such as my wife's dentist who gave her a 50% discount of a big bill for paying in cash to the undocumented house cleaners in San Antonio.


Why Now is the Time to Statutorily Ban Insider Trading Under the Equality of Access Theory
SSRN, March 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2799917
William & Mary Business Law Review (Volume 7, Issue 2, March 2016)

Author

Bruce W. Klaw University of Denver, Daniels College of Business;
University of Denver, Daniels College of Business, Dept. of Business Ethics and Legal Studies

Abstract

This Article makes the case for a new U.S. statutory provision that defines and prohibits insider trading under an "equality of access" theory. It supports this claim, and contributes to the important public dialogue concerning this prevalent practice, by highlighting the moral and legal gaps in existing U.S. law that result from understanding the harms of trading on the basis of material nonpublic information solely with reference to fiduciary breach or misappropriation, as evidenced by the recent cases of United States v. Newman and United States v. Salman. It weaves legal analysis together with current literature in business ethics, moral philosophy, finance, and accounting to consolidate and offer new arguments in the long-standing debate over insider trading based on Rawlsian social contract theory, applied deontology, and empirically informed utilitarianism. It then draws on lessons learned from empirical analysis of European states' adoption of the equality of access theory under the Market Abuse Directive. Finally, it analyzes three insider trading bills currently pending in Congress and makes the case for a statute, like S. 702, that will prohibit the use, by anyone, of material information concerning a financial instrument that is not, at least in principle, available to others through independent and otherwise lawful due diligence


Does Fair Value Accounting Exacerbate the Pro-Cyclicality of Bank Lending?
SSRN, March 1, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2798779
Journal of Accounting Research, Vol. 54, No. 1, 2016

Author

Biqin Xie Pennsylvania State University

Abstract

This study investigates whether fair value accounting contributes to the procyclicality of bank lending. Using banks’ approval/denial decisions on residential mortgage applications to capture banks’ supply of credit, I find no evidence that fair value accounting has procyclical effects on bank lending over the past two business cycles. I further identify two reasons for this result. First, the main accounting item distinguishing fair value accounting from historical cost accounting — unrealized gains and losses on available-for-sale securities — does not affect lending decisions. Second, unrealized gains and losses on available-for-sale securities are not procyclical, as the risk-free interest rate rises during some expansionary periods, resulting in unrealized losses, while the risk-free interest rate (and sometimes the default spread) falls during some recessionary periods, resulting in unrealized gains.

Bob Jensen's threads on fair value accounting controversies ---
http://faculty.trinity.edu/rjensen/theory02.htm#FairValueFails


Congressional Budget Office --- https://en.wikipedia.org/wiki/Congressional_Budget_Office

"When the Best Umps Blow a Call," Larry Summers, Larry Summers Blog, July 14, 2016 ---
http://larrysummers.com/2016/07/14/even-the-best-umps-occasionally-blow-a-call/

. . .

So, I was very surprised to read the June CBO report on the consequences of federal investment. It assumes, from its reading of the literature (also here), as its central base case what it calls a 5 percent rate of return on infrastructure investment but then finds that the payback effect of infrastructure investment on the federal deficit is very small, contradicting my earlier claims and more importantly raising doubts about the desirability of a big infrastructure push.

Why the discrepancy? After carefully reading the report, and speaking at some length with CBO officials, I think I understand at least one aspect of it. CBO uses the term “rate of return” in a way that is very different than what I would regard as standard usage. They take a 5 percent rate of return to mean that one dollar more capital produces five cents more output. This turns out to be quite different from assuming that investments in public capital earn a 5 percent return.

For example, CBO does not subtract depreciation in calculating their rate of return unlike what is standard in the private sector. Nor, contrary to what I would have assumed was natural, do they suppose that rates of return are reduced by the fact that on their (questionable) assumptions it takes many years for dollars invested to turn into capital. (Think of R&D as an example here). Adjusting for these factors, CBO is actually assuming an economic return a little above 2 percent on public investment and then concluding it will not help much.

If one assumes that public investment is basically unproductive, it is no surprise that it does not yield large economic benefits. There is still the question of if the 5 percent rate of return is misdescribed, whether or not CBO has made a reasonable judgement about the productivity of public investment. I’m pretty skeptical. They rely on aggregate econometric estimates of an elasticity of GDP with respect to public capital. Such estimates are plagued by all sorts of problems of heterogeneity, simultaneity, limited variation in the exogenous variables and so forth.

I would prefer to build up from individual projects by looking for example at estimates of the return on fixing potholes, building dams, or repairing water systems. I think anyone taking this kind of ground up approach will conclude that the social return to public investment is far higher than 2 percent. This is, of course, a matter of judgement.

There are other, probably lesser, problems with CBO’s work. Much of the adverse effect of public investment on the budget in their work comes from an assumed increase in interest rates resulting from budget deficits. This assumption would have been natural once, but is much less compelling in the current liquidity trap, possible secular stagnation environment. They also haircut the return to federal investment by assuming that it crowds out state and local investment but do not recognize explicitly the benefits of less state and local borrowing. And they focus on deficit impacts rather than the more appropriate question of impacts on debt-to-GDP ratios.

On balance, I do not think anyone should change her mind about public investment based on CBO’s analysis. Great umpires never change their minds. But they do learn from their mistakes. I hope CBO will do better next time out.

Jensen Comment
I think Professor Summers is being overly conservative here. In fact I don't think it is possible to measure returns on infrastructure investment due to all the externalities involved such as when fixing a bridge increases ambulance response time. There are also impractical measurement issues such as measuring the decrease in repair costs of every vehicle that would other wise be jolted from a pothole.


The Quality and Usability of XBRL Filings in the US
SSRN, June 21, 2016
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2798732

Author

Ariel J. Markelevich Suffolk University

Abstract

In 2009, the US Securities and Exchange Commission (SEC) required all public companies and mutual funds to report their financial information to the SEC using a markup language called eXtensible Business Reporting Language (XBRL). The purpose of this requirement was to improve the accessibility to financial accounting data, increase the information flow between companies and investors, and make it easier and cheaper to collect and analyze data. Some controversy exists whether the benefits from using XBRL based data outweigh the costs associated with the creation of data and the use of the data. As part of that discussion, some claimed that the XBRL filings are of low quality and are difficult to use. The purpose of this paper is to examine the quality and usability of XBRL filings by examining different filing characteristics and mistakes over time. The focus of this paper is on the following characteristics: the use of extended tags, Document and Entity Information (DEI) errors, scale errors, and sign switches. Findings suggested that starting in 2012, there has been a steady improvement in the quality and usability of the XBRL filings in most aspects. Additionally, it seems that the lower quality and usability originates in data in the notes to the financial statements and in data filed by smaller companies. The results presented in the paper are consistent with the notion of companies moving along a learning curve and improving the quality and usability of the XBRL data as they gain more experience tagging. These improvements make it easier to use the XBRL filings and reap the benefits offered by this data. However, in spite of the efforts and improvements, it seems like more work is needed to continue improving the quality of the data.

Bob Jensen's threads on XBRL and XML ---
http://faculty.trinity.edu/rjensen/XBRLandOLAP.htm


The institute’s Auditing Standards Board has released Proposed Statement on Auditing Standards, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern ---
http://www.accountingtoday.com/news/audit-accounting/aicpa-issues-exposure-drafts-78634-1.html

 


AICPA:  5 tips for implementing FASB’s new credit loss standard ---
http://www.journalofaccountancy.com/news/2016/jul/implement-fasb-credit-loss-standard-201614755.html?utm_source=mnl:globalcpa&utm_medium=email&utm_campaign=20Jul2016#sthash.JeptfU8r.dpuf


The Fed giveth away seldom and taketh away a lot
Pension Returns Slump, Squeezing States and Cities ---
http://www.wsj.com/articles/pension-returns-slump-squeezing-states-and-cities-1469488579 

Jensen Comment
The Fed is forcing the older generation to consume savings and delay retirements in every way it can.


From the CPA Newsletter on July 7, 2016

Per-capita health care spending has dropped for poor Americans

Per-capita health care spending by low-income individuals fell after 2004, while per-capita spending by high-income individuals increased, according to a Harvard study. Explanations for the shift may include wage stagnation and the growth of high-deductible Obamacare health insurance plans.

Jensen Comment
My Barber's Formula for Medicaid Cheating
Of course in about half the states poor Americans are faring better because if the greatly expanded number of them covered by the Obamacare Medicaid expansion of the numbers covered.

Studies have also found widespread cheating among Americans not eligible for Medicaid such as the finding that half the Medicaid recipients in Illinois were not eligible for Medicaid.

Note that Medicare does not cover nursing home expenses. My barber explained how cheating works. His mother sold her house and came to live with him. Over several years her entire savings was bled off to him in inflated rent and other living charges. I suspect her payments were not declared as income by him.

Then when she needed to enter a nursing home she was a poverty case and became eligible for Medicaid to pay all of her nursing home expenses for about ten years.

This type of Medicaid cheating (early liquidation of savings)  for nursing home coverage is illegal, but I suspect it's extremely commonplace. In some cases grandma has to go on welfare and food stamps before she can get into a nursing home

July 7, 2016 reply from Elliot Kamlet

Hi Bob

I have bad news for you. Not only can this be done legally, there are many, many lawyers out there who specialize in setting up a situation within the rules so Medicaid will pay for nursing homes. They sell it to fair and reasonable people by saying it's not fair that your life savings, that you intended to leave to your children, will all be taken by the nursing home.

Elliot

July 7, 2016 reply from Paul Williams

Elliot,
The indictment is not of the people who are forced to impoverish themselves to be warehoused until they die. People who worked all of their lives are forced to suffer the indignity of impoverishment simply because they lived longer than is convenient. Of course their desire to leave something to their children and grandchildren is unworthy of consideration, so they are labeled "cheaters.
"

 


Only an active investigation into criminal acts would allow the IRS to give the tax returns to the Justice Department. And then, by law, Justice would have to specifically request them ---
http://taxprof.typepad.com/taxprof_blog/2016/07/the-irs-scandal-day-1149.html

Jensen Comment
I did not know that the IRS could not instigate DOJ investigations by sending tax returns to the DOJ. My guess (and really a hope) that it happens on occasion but not on a Lois Lerner scale.

I guess the theory is that criminals are less inclined to file "honest" tax returns if they know that doing so increases their chances of being prosecuted for crimes that are taxable. I can't imagine that the IRS does not meet in secret with the DOJ to whisper "look into this guy."

But in theory a tax return is a bit like a confessional in the Roman Catholic Church where the IRS Agent becomes like a priest that is duty bound not to report crimes discovered in confessionals. However, TV shows frequently reveal how priest cleverly break their vows of silence.


SFAS 52 --- http://www.fasb.org/pdf/fas52.pdf
Note: To find historic original FASB standards go www.bing.com and enter the "SFAS 52" or whatever X number you are searching for such as "SFAS X"
For example go to www.bing.com and enter "SFAS 133"
Note that these are historic and may have been modified in subsequent standards and other modifications issued by the FASB
Current standards can only be accessed by in the FASB Standards Codification which is not free ---
https://asc.fasb.org/

SFAS 52 and Net Investment Hedging
Yesterday I stumbled around this rather interesting 2008 footnote in Citigroup's 2008 10-K report:
http://www.wikinvest.com/stock/Citigroup_(C)/Derivatives_Activities

Consistent with SFAS No. 52, "Foreign Currency Translation" (SFAS 52), SFAS 133 allows hedging of the foreign currency risk of a net investment in a foreign operation. Citigroup primarily uses foreign currency forward contracts, short-term borrowings, and to a lesser extent foreign currency future contracts and foreign-currency-denominated debt instruments, to manage the foreign exchange risk associated with Citigroup's equity investments in several non-U.S. dollar functional currency foreign subsidiaries. In accordance with SFAS 52, Citigroup records the change in the carrying amount of these investments in the cumulative translation adjustment account within Accumulated other comprehensive income (loss). Simultaneously, the effective portion of the hedge of this exposure is also recorded in the cumulative translation adjustment

Continued in footnote

Bob Jensen's free tutorials on accounting for derivatives and hedging activities ---
http://faculty.trinity.edu/rjensen/caseans/000index.htm


Question
How can MOOC students and other self-learners access the FASB's Standard Codification without paying $895 per year?

Answer
I don't think it's possible unless they are also currently enrolled in a college that pays for student access. These colleges only have to pay $250 for a license for all students.

Current standards can only be accessed by in the FASB Standards Codification which is not free ---
https://asc.fasb.org/

Jensen Comment
I don't think the FASB anticipated MOOC-type learning where students take courses (sometimes accounting courses) online for free without being registered students in any college.

July 15, 2016 reply from the FASB

Thank you for your inquiry about access to the FASB Accounting Standards Codification for MOOC students and other self-learners.

The Foundation offers a Basic View of the Codification at no cost. Basic View users have access to the full content of the Codification, although not to search or advanced navigation features that come with the Professional View.

You can get to the registration page here: https://www.fasb.org/store/subscriptions/fasb/new 

I hope the students find the Basic View useful!

Best regards,

Letty Selkovits

 


From the CFO Journal's Morning Ledger on July 22, 2016

Amazon enters student-loan business
Amazon.com Inc.
 is stepping into the student-loan marketplace. The online retailer has entered into a partnership with San Francisco lender Wells Fargo & Co. in which the bank’s student-lending arm will offer interest-rate discounts to select Amazon shoppers. Amazon said this is the first time members of the company’s “Prime Student” service are receiving a student-loan offer by a lender through its site since that service was launched in 2010. The discount will be offered both to students who want college loans and those who want to refinance. The offer also represents the latest effort among private student lenders to stand out by discounting.

Also see
https://www.insidehighered.com/news/2016/07/22/amazon-wells-fargo-partnership-private-student-loans-troubles-consumer-advocates?utm_source=Inside+Higher+Ed&utm_campaign=56cdbb1f78-DNU20160722&utm_medium=email&utm_term=0_1fcbc04421-56cdbb1f78-197565045

Jensen Comment
Bezos and Musk may be trying to do too many things at the same time.


The Big Medical Insurance Companies are Pushing Out Obamacare's Smaller ACA Plans

From the CFO Journal's Morning Ledger on July 20, 2016

ACA dings UnitedHealth
UnitedHealth Group Inc. on Tuesday posted a strong earnings beat as revenue continued to surge in its pharmacy-services business, and it lifted the low end of its profit guidance for the year. It also raised the low end of its earnings guidance. But amid the positive news, the company included one ongoing dark spot: Affordable Care Act plans, which it will almost completely stop selling next year. The insurer booked another $200 million in full-year ACA-plan losses in the second quarter, but more than that, costs mounted because enrollees were even sicker than projected, with more chronic conditions than last year.

 


 

CalPERS --- https://en.wikipedia.org/wiki/CalPERS

CalPERS Reports Preliminary 2015-16 Fiscal Year Investment Returns ---
https://www.calpers.ca.gov/page/newsroom/calpers-news/2016/preliminary-investment-returns
CalPERS blames the markets without giving details on how the S&P can hit all-time highs while CalPERS returns are lousy.

From the CFO Journal's Morning Ledger on July 19, 2016

CalPERS weathers storm, barely.
The largest U.S. public pension posted its lowest annual gain since the last financial crisis due to heavy losses in stocks. The California Public Employees’ Retirement System, or CalPERS, said it earned 0.6% on its investments for the fiscal year ended June 30, according to a Monday news release. It was the second straight year CalPERS failed to hit its internal investment target of 7.5%. Workers or local governments often must contribute more when pension funds fail to generate expected returns

Jensen Comment
One would think that staying out of oil and gas would have helped the pension fund returns of CalPERS. Perhaps the heavy shift into green investing, especially renewable energy, has not been as profitable as CalPERS intended. In any case CalPERS wiggles out of providing details of why their returns reported in 2016 are way below expectations.
 


From the CFO Journal's Morning Ledger on July 18, 2016

Pharma’s big (accounting) GAAP
The use of custom accounting metrics has spread across the U.S. pharmaceuticals industry, Tatyana Shumsky reports. And the gap between standard and adjusted earnings figures is widening, according to a report from Credit Suisse. U.S. listed companies are required to file their financial reports in accordance with U.S. generally accepted accounting principles, but are free to supplement those figures with custom metrics. Credit Suisse said the gap between standard and adjusted earnings figures rose to 38% in the first quarter of 2016 from 37% in the year ago quarter and 22% in the first quarter of 2014. Amortization expenses were the largest contributor to the difference.

 


From the CFO Journal's Morning Ledger on July 18, 2016

Cloud costly, necessary for Microsoft
For Microsoft Corp., shifting its business to the cloud has been the right decision—albeit an expensive one. While now just one-third of the company’s revenues, Microsoft’s cloud business is the company’s primary driver of growth—and its stock price. The latter point was painfully clear in the company’s most recent quarterly report in April, when a small miss for the cloud business translated into a big selloff in the stock.

Jensen Comment

Virtually all accountants know that there is a wide margin of error in net income numbers due to accrual errors (think depreciation) and fair value estimation of financial instruments. Apparently for Microsoft some errors can be costly.


From the CFO Journal's Morning Ledger on July 15, 2016

The Enron of biofuel
Not unlike Enron, Green Diesel was a Houston energy company, seemingly full of promise. Like Enron, much of what the biodiesel company did was allegedly fabricated and fraudulent, Bloomberg Businessweek reports. Rather than actually produce biofuel, Green Diesel apparently traded the market for credits for biofuel, based on production that didn’t exist, to take advantage of price swings.

 


From the CFO Journal's Morning Ledger on July 15, 2016

Congress rules trump Vermont
In a victory for food companies, Congress has passed a federal requirement for labeling products made with genetically modified organisms that will supersede tougher measures passed by Vermont and considered in others. The bill will require labels to be reworked or updated to show whether any of the ingredients had their natural DNA altered, but will take years to phase in and will give companies the option of using straightforward language, digital codes or a symbol to be designed later.

Jensen Comment
Taxpayers in Vermont are probably relieved. When Vermont's GMO-labelling law was passed the biggest fear was that it would cost Vermont millions of dollars to defend the law in the courts with a high risk of losing the entire law. Now Vermont wins a piece of the law without further cost, although activists in Vermont may be unhappy with the weaker law passed by Congress.

Actually the Vermont's law was sort of a joke anyway. It was passed to hurt non-Vermont food manufacturers without hurting Vermont's most important industries. For example, Vermont's beer and dairy product (think of that popular Vermont Cheddar Cheese) manufacturing was exempt from the law as were some other in-state businesses. If genetic labeling is so important to health and well-being why exempt Vermont products?

 


Question
Why did the Department of Justice have zero interest in Hillary Clinton's or Lois Lerner's questionable email messages while having a keen interest in Microsoft's foreign email messages?

From the CFO Journal's Morning Ledger on July 15, 2016

Microsoft beats back DOJ
Microsoft Corp.
 won a major legal battle with the U.S. Justice Department Thursday when a federal appeals court ruled that the government can’t force the company to turn over emails or other personal data stored on computers overseas. The case, closely watched by Silicon Valley, comes amid tensions between Europe and the U.S. over government access to data that resides on the computers of social-media and other internet companies. The ruling is another setback for the DOJ’s efforts to force technology companies to comply with government orders for data.

 


The Fed's Message to Retirees and Persons Still Working

Take financial risks with your retirement savings or eventually eat your seed corn (read that as meaning spend your savings on living with out any interest returns)

From the CFO Journal's Morning Ledger on July 15, 2016

The head of the world’s largest asset manager said investors no longer know what to do with their money as they wrestle with historically low interest rates, the U.K.’s decision to exit the European Union and uncertainty surrounding the next U.S. election. “They are afraid and they are pulling back,” BlackRock Chief Executive Laurence Fink said as he discussed the company’s second-quarter results with analysts Thursday. Individual savers and institutional investors are grappling with a low-return environment that is forcing them to save more, revise their targets or take greater risks to meet their goals.

That said, equity investors are nonetheless hoping to pitch their first perfect game in 18 years today. The S&P 500 has enjoyed a record close every day this week, the first such showing since late 2014. according to Howard Silverblatt, who has kept an eye on the index for a long time. If the S&P can close higher today, that will be just the 18 time since 1928 that the index has turned in a weekly perfecto. To put that in perspective, only 18 professional baseball pitchers have thrown a perfect game, one of the rarest feats in sports, over that span. Futures are down slightly this morning, after markets shrugged off news yesterday that the Bank of England would hold interest rates steady. But the BOE telegraphed an August move to support the economy in the wake of Brexit.

Jensen Comment
Is there any doubt about the major driver of current all-time highs in the financial indices like the Dow and the S&P 500?
Workers are planting their seed corn and taking on risks that there will be a severe drought (read that as market crash).

The silver lining is that highly diversified equity investments are inflation hedges. In the long run the run-away entitlements obligations not yet booked as Federal and State Debt will eventually cause run-away inflation in the long term (but not the short term).


From the CFO Journal's Morning Ledger on July 14, 2016

Court rules against GM
A Manhattan federal appeals court denied General Motors Co.’s attempt to use a bankruptcy shield to block some lawsuits over faulty ignition switches, ruling GM’s failure to reveal the defect violated consumers’ legal rights in chapter 11 court proceedings. The court on Wednesday reversed a bankruptcy judge’s decision that had barred lawsuits with up to $10 billion in potential claims that arose before the auto maker’s bankruptcy. Separately, GM resolved a dispute with financially troubled auto-parts supplier Clark-Cutler-McDermott Co. in a deal that averts a potential production shut down of some of GM North American operations

Jensen Comment
If it has not already done so, the time has come for GM to put numbers on the estimated losses of future losses due to this negligence.


Putin Peers Into Shadows Where 30 Million Toil on Fringes ---
https://www.msn.com/en-us/money/markets/putin-peers-into-shadows-where-30-million-toil-on-fringes/ar-BBuiX7j?li=BBmkt5R&ocid=spartandhp

Uncounted by statisticians and invisible to tax collectors, a population the size of Texas -- or about 30 million people -- plies its trade in the nooks and crannies of what’s become known as the “garage economy.” There, professions such as mechanics, builders, dentists and veterinarians conduct their business off-the-books and in cash. President Vladimir Putin is zeroing in on the phenomenon, said two participants in a recent Kremlin meeting on economic policy.

It’s the cops, prosecutors and taxes driving them underground, he told a gathering of ministers, advisers and regional bureaucrats, according to the people, who asked to remain unidentified because the discussion wasn’t public. Putin asked the “serious, bespectacled” lot in front of him to devise a way to ferret out the businesses and motivate them to legalize their operations, the people said.

The scale of this underworld, estimated at as much as a quarter of gross domestic product, presents Russia’s leader with a dilemma. For an economy that’s struggling to shake off a recession in an era of cheap oil, the millions of undocumented workers could prove an unrivaled resource as government finances run dry.

Jensen Comment
It's too bad the USA does not put the same or greater priority on its own $ 2+ trillion underground economy most likely much larger than the underground economy of Russia. In the USA this leads to great frauds such as working for more than $20 per hour while collecting welfare, food stamps, Medicaid, etc. ---
http://www.cs.trinity.edu/~rjensen/temp/SunsetHillHouse/SunsetHillHouse.htm

One of the most effectvie ways to clobber the underground economy and underground crime is to do away with cash ala Kenya where it seems to be quite effectie. Nigeria is one of the latest nations to experiment with a cashless policy --- https://en.wikipedia.org/wiki/Cashless_Policy_(Nigeria)   


From the CPA Newsletter on July 14, 2016
One in every 10 children in the USA receives Social Security payments
Most were abandoned by parents such that these children ended up in the care of one or more grandparents
http://globalpolicysolutions.org/report/overlooked-not-forgotten-social-security-lifts-millions-children-poverty/

Jensen Comment
Although most of these children ended up with a grandparent for involuntary reasons (incarceration, disability, or death of a parent) there is moral hazard here in that some voluntrily abandon children in order to have these children collect the benefits. Indeed a parent may still indeed play much of the role of a parent in what is tantamount to fraud. Having said this the families are generally poor and can add to food stamps and other forms of welfare in this manner.

This is one of the many safety nets of the poor in the USA. Mitt Romney found that mentioning safety nets for the poor was bad politics and drew a lot of negative media attention.

Mentioning them is not politically correct. It's an example where welfare in the USA tends to destroy traditional families of the poor.

It's also an example of another unfunded entitlement added to Social Security that became an unfunded entitlement burden for future generations.


You might ask students if there is any way to report these risks in ways other than in footnotes to financial statements and M&A statements

From the CFO Journal's Morning Ledger on July 14, 2016

U.S. power grid precarious
The Wall Street Journal examined dozens of break-ins to that show how, despite federal orders to secure the power grid, tens of thousands of substations are still vulnerable to saboteurs. It’s a sobering must-read. The U.S. electric system is in danger of widespread blackouts lasting days, weeks or longer through the destruction of sensitive, hard-to-replace equipment. Yet records are so spotty that no government agency can offer an accurate tally of substation attacks.

Jensen Comment
There are two types of risk to report
One is the risk of overload due to unavailable capacity. The grid itself can become overloaded due, in recent times, dependency upon solar and wind power that led to reduction in conventional power plant capacity. For example, a severe plunging of temperatures when people become more dependent on electric heat to supplement solar power on the roof. Up where I live the winter days become very short for solar power in late in the year.

The second type of risk is the one focused upon in the article. We tend to think of grid risk in the generating plants that feed the grid. But the real risk is in the proliferation of substations that are easy to blow up to kingdom come.

In any case your students might conduct some research on the reporting of both types of risk.


Dennis Elam: Who is the worst fraudster in 2016? (remember it's only July) ---
http://professorelam.typepad.com/my_weblog/2016/07/whos-the-worst-2016.html
Dennis teaches internal auditing

Each Fall I begin a Who's the Worst list of fraudsters.This is preparation for the Accounting Ethics 5308 class taught in the spring. One particular case has already caught my eye so let's get underway. 

Business

Valeant Pharma stock has fallen 73% this year.

CEO Mike Pearson is leaving, not a mutual decision. Activist investor Bill Ackman is joining the Board. There will be more on the firm in this space I am sure....

Valeant's Elizabeth Holmes banned from running a lab for two years. She intentionally omitted information about lab tests to shareholders.

 

Politics

Representative Corrine Brown has been indicted along with her Chief of Staff for using the One Door for Education Foundation as a sluch fund.

She had raised some $800,000 but only dispensed one $1,000 scholarship. Apparently she deposited money from the charity to her personal bank account.g Funds were also used to pay for events hosted by Brown including lavish receptions and luxury boxes at concerts. \

In 2013 Crown responded to a question by saying Don't confuse me with the facts.

_________________

U S Rep Chaka Fattah was found guilty of all counts including racketeering, fraud, and money laundering.

This scheme also involved an education non profit.

He routed a federal grant through his consultants to pay back an illegal loan. The 59 year Old Democrat had beenin Congress since 1995 and served on the powerful House ?Appropriations Committee.

Gee how is that for irony!

___________________

Hillary Clinton violates the Federal Records Act, among other statutes.

FBI's Comey confirms foreign hackers probably have all 60,000 e mails including the 30,000 not released. President Obama campaigns for her the same day the Attorney General is supposedly deciding on prosecution. Hmm, do we have a double standard here?

Jensen Comment
Millions of Republicans and Democrats are calling Donald Trump a fraud.
Veteran Supreme Court Justice Ruth Ginsberg called him a "Faker" ---
https://en.wikipedia.org/wiki/Ruth_Bader_Ginsburg
She's since apologized for her remarks deemed inappropriate for a USA Supreme Court Justice
Donald Trump may still be the biggest fraud of 2016 but there's no monetary gain here --- it's costing him a sizeable share of his fortune to be a "faker."
All frauds committed along the way to November 2016 seem to be more a part of his ego tri.
The damage to Ginsberg is probably beyond repair after such a long and distinguished history on the Supreme Court (ignoring the time she was filmed sleeping through a court session).

I have my on opinion as to who the biggest fraudster continues to be from 2012, but the fraud may have been one of his friends rather than he himself. There's no way of proving it since the IRS destroyed the evidence.

Other candidates for Fraudsters of the Year are documented for various years at
 http://faculty.trinity.edu/rjensen/FraudUpdates.htm 


Expanded rule book on how to handle the discovery of corporate misdeeds

From the CFO Journal's Morning Ledger on July 12, 2016

Accountants will soon get a new, expanded rule book on how to handle the discovery of corporate misdeeds, from money laundering to environmental abuses, Richard Teitelbaum reports for CFO Journal in today’s Business & Tech. section. The International Ethics Standards Board for Accountants is set to unveil new standards this week aimed at resolving potential conflicts of interest for internal and external accountants and auditors, who can feel bound by strict client confidentiality rules, even when they uncover wrongdoing.

More than six years in the making, the new standards come amid a spate of high-profile corporate missteps—from Volkswagen AG’s emissions-cheating scandal to allegedly inadequate money-laundering controls at financial firms like HSBC Holdings PLC and U.S. Bancorp. Some experts, however, have doubts about the usefulness of the guidelines, at least in the U.S., where the Securities and Exchange Commission already takes accountants to task for failing to raise a red flag when they learn of regulatory infractions.

Jensen Comment
One of the best teaching cases on this topic is the Koss Case.

"Koss Sues Grant Thornton, Blames Firm’s Assignment of Newbie Auditors," by Caleb Newquist , Going Concern, June 25, 2010 ---
http://goingconcern.com/2010/06/koss-sues-grant-thornton-blames-firms-assignment-of-newbie-auditors/

Koss hired one of the best accounting firms in the world, Grant Thornton, and should have been able to rely on Thornton’s audits to uncover wrongdoing, Avenatti said. The suit against the auditing firm says auditors assigned to Koss were not properly trained.

The lawsuit lists hundreds of checks that Sachdeva ordered drawn on company accounts to pay for her personal expenses. She disguised the recipients — upscale retailers such as Neiman Marcus, Saks Fifth Avenue and Marshall Fields — by using just the initials. But the suit says Grant Thornton could have ascertained the true identity of the recipients by inspecting the reverse side of the checks, which showed the full name.

Continued in article

July 3, 2013 ---
http://www.theflyonthewall.com/permalinks/entry.php/KOSSid1854256/KOSS-Koss-Corp-receives-M-in-settlement-with-former-auditor

Koss Corp. receives $8.5M in settlement with former auditor Koss Corporation announced it has settled the claims between Koss and its former auditor, Grant Thornton, in the lawsuit pending in the Circuit Court of Cook County, Illinois. As part of the settlement, the parties provided mutual releases that resolved all claims involved in the litigation between Koss and its directors against Grant Thornton. Pursuant to the settlement, Koss received gross proceeds of $8.5M on July 3.

Jensen Comment
Grant Thornton failed to detect former Koss Corp. executive's $34 million embezzlement. Normally external auditors rested easy when such frauds did not materially affect the financial statements or they had strong cases that they were deceived by the client in a way that they were not responsible to detect such fraud in a financial statement audit.

Both the SEC and the PCAOB are beginning to make waves about having audit firms more responsible for detecting major frauds like the SAC fraud. If one of the Big Four had been the auditor of the Madoff Fund I think the audit firm probably would not have gotten off with zero liability for negligence. Times are changing since Andy Fastow pilfered around $60 million from his employer (Enron).

 

"Defending Koss And Their Auditors: Just Loopy Distorted Feedback," by Francine McKenna, re: TheAuditors, January 16, 2010 ---
http://retheauditors.com/2010/01/16/defending-koss-and-their-auditors-just-loopy-distorted-feedback/

My objective in writing this story was to handily contradict Grant Thornton’s self-serving defense to the Koss fraud.

The defense supported by some commentators:

Audits are not designed to uncover fraud and Koss did not pay for a separate opinion on internal controls because they are exempt from that Sarbanes-Oxley requirement.

But punching holes in that Swiss-cheese defense is like shooting fish in a barrel.  Leading that horse to water is like feeding him candy taken from a baby. The reasons why someone other than American Express should have caught this sooner are as numerous as the acorns you can steal from a blind pig

Ok, you get the gist.

Listing standards for the NYSE require an internal audit function.  NASDAQ, where Koss was listed, does not.  Back in 2003, the Institute of Internal Auditors (IIA) made recommendations post- Sarbanes-Oxley that were adopted for the most part by NYSE, but not completely by NASDAQ. And both the NYSE and NASD left a few key recommendations hanging.

In addition, the IIA has never mandated, under its own standards for the internal audit profession, a direct reporting of the internal audit function to the independent Audit Committee. The SEC did not adopt this requirement in their final rules, either.

However, Generally Accepted Auditing Standards (GAAS), the standards an external auditor such as Grant Thornton operates under when preparing an opinion on a company’s financial statements – whether a public company or not, listed on NYSE or NASDAQ, whether exempt or not from Sarbanes-Oxley – do require the assessment of the internal audit function when planning an audit.

Grant Thornton was required to adjust their substantive testing given the number of risk factors presented by Koss, based on SAS 109 (AU 314), Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement.  If they had understood the entity and assessed the risk of material misstatement fully, they would have been all over those transactions like _______. (Fill in the blank)

If they had performed a proper SAS 99 review (AU 316), Consideration of Fraud in a Financial Statement Audit, it would have hit’em smack in the face like a _______ . (Fill in the blank.) Management oversight of the financial reporting process is severely limited by Mr. Koss Jr.’s lack of interest, aptitude, and appreciation for accounting and finance. Koss Jr., the CEO and son of the founder, held the titles of COO and CFO, also.  Ms. Sachdeva, the Vice President of Finance and Corporate Secretary who is accused of the fraud, has been in the same job since 1992 and during one ten year period worked remotely from Houston!

When they finished their review according to SAS 65 (AU 322), The Auditor’s Consideration of the Internal Audit Function in an Audit of Financial Statements, it should have dawned on them: There is no internal audit function and the flunky-filled Audit Committee is a sham.  I can see it now. The Grant Thornton Milwaukee OMP smacks head with open palm in a “I could have had a V-8,” moment but more like, “Holy cheesehead, we’re indigestible gristle-laden, greasy bratwurst here! We’ll never be able issue an opinion on these financial statements unless we take these journal entries apart, one-by-one, and re-verify every stinkin’ last number.”

But I dug in and did some additional research – at first I was just working the “no internal auditors” line – and I found a few more interesting things.  And now I have no sympathy for Koss management and, therefore, its largest shareholder, the Koss family.  Granted there is plenty of basis, in my opinion, for any and all enforcement actions against Grant Thornton and its audit partners.  And depending on how far back the acts of deliciously deceptive defalcation go, PricewaterhouseCoopers may also be dragged through the mud.

Yes.

I can not make this stuff up and have it come out more music to my ears. PricewaterhouseCoopers was Koss’s auditor prior to Grant Thornton. In March of 2004, the Milwaukee Business Journal reported, “Koss Corp. has fired the certified public accounting firm of PricewaterhouseCoopers L.L.P. as its independent auditors March 15 and retained Grant Thornton L.L.P. in its place.” The article was short with the standard disclaimer of no disputes about accounting policies and practices.  But it pointedly pointed out that PwC’s fees for the audit had increased by almost 50% from 2001 to 2003, to $90,000 and the selection of the new auditor was made after a competitive bidding process.  PwC had been Koss’s auditor since 1992!

The focus on audit fees by Koss’s CEO should have been no surprise to PwC.  Post-Sarbanes-Oxley, Michael J. Koss the son of the founder, was quoted extensively as part of the very vocal cadre of CEOs who complained vociferously about paying their auditors one more red cent. Koss Jr. minced no words regarding PwC in the Wall Street Journal in August 2002, a month after the law was passed:

“…Sure, analysts had predicted a modest fee increase from the smaller pool of accounting firms left after Arthur Andersen LLP’s collapse following its June conviction on a criminal-obstruction charge. But a range of other factors are helping to drive auditing fees higher — to as much as 25% — with smaller companies bearing the brunt of the rise.

“The auditors are making money hand over fist,” says Koss Corp. Chief Executive Officer Michael Koss. “It’s going to cost shareholders in the long run.”

He should know. Auditing fees are up nearly 10% in the past two years at his Milwaukee-based maker of headphones. The increase has come primarily from auditors spending more time combing over financial statements as part of compliance with new disclosure requirements by the Securities and Exchange Commission. Koss’s accounting firm, PricewaterhouseCoopers LLP, now shows up at corporate offices for “mini audits” every quarter, rather than just once at year-end.”

A year later, still irate, Mr. Koss Jr. was quoted in USA Today:

“Jeffrey Sonnenfeld, associate dean of the Yale School of Management, said he recently spoke to six CEO conferences over 10 days. When he asked for a show of hands, 80% said they thought the law was bad for the U.S. economy.

When pressed individually, CEOs don’t object to the law or its intentions, such as forcing executives to refund ill-gotten gains. But confusion over what the law requires has left companies vulnerable to experts and consultants, who “frighten boards and managers” into spending unnecessarily, Sonnenfeld says.

Michael Koss, CEO of stereo headphones maker Koss, says it’s all but impossible to know what the law requires, so it has become a black hole where frightened companies throw endless amounts of money.

Companies are spending way too much to comply, but the cost is due to “bad advice, not a bad law,” Sonnenfeld says.”

It’s interesting that Koss Jr. has such minimal appreciation for the work of the external auditor or an internal audit function. By virtue, I suppose, of his esteemed status as CEO, COO and CFO of Koss and notwithstanding an undergraduate degree in anthropology, according to Business Week, Mr. Koss Jr. has twice served other Boards as their “financial expert” and Chairman of their Audit Committees.  At Genius Products, founded by the Baby Genius DVDs creator, Mr. Koss served in this capacity from 2004 to 2005. Mr. Koss Jr. has also been a Director, Chairman of Audit Committee, Member of Compensation Committee and Member of Nominating & Corporate Governance Committee at Strattec Security Corp. since 1995.

If I were the SEC, I might take a look at those two companies…Because I warned you about the CEOs and CFOs who are pushing back on Sarbanes-Oxley and every other regulation intended to shine a light on them as public company executives.

No good will come of this.

I don’t want you to shed crocodile tears or pity poor PwC for their long-term, close relationship with another blockbuster Indian fraudster. Nor should you pat them on the back for not being the auditor now. PwC never really left Koss after they were “fired” as auditor in 2004.  They continued until today to be the trusted “Tax and All Other” advisor, making good money filing Koss’s now totally bogus tax returns.

Continued in article

Bob Jensen's threads on PwC and other large auditing firms
http://faculty.trinity.edu/rjensen/fraud001.htm

Jensen Comment
You may want to compare Francine's above discussion of audit fees with the following analytical research study:

In most instances the defense of underlying assumptions is based upon assumptions passed down from previous analytical studies rather than empirical or even case study evidence. An example is the following conclusion:

We find that audit quality and audit fees both increase with the auditor’s expected litigation losses from audit failures. However, when considering the auditor’s acceptance decision, we show that it is important to carefully identify the component of the litigation environment that is being investigated. We decompose the liability environment into three components: (1) the strictness of the legal regime, defined as the probability that the auditor is sued and found liable in case of an audit failure, (2) potential damage payments from the auditor to investors and (3) other litigation costs incurred by the auditor, labeled litigation frictions, such as attorneys’ fees or loss of reputation. We show that, in equilibrium, an increase in the potential damage payment actually leads to a reduction in the client rejection rate. This effect arises because the resulting higher audit quality increases the value of the entrepreneur’s investment opportunity, which makes it optimal for the entrepreneur to increase the audit fee by an amount that is larger than the increase in the auditor’s expected damage payment. However, for this result to hold, it is crucial that damage payments be fully recovered by the investors. We show that an increase in litigation frictions leads to the opposite result—client rejection rates increase. Finally, since a shift in the strength of the legal regime affects both the expected damage payments to investors as well as litigation frictions, the relationship between the legal regime and rejection rates is nonmonotonic. Specifically, we show that the relationship is U-shaped, which implies that for both weak and strong legal liability regimes, rejection rates are higher than those characterizing more moderate legal liability regimes.
Volker Laux  and D. Paul Newman, "Auditor Liability and Client Acceptance Decisions," The Accounting Review, Vol. 85, No. 1, 2010 pp. 261–285
http://faculty.trinity.edu/rjensen/TheoryTAR.htm#Analytics

Bob Jensen's threads on Grant Thornton are at
http://faculty.trinity.edu/rjensen/Fraud001.htm

 

Bob Jensen's threads on auditor professionalism ---
http://faculty.trinity.edu/rjensen/fraud001c.htm

 


Zero-Based Budgeting --- https://en.wikipedia.org/wiki/Zero-based_budgeting

"Zero-Based Budgeting Is Not a Wonder Diet for Companies," by Daniel Mahler, Harvard Business Review Blog, June 30, 2016 ---
https://hbr.org/2016/06/zero-based-budgeting-is-not-a-wonder-diet-for-companies?referral=00563&cm_mmc=email-_-newsletter-_-daily_alert-_-alert_date&utm_source=newsletter_daily_alert&utm_medium=email&utm_campaign=alert_date

Zero-based budgeting (ZBB) is elegantly logical: Expenses must be justified for each new budget period based on demonstrable needs and costs, as opposed to the more common method of using last year’s budget as your starting point, then adjusting up or down. ZBB is a straightforward, intuitively simple way to aggressively strip out costs that cannot be rationally justified. Who would argue that a business should not eliminate unjustifiable costs?

ZBB has been around for decades, but is currently enjoying a revival driven by powerful investors like 3G Capital Partners, the force behind the 2015 merger of Kraft Foods and H.J. Heinz. Such high-profile exposure has prompted more companies to view ZBB as a fresh “wonder diet” for achieving radical corporate leanness. ZBB’s resurgence is further fueled by the uncertain markets hindering many companies’ efforts to attract fresh capital, as we see venture capital and private equity funds increasingly pushing ZBB on their portfolio companies, in the hope of securing a more rapid and profitable exit on their investments.

Yet for all the promise of ZBB, many companies that try it soon grow disenchanted. They find that the process is a distraction to their people, that it does not deliver all the cost savings they anticipated, and that many of the costs they do eliminate soon creep back in, making the whole effort feel futile. One might conclude from such failures that implementing zero-based budgeting is simply too ambitious. We believe the exact opposite to be true. Most ZBB implementations are not ambitious enough.

Traditional ZBB implementations focus almost exclusively on simple SG&A, in part because SG&A benchmark data is far more readily attainable than are relevant data from the core functions of comparable companies. In comparison to other methods (such as Six Sigma or activity-based costing), ZBB typically does not address operational excellence in core processes (marketing, sales, supply chain, procurement, manufacturing) or fundamental cost drivers such as portfolio complexity, organizational complexity, customer complaints, and quality issues. Also, ZBB does not challenge existing process design, which can now be completely re-thought and often drastically improved through digitization. Rather, the most visible outcomes of many ZBB efforts are burdensome policies (such as travel cost restrictions) that fail to address the underlying fundamentals (such as who needs to travel, why, and when). The result is a superficial and simplistic focus on “policing” costs versus substantive cost prevention.

Continued in article

From the CFO Journal's Morning Ledger on March 26, 2015

Zero-based budgeting, an austerity measure that forces corporate managers to justify from scratch their spending plans every year, is getting its moment in the spotlight. The tactic is a critical element to 3G Capital Partners LP’s plan for making good with its roughly $49 billion deal to acquire Kraft Foods Group Inc. through its H.J. Heinz Co. unit, the WSJ reports. Zero-based budgeting has triggered sweeping cost cuts at 3G-related companies, including Heinz, ranging from the elimination of hundreds of management jobs to jettisoning corporate jets—and even requiring employees to get permission to make color photocopies.

And it isn’t just 3G adopting the cost-cutting measure. The budget tool has attracted a wide following among big food companies and has been used by many public agencies. But it does have its downsides. Employees may perceive it as harsh, especially when it eliminates office perks and leads to layoffs, and it can require staff training and sometimes painful discussions. Some experts also say that it doesn’t make sense for high-growth companies or those expanding into new regions.

Bob Jensen's threads on zero-based budgeting ---
http://faculty.trinity.edu/rjensen/theory02.htm#Zero-Based-Budgeting


Students at Michigan State University will no longer have to take college-level algebra, thanks to a revision of the general-education math requirement ---
"Algebra No More," Inside Higher Ed, July 6, 2016 ---
https://www.insidehighered.com/news/2016/07/06/michigan-state-drops-college-algebra-requirement?utm_source=Inside+Higher+Ed&utm_campaign=d5cb16d025-DNU20160706&utm_medium=email&utm_term=0_1fcbc04421-d5cb16d025-197565045

Jensen Questions
Will college-level algebra requirements fall like dominos in the common core requirements of higher education?
Wayne State University dropped algebra and is considering replacing it with a diversity course.
Michigan State will still have a math requirement that does not have formulas and equations..

What the universities dropping algebra are not revealing, at least to my knowledge. of whether they are still requiring remedial math and algebra for students deemed exceptionally weak in middle-school algebra on SAT/ACT admission tests. My guess is no since the dropping of algebra seems to be an effort to make it easier for those students to graduate.there will be no remedial algebra.

In terms of math requirements for GRE, GMAT, MCAT, and other graduate school admissions requirements undergraduates will now fall into two classifications. The math dummies who graduate versus the the graduates required to take math and algebra and statistics in their majors like engineering students, science students, and business students. Humanities majors who might want to go to graduate school are are advised to take college-level algebra as an elective course, especially if they had lousy SAT/ACT scores in high school.

Maybe SAT and ACT exam preparers will yield to pressures and drop algebra from college admissions tests.

It all sound like dumbing down to me to make up for the lousy high schools in the USA relative to those in Asia and Europe. But in Asia and Europe less than half the Tier 2 graduates are even allowed to go to college.

July 6, 2016 Reply from Ed Scribner

Bob, et al.,

This does smell like a "dumbing down" decision, which I have come to refer to as MEXIT (Michigan schools' (so far MSU and Wayne State) EXIT from what we grizzled veterans would call "real courses"). It is similar to to the familiar movement to eliminate journal entries from accounting content offered to non-accounting majors.

Nevertheless, it can be argued that (1) traditional treatment of algebraic content may be less valuable to non-STEM students than some other treatment of math concepts, (2) majors can still require traditional algebra, (3) the head of the math department at MSU appears to be on board, and (4) "quantitative literacy" courses could conceivably be designed to be quite challenging and meaningful (though I doubt they will go so far as to use Courant and Robbins).

Having said this, the real reason for MEXIT may lie in the MTA (Michigan Transfer Agreement), mentioned toward the end of the article. Ease of transfer from community college to a four-year school, with maximum counting of credits, is a big deal to community colleges, to their students, and to four-year schools seeking to sustain enrollments.

Ed

Ed Scribner New Mexico State University

 


"Firm (PwC) used taxpayer money for prostitutes, Las Vegas bachelor parties, DWP claims in lawsuit," by Matt Stevens, Los Angeles Times, June 30, 2016 ---
http://www.latimes.com/local/lanow/la-me-ln-dwp-billing-20160630-snap-story.html

. . .

Three PricewaterhouseCoopers managers and the contractor used the stolen funds to pay for two “lavish” Las Vegas bachelor parties — one for the consulting firm’s partner in charge in 2011 and another for a firm manager two years later, the documents allege. In addition to the escorts, hotel stay and alcohol, the DWP alleges that stolen ratepayer money was used for condoms, a steak dinner and a poolside cabana party.

Continued in article

Jensen Comment
The perpetrators must have been consultants. Accountants don't know how to party like that. There's an old saying that hookers schedule vacations when accounting conventions will be in town.

July 6, 2016 reply from Glen Gray

Well there are variations on the story (about why the American Accounting Association is not welcome in Las Vegas). As you know the AAA always announces where the next 3 annual will be. Las Vegas appeared on that list. Suddenly as the Las Vegas year was approaching it suddenly changed to Hawaii. I don't recall the exact date but it was the last time the AAA was in Hawaii if someone wants to look it up. So far these are facts.

My favorite back story, but I don't know if all facts are 100% true, is that when the hotel found out who we were, not only did they refund the $100,000 deposit, the hotel offered $200,000 for the AAA to go away.

When the AAA annual meeting was in Las Vegas before, the MGM Grand discovered that accounting professors don't drink, gamble, will stand in line for an hour for the $1.99 buffet and not play the slot machines that parallel the buffet line. On top of that the doormen were about to go on strike because accounting professors don't tip doormen to blow a whistle to call a cab parked a few feet away. Seriously, the doormen were really angry! I know this because I was standing next to an angry doorman who said, " who are these people?"--with a few swear words tossed in.

I'm assuming we are also banned from Reno. I'm sure the Hilton manager still talks about us. He was shocked by how much food we consumed at the receptions. He said in his 20+ years of experience he had never seen a group consume food the way we did.

Glen

 


Former accountant charged with stealing $3.4M from employer in Boston ---
http://www.bizjournals.com/boston/blog/mass_roundup/2016/06/former-accountant-charged-with-stealing-3-4m-from.html


Jensen Question
I wonder how many Facebook users believe Facebook would never dodge taxation?

IRS Sues Facebook For Billions In Undervalued IP Assets In 2010 Irish Transfers ---
http://taxprof.typepad.com/taxprof_blog/2016/07/irs-sues-facebook-for-billions-in-undervalued-ip-assets-in-2010-irish-transfers.html

Bob Jensen's Fraud Updates
 http://faculty.trinity.edu/rjensen/FraudUpdates.htm


From the CFO Journal's Morning Ledger on July 5, 2016

Barclays trio get Libor-rigging conviction
Three former Barclays employees have been convicted of conspiracy to defraud in connection with an investigation into the manipulation of Libor interest rates. British citizens Jonathan Mathew and Jay Merchant as well as American Alex Pabon were convicted by a jury at Southwark Crown Court after an 11-week trial. The jury couldn’t reach verdicts for two of their co-defendants, the U.K.’s Serious Fraud Office wrote in a press release on Monday.

Bob Jensen's Fraud Updates
 http://faculty.trinity.edu/rjensen/FraudUpdates.htm


Impact of Brexit on the EU

From the CFO Journal's Morning Ledger on July 5, 2016

Italian banks reeling after Brexit
Britain’s vote to leave the EU has produced dire predictions for the U.K. economy. The damage to the rest of Europe could be more immediate and potentially more serious. Nowhere is the risk concentrated more heavily than in the Italian banking sector. In Italy, 17% of banks’ loans have gone bad. That is nearly 10 times the level in the U.S. Among publicly traded banks in the eurozone, Italian lenders account for nearly half of total bad loans. Years of lax lending standards left Italian banks ill-prepared when an economic slump sent bankruptcies soaring a few years ago.

From the Former Chief Economic Advisor to President Obama and Former President of Harvard University
"Why Brexit is worse for Europe than Britain," Larry Summer's Blog, June 24, 2016 ---
http://larrysummers.com/2016/06/24/why-brexit-is-worse-for-europe-than-britain/

. . .

Economics

For Britain, the economic effects are two sided. On the one hand, a major jolt has been delivered to confidence, to future unity and down the road to trade. On the other, the currency has become more competitive, and liquidity will be in very ample supply. I would expect that a significant deterioration in growth and a recession beginning in the next 12 months has to be a substantial risk though short of an odds on bet.

As suggested by the fact that stock markets in Italy and Spain are down almost twice as much as in the UK, the prospects for Europe may in some ways be worse than for the UK. There is the real risk of “populist exit contagion” in a number of countries. A credit crunch is a serious risk. Unlike in Britain, the trade weighted exchange rate is unlikely to decline very much. The central bank has less room for incremental policy measures.

The effects on the rest of the world will depend heavily on psychology. I continue to be alarmed as I wrote in this space a few days ago that this unexpected outcome in the UK will raise the spectre of “Trump risk”. If the UK can vote for Brexit perhaps the U.S. can vote for Donald Trump. I fear this possibility will lead to a freezing up of spending decisions particularly on the part of internationally oriented businesses. The odds of U.S. recession beginning within the next 12 months are I think now in the 30 percent range. Also noteworthy is that an environment of increased risk aversion and flight to quality will complicate Japan’s problem of generating inflation, and China’s challenge of attaining currency stability.

To an extent that is underestimated in some quarters and understated in others, the world economy is far more brittle than usual because of the inability almost everywhere to lower interest rates substantially. Normally in response to incipient downturns central banks lower rates by 400 basis points or more. Nowhere do they have that kind of room. Nor is there large scope for reducing term and credit spreads given their very low levels. This is no time for austerity. Greater use of fiscal policy should be on the agenda almost everywhere and certainly with the change of government in the UK.

Brexit will rightly be taken as a signal that the political support for global integration is at best waning and at worst collapsing. Dramatic exchange rate fluctuations tend to portend upswings in protectionist pressure. And problems in European banks could as in 2009 lead to a drying up of trade finance. Already global trade has lagged global growth in recent years. A clear sense of commitment to avoid backsliding towards protection from the G20 will be essential going forward. Specific efforts with respect to trade finance may be appropriate.

Broader Observations

After Brexit, Trump, Sanders and the misforecast British and Canadian general elections, it should be clear that the term political science is an oxymoron. Political events cannot be reliably predicted by pollsters, pundits or punters. All three groups should have humility going forward. In particular no one should be confident about the outcome of the U.S. presidential election.

The political challenge in many countries going forward is to develop a “responsible nationalism”. It is clear that there is a hunger on the part of electorates, if not the Davos set within countries, for approaches to policy that privilege local interests and local people over more cosmopolitan concerns. Channeling this hunger constructively rather than destructively is the challenge for the next decade. We now know that neither denying the hunger, or explaining that it is based on fallacy is a viable strategy


From the CFO Journal's Morning Ledger on June 30, 2016

Non-GAAP reporting comes in all flavors
Nearly all large companies report adjusted financials now, as we reported Tuesday. But like unhappy families in a Tolstoy novel, the ways in which they adjust their numbers vary widely, Theo Francis writes. That holds true even beyond the sometimes baffling adjustments many companies make. In its analysis of more than 800 companies that tweaked their 2015 net income figures, Calcbench extracted data from earnings releases about five key areas of adjustments.

Bob Jensen's threads on pro forma reporting ---
http://faculty.trinity.edu/rjensen/Theory02.htm#ProForma


From the CFO Journal's Morning Ledger on June 30, 2016

GM can’t keep pace with demand.
For years, the thousands of U.S. dealers selling General Motors Co. vehicles were saddled with large cars and trucks when customers were looking for small vehicles. Now, as U.S. auto sales climb to a record pace, many of these same dealers say they are begging for pickup trucks and sport-utility vehicles. The mismatch is again costing GM precious U.S. market share.

 


From the CFO Journal's Morning Ledger on June 30, 2016

Puerto Rico population slide exacerbates debt woes
Puerto Rico has suffered a population slide that is steeper and more financially disastrous than in any U.S. state since the end of World War II. An exodus of workers, retirees and entire families has shrunk Puerto Rico’s population by more than 9% in the past decade to less than 3.5 million, magnifying the territory’s inability to repay its $70 billion in debt. Meanwhile, Congress completed Wednesday a bipartisan compromise to oversee a Puerto Rico rescue plan that would begin the largest municipal-debt workout in U.S. history.

Puerto Rico authorizes debt payment suspension; Obama signs rescue bill ---
http://www.reuters.com/article/us-puertorico-debt-idUSKCN0ZG09Y


Costco repatriates more than $1.5 billion dollars over two years, virtually tax-free

From the CFO Journal's Morning Ledger on June 29, 2016

Good morning. A weak Canadian dollar and a quirk in U.S. tax rules allowed Costco Wholesale Corp. to repatriate more than $1.5 billion dollars over two years, virtually tax-free, Vipal Monga reports. Costco said in a filing with the Securities and Exchange Commission that it decided to bring back the funds “due to fluctuations in exchange rates and other factors.” The company said it repatriated the money from Canada “without adverse tax consequences.”

The filing is dated May 18, but the company posted it to the SEC on Tuesday.The company essentially paid no U.S. taxes on the repatriated money, said Richard Galanti, the chief financial officer, in an interview. “The weakening Canadian dollar was an opportunity to bring back the funds,” he said. He didn’t elaborate, but tax experts say that Costco likely benefited from a quirk in U.S. tax rules, which boosts the value of tax credits when the U.S. dollar strengthens.

 


Pro Forma --- https://en.wikipedia.org/wiki/Pro_forma

Pro Forma Reporting Gaining Ground on GAAP Reporting

From the CFO Journal's Morning Ledger on June 28, 2016

Good morning. Will the last company to abandon reporting results that are solely based on U.S. generally accepted accounting principles please turn out the lights? Not even 6% of companies  in the S&P 500 provide GAAP results without also providing a view with qualifiers that don’t adhere to that standard, Tatyana Shumsky and Theo Francis write for CFO Journal in today’s Business & Tech. section. A decade ago, a quarter of the index reported GAAP figures only.

Purists are dwindling as companies struggle to increase their earnings in the wake of the 2008 financial crisis, analysts and accountants say, and regulators are taking notice. The adjusted, or customized, figures many finance chiefs use to supplement their company’s standard financial reports inflate income by an average of 44% at profitable companies, according to new research by financial-data provider Calcbench Inc. Adjustments can exclude currency swings, restructuring costs and other one-time charges. That can help mask the impact of tepid global economic growth, which has left many businesses unable to raise prices and hindered sales growth.

From the CFO Journal's Morning Ledger on July 20,, 2016

EA’s new game is GAAP
Electronic Arts Inc.
 will stop reporting many of the adjusted financial measures it has used for years, addressing regulators’ stepped-up criticism of how companies apply customized metrics in earnings. The Securities and Exchange Commission in May issued new guidelines for the use of adjusted measures that don’t comply with U.S. generally accepted accounting principles. In a Tuesday conference call with analysts, EA said results for its most recently ended quarter, due Aug. 2, will be the last to include revenue, gross margin and per-share earnings on a non-GAAP basis.

Bob Jensen's threads on the dangers of pro forma reporting ---
http://faculty.trinity.edu/rjensen/theory02.htm#ProForma


EY:  Accounting and Reporting Considerations Under Brexit

What you need to know

Entities will need to consider the accounting and financial reporting implications of both the uncertainty and the financial market volatility caused by the vote by the British people to leave the EU.

Entities also will need to monitor events and consider the accounting and financial reporting implications of future actions by governments and any decisions they make about their own business and/or investment strategies.

SEC registrants should take a fresh look at their disclosures in management’s discussion and analysis and other parts of their SEC filings.

 

EY:  VIE guidance on evaluating indirect interests held by related parties under common control may change

What you need to know

The FASB proposed a change to the Variable Interest Entity Model (VIE Model) for determining the primary beneficiary when indirect interests are held by related parties under common control.

The proposal would no longer require indirect interests held by related parties that are under common control with a decision maker to be considered the equivalent of direct interests when determining whether the decision maker is the primary beneficiary.

The proposal could change consolidation conclusions for some entities that are under common control.

Bob Jensen's Threads
What's Right and What's Wrong With (SPEs), SPVs, and VIEs ---
http://faculty.trinity.edu/rjensen//theory/00overview/speOverview.htm


"U.S. lawmakers seek more money, authority for derivatives regulator," Reuters, June 29, 2016 ---
http://www.reuters.com/article/us-usa-congress-cftc-idUSKCN0ZF1K0

The Commodity Futures Trading Commission would have stronger policing powers over the derivatives market, along with a boosted budget, under legislation introduced in the U.S. Congress on Wednesday.

 

The bill, introduced by Democrats Elizabeth Warren and Mark Warner in the Senate and Elijah Cummings in the House of Representatives, also would add new tasks to the regulator's rulemaking agenda.

 

"The only way to make sure that derivatives can never lead to a financial crisis and taxpayer bailouts again is to put in place clearer rules and stronger oversight," Warren said in a statement.

 

The bill likely will fizzle in the Republican-led Congress. It could also become part of this year's election fights, as the relationship between Wall Street and Washington frequently moves to center stage in presidential and congressional campaigns.

 

Democrats such as Warren, who is campaigning for her party's presumptive nominee, Hillary Clinton, regard the Dodd-Frank Wall Street reform law passed after the 2007-09 financial crisis as crucial for preventing another massive meltdown. That law greatly expanded the CFTC's reach, as swaps and derivatives had played a key role in the breakdown of banks and other firms.

 

They also seek further regulation, saying vulnerabilities persist in the financial system.

 

The presumptive nominee for the Republican Party, real estate developer and television star Donald Trump wants to repeal Dodd-Frank. Many in the party say the law has gone too far, drying up liquidity and freezing capital.

 

The proposed legislation "gives the CFTC a stable funding stream and the tools necessary to help deter future illegal acts by permitting penalties large enough to impact the bottom lines of even the largest financial firms," Cummings said.

 

The CFTC currently is funded through annual appropriations from Congress, unlike the Securities and Exchange Commission, which is backed by user fees and fines.

 

CFTC Chair Timothy Massad has sought a change, saying millions of dollars more in funds would help the agency keep up with technology advancements in the markets it oversees and with "high-powered defense teams" in its enforcement cases.

 

Continued in article

 

Jensen Comment
One of the problems of being such an activist against Wall Street is that when a well-intended politician like Senator Warren has good idea I suspect that the Wall Street defenders in Congress have a knee jerk reaction that any and every bill proposed by Senator Warren must be defeated. Hillary Clinton, on the other hand, has close ties with Wall Street and will probably have more respect from the financial sector when she becomes President of the USA. At the moment Wall Street trembles in fear of Donald Trump. Wall Street money is backing Hillary Clinton.

 

 

Bob Jensen's free tutorials on how to account for dervatives and hedging activities ---
http://faculty.trinity.edu/rjensen/caseans/000index.htm


The salary of the chief executive of a large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.
John Kenneth Galbraith --- Click Here

If you aren’t (cynical) now, you will by the time you finish the new Bebchuk and Fried paper on executive compensation.  They paint a fairly gloomy picture of managers exerting their power to “extract rents and to camouflage the extent of their rent extraction.”  Rather than designed to solve agency cost problems, the paper makes the case that executive pay can by an agency cost in and of itself.  Let’s hope things aren’t this bad. 
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=364220

Jensen Note
This could be made into a good accounting teaching case on how to account for all of this.

"Investors Get Stung Twice by Executives’ Lavish Pay Packages," by Grechen Morgenson, The New York Times, July 8, 2016 ---
http://www.nytimes.com/2016/07/10/business/investors-get-stung-twice-by-executives-lavish-pay-packages.html?_r=0

. . .

When compared with those companies’ earnings or revenue, $20 million may not sound like much. But looking at pay another way, said David J. Winters, chief executive at Wintergreen Advisers, a money management firm in Mountain Lakes, N.J., brings a clearer picture of the costs that these lush packages mean for shareholders.

The analysis suggested by Mr. Winters focuses on the stock awards given to top corporate executives every year, and the two kinds of costs they impose on shareholders. Stock grants are a substantial piece of the pay puzzle: Last year, they accounted for $8.7 million of the $20 million median C.E.O. package, according to Equilar, a compensation analysis firm in Redwood City, Calif.

Cost No. 1 is the dilution for existing shareholders that results from these grants. As a company issues shares, it reduces the value of existing stockholders’ stakes.

A second cost to consider, Mr. Winters said, is the money companies pay to repurchase their shares in trying to offset that dilutive effect on other stockholders’ stakes.

“We realized that dilution was systemic in the Standard & Poor’s 500,” Mr. Winters said in an interview, “and that buybacks were being used not necessarily to benefit the shareholder but to offset the dilution from executive compensation. We call it a look-through cost that companies charge to their shareholders. It is an expense that is effectively hidden.”

Mr. Winters and his colleague Liz Cohernour, Wintergreen’s chief operating officer, totaled the compensation stock grants dispensed by S.&P. 500 companies and added to those figures the share repurchases made by the companies to reduce the dilution associated with the grants.

What they found: The average annual dilution among S.&P. 500 companies relating to executive pay was 2.5 percent of a company’s shares outstanding. Meanwhile, the costs of buying back shares to reduce that dilution equaled an average 1.6 percent of the outstanding shares. Added together, the shareholder costs of executive pay in the S.&P. 500 represented 4.1 percent of each company’s shares outstanding.

Of course, these numbers are far greater at certain companies. The 15 companies with the highest combination of dilution and buybacks had an average of 10.2 percent of their shares outstanding.

“It’s not only today’s expense,” Mr. Winters said. “It’s that the costs of dilution over time have been going up, so you have a snowballing effect.”

Bob Jensen's threads on outrageous compensation packages ---
http://faculty.trinity.edu/rjensen/FraudConclusion.htm#OutrageousCompensation

 




Teaching Case
"Williams Community Hospital: An Internal Auditing Case,"
by Sandra Waller Shelton, Michael Trendell, and Ray Whittington. Issues in Accounting Education, August 2016, Vol. 31, No. 3, pp. 337-345 ---
http://aaajournals.org/doi/full/10.2308/iace-51273

Abstract

The internal audit function is a critical part of an organization's control and governance structure. This case introduces students to the complete internal audit process for a company, including identification of risk, audit planning, execution of fieldwork, and reporting. In this exercise students are asked to assume the role of an internal auditor for a community hospital and perform risk assessment, perform testing, and documentation based on an audit program, and prepare an audit report, detailing findings and recommendations. The case includes both testing for compliance with laws and regulations, and tests of compliance with internal control policies and procedures. In response to an ever-changing business environment and the expectations of stakeholders, the internal audit profession identifies compliance with laws and regulations as one of the top risks frequently cited by both audit committee and executive management. The hospital setting is one of particular interest for addressing this topic. This case is appropriate for undergraduate and graduate students in internal auditing and external auditing classes.


Teaching Case
"The Marriage of Sharon and Henry Sawbones: A Forensic Case Illustrating the Use of a Tax Return in a Litigation Advisory Services Context,"
byJeffrey J. Quirin and David O'Bryan,  Issues in Accounting Education, August 2016, Vol. 31, No. 3, pp. 347-354 ---
http://aaajournals.org/doi/full/10.2308/iace-51206

Abstract

This case is designed for use in a forensic accounting curriculum at the undergraduate or graduate level. The case contains no allegations of fraud. Rather, it illustrates the subset of forensic accounting referred to as litigation advisory services and is based upon an actual case that was investigated by the lead author working as a litigation support consultant. The case utilizes the problem-based learning approach wherein students are put in the role of the forensic accountant and must request additional information from the instructor. Students must first review a personal income tax return to develop a list of financial documents that would serve as a discovery request when assisting a family law attorney and his divorcing client. Using the information obtained from their requests, students must then prepare an income exhibit and an asset/liability exhibit that will support the client's need for a division of the marital estate, spousal maintenance, and child support. The process of using a completed income tax return to reconstruct the couple's asset and income profile not only mirrors the real-world engagement, but also complements and reinforces any prior courses in taxation. Student feedback on the case was extremely positive across all dimensions. Students reported having a better understanding of the role of a forensic accountant in the litigation process and enhanced abilities in analyzing a personal income tax return.


Teaching Case
"Trading Styles, Inc.: An Analysis of the Going Concern Assessment," by Velina K. Popova and Sarah E. Stein, Issues in Accounting Education, August 2016, Vol. 31, No. 3, pp. 355-366 ---
http://aaajournals.org/doi/full/10.2308/iace-51218

Abstract

This instructional case focuses on the auditor's going concern decision for a private retail client. The primary objective of this case is to understand and examine the auditor's consideration of the client's ability to continue as a going concern in a real-world setting. The case provides students with the financial aspects as well as the personal aspects of such a decision. Specifically, students must complete analytical procedures and evaluate information from several sources when forming their opinion. We also ask students to contemplate the auditor's relationship with the client in order to understand issues involving auditor independence. Throughout the case, students have the opportunity to review applicable auditing standards and to draft a going concern audit report. We expect this case would be most applicable for an undergraduate or a graduate audit course

Teaching Case on Going Concern Accounting
From The Wall Street Journal Accounting Weekly Review on September 5, 2014

Executive Responsibility For 'Going Concern' Disclosures Increases
by: Emily Chasan and Maxwell Murphy
Aug 28, 2014
Click here to view the full article on WSJ.com
 

TOPICS: Accounting Deficiency

SUMMARY: Corporate managers will have to make more uniform disclosures when there is substantial doubt about their business' ability to survive, according to the Financial Accounting Standards Board. The FASB updated U.S. accounting rules, effective by the end of 2016, to define management's responsibility to evaluate whether their business will be able to continue operating as a "going concern," and make relevant disclosures in financial statement footnotes. Previously, there were no specific rules under U.S. Generally Accepted Accounting Principles and disclosures were largely up to auditors. Corporate executives had the option to make any voluntary disclosures they felt relevant.

CLASSROOM APPLICATION: This is a good article to discuss going concern, notes to the financial statements, and FASB, as well as management's responsibility in financial reporting.

QUESTIONS: 
1. (Introductory) What is FASB? What is its function? What is GAAP? Why is GAAP used in accounting?

2. (Advanced) What does the concept "going concern" mean? Why is it important? What kind of disclosures is FASB requiring? Who is required to make the disclosures? Why are these parties included in the requirement?

3. (Advanced) In general, what is included in the notes to financial statements? Why are notes required? Who uses the notes and how are they used? Please give some examples of information regularly included in the notes.

4. (Advanced) What is the benefit of this new rule? How can this information be used? Are there other ways besides a note that someone could access this information?
 

Reviewed By: Linda Christiansen, Indiana University Southeast
 

RELATED ARTICLES: 
Going Concern Opinions on Life Support With Investors
by Emily Chasan
Sep 12, 2014
Online Exclusive

"Executive Responsibility For 'Going Concern' Disclosures Increases," by Emily Chasan and Maxwell Murphy, The Wall Street Journal, August 27, 2014 ---
http://blogs.wsj.com/cfo/2014/08/27/executive-responsibility-for-going-concern-disclosures-increases/?mod=djem_jiewr_AC_domainid

Corporate managers will have to make more uniform disclosures when there is substantial doubt about their business’ ability to survive, the Financial Accounting Standards Board said Wednesday.

The FASB updated U.S. accounting rules, effective by the end of 2016, to define management’s responsibility to evaluate whether their business will be able to continue operating as a “going concern,” and make relevant disclosures in financial statement footnotes. Previously, there were no specific rules under U.S. Generally Accepted Accounting Principles and disclosures were largely up to auditors. Corporate executives had the option to make any voluntary disclosures they felt relevant.

Investors, however, have grown frustrated with a lack of going concern opinions during the financial crisis that failed to warn them of impending bankruptcies.

The FASB first issued a proposal at the peak of the financial crisis in 2008, but debate and revisions delayed the final standard, which didn’t go up for a vote until May.

Supporters of the changes have argued that corporate managers have better information about a company’s ability to continue financing their operations than auditors. The updated rule will force executives to disclose serious risks even if management has a credible plan to alleviate them, for example.

Information currently disclosed by companies can vary significantly. Only about 40% of companies that filed for bankruptcy in the past two decades have explicitly disclosed the possibility that they could cease to operate before running into trouble, according to a study this month from Duke University’s Fuqua School of Business.


 




Teaching Case from The Wall Street Accounting Weekly Review on July 8, 2016

Accounting Choices Blur Profit Picture
by: Tatyana Shumsky and Theo Francis
Jun 29, 2016
Click here to view the full article on WSJ.com

TOPICS: Financial Accounting, Financial Reporting, GAAP, Non-GAAP Reporting, SEC

SUMMARY: Just 29 companies in the S&P 500 index - or 5.7% of the total - closed their books for 2015 exclusively using U.S. Generally Accepted Accounting Principles, or GAAP. That's a sharp decline from 25% in 2006. The purists are dwindling as companies struggle to increase their earnings in the wake of the 2008 financial crisis, analysts and accountants say, and regulators are taking notice. The adjusted, or customized, figures many finance chiefs use to supplement their company's standard financial reports inflate income by an average of 44% at profitable companies. Adjustments can exclude the effects of such factors as currency swings, noncash charges like restructuring costs and one-time charges.

CLASSROOM APPLICATION: This article is an excellent addition to the recent popularity and increased concerns regarding non-GAAP/pro forma financial reporting articles.

QUESTIONS: 
1. (Introductory) What is GAAP? How is it determined? What entities use GAAP?

2. (Advanced) What is non-GAAP reporting? Why do companies engage in non-GAAP reporting? What are the benefits of this type of reporting?

3. (Introductory) What is the SEC? What is its area of authority?

4. (Advanced) How many companies use non-GAAP reporting? Why? Name some examples of differences between GAAP and non-GAAP reporting.

5. (Advanced) What issues or problems can non-GAAP reporting present to users of the financial statements?

6. (Advanced) Is any or all non-GAAP regulated? Is any of it illegal? How does the SEC view non-GAAP reporting? Should non-GAAP reporting be regulated? Why or why not?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
What Exactly are Non-GAAP Numbers? Well, That Depends
by Tatyana Shumsky
Jul 05, 2016
Online Exclusive

SEC Chairman Warns Against Custom Accounting
by Tatyana Shumsky
Jun 29, 2016
Online Exclusive

 

"Accounting Choices Blur Profit Picture.' by Tatyana Shumsky and Theo Francis," The Wall Street Journal, June 29, 2016 ---
http://www.wsj.com/articles/accounting-choices-blur-profit-picture-1467086625?mod=djem_jiewr_AC_domainid

Customized detours from generally accepted standards can inflate income by average 44%, analysis finds.

U.S. companies that rely solely on standard accounting to report their financial results are in the minority, and their numbers are shrinking fast.

Just 29 companies in the S&P 500 index—or 5.7% of the total—closed their books for 2015 exclusively using U.S. Generally Accepted Accounting Principles, or GAAP. That’s a sharp decline from 25% in 2006, according to research firm Audit Analytics.

The purists are dwindling as companies struggle to increase their earnings in the wake of the 2008 financial crisis, analysts and accountants say, and regulators are taking notice.

The adjusted, or customized, figures many finance chiefs use to supplement their company’s standard financial reports inflate income by an average of 44% at profitable companies, according to new research by financial-data provider Calcbench Inc. Adjustments can exclude the effects of such factors as currency swings, noncash charges like restructuring costs and one-time charges.

That can help mask the impact of tepid global economic growth, which has left many businesses unable to raise prices and hindered sales growth.

In many cases these companies have exhausted cost-cutting options.

“As the economy slows or grows companies are incentivized to provide more or less [customized] metrics,” said Angela Newell, partner at accounting firm BDO USA LLP.

“If everything is rosy and GAAP looks great, there is no need to include a non-GAAP metric,” she added.

Continued in article

 


Teaching Case from The Wall Street Accounting Weekly Review on July 8, 2016

The Latest Bitcoin Hurdle: How to Tax It
by: Laura Saunders
Jun 25, 2016
Click here to view the full article on WSJ.com

TOPICS: Bitcoin, Investment Property, Taxation

SUMMARY: A little more than two years after the Internal Revenue Service issued bare-bones guidance on bitcoin and other digital currencies, the agency still hasn't addressed many important tax matters affecting them. The tax questions are one of several hurdles on the path to broader acceptance of digital currencies - money that exists only online and isn't backed by any government. Many bitcoin advocates were delighted with the IRS's first ruling on digital currencies in April 2014. It held that digital currencies are property, akin to real estate or stocks. Thus the profit on an investment in such currencies can be eligible for favorable capital-gains tax rates if it is held longer than a year, and losses can be used to offset gains. The downside, for people who want to use bitcoin as a medium of exchange, is that each transaction can involve the sale of investment property.

CLASSROOM APPLICATION: This is a very interesting article about taxation of bitcoin transactions we can use when covering purchases and sales of investment property.

QUESTIONS: 
1. (Introductory) What is bitcoin? What is its purpose? How is it used?

2. (Advanced) What are the tax issues regarding bitcoin? What has the IRS ruled regarding bitcoin? What are the implications and benefits of that decision?

3. (Advanced) What tax issues regarding bitcoin remain unresolved? How do these open issues affect taxpayers and tax planning?

4. (Advanced) How could tax issues limit the widespread use of bitcoin? What rulings could encourage the use of bitcoin? What rulings could limit its use?

5. (Advanced) What does "de minimus" mean? How could a de minimus rule be drafted regarding use of bitcoin? What purpose could it serve? What challenges could prevent it or resolve?

Reviewed By: Linda Christiansen, Indiana University Southeast

 

"The Latest Bitcoin Hurdle: How to Tax It," by Laura Saunders, The Wall Street Journal, June 26, 2016 ---
http://www.wsj.com/articles/the-latest-bitcoin-hurdle-how-to-tax-it-1466781291?mod=djem_jiewr_AC_domainid

A little more than two years after the Internal Revenue Service issued bare-bones guidance on bitcoin and other digital currencies, the agency still hasn’t addressed many important tax matters affecting them.

The American Institute of CPAs sent the IRS a letter earlier this month requesting clarifications on 10 issues, including the tax status of small transactions and rules for donating digital currencies to charity.

“We’d like to know the tax rules before they turn into audit issues,” says Annette Nellen, a professor at San Jose State University in Silicon Valley, who helped draft the AICPA’s request.

The tax questions are one of several hurdles on the path to broader acceptance of digital currencies—money that exists only online and isn’t backed by any government. Bitcoin and its smaller rivals, such as ether, ripple and litecoin, are maintained by a network of computers that process and verify transactions using them.

Digital currencies gained favor in 2013 and 2014 when federal and state regulators issued rules for them and businesses such as Overstock.com and the Sacramento Kings basketball team said they would accept bitcoin payments. But volatility and scandals, such as the 2014 failure of Mt. Gox, an early bitcoin exchange, put off some investors.

According to Blockchain.info, which tracks bitcoin data, the number of bitcoin transactions a day recently was 240,000, compared with 50,000 two years ago. The price of bitcoin peaked at more than $1,100 in late 2013 before dropping to a low of about $200 in early 2015, and it was recently above $600.

Given this growth, the IRS has already conducted audits of taxpayers holding bitcoin, according to Bryan Skarlatos, a tax lawyer with Kostelanetz & Fink in New York. Some clients under audit paid his fee using bitcoin, he says.

Continued in article


Teaching Case from The Wall Street Accounting Weekly Review on July 8, 2016

As Cyberthreats Mount, Internal Audit Can Help Play Defense
by: Deloitte CFO Journal Editor
Jun 30, 2016
Click here to view the full article on WSJ.com

TOPICS: Audit Committee, Auditing, Cybersecurity, Internal Audit

SUMMARY: Bolstered by technology expansion, a surge in data growth, evolving business models and motivated attackers, the threat from cyberattacks is significant and continuously evolving. One estimate suggests that cybercrime could cost businesses more than $2 trillion by 2019, nearly four times the estimated 2015 expense. In response to the increasing threat, many audit committees and boards have set an expectation for internal audit to perform an independent and objective assessment of the organization's capabilities of managing the associated risks. A first step in meeting this expectation is for internal audit to conduct a cyber risk assessment and distill the findings into a concise report for the audit committee and board, which can provide the basis for a risk-based, multiyear internal audit plan to help manage cyber risks.

CLASSROOM APPLICATION: This article is appropriate for use in auditing classes, as well as for use in fraud and forensic accounting classes.

QUESTIONS: 
1. (Introductory) What is internal audit? What are the regular duties and responsibilities of internal audit?

2. (Introductory) What are some of the cyberthreats facing businesses? What are the potential financial ramifications of those threats?

3. (Advanced) How can the internal audit function help in the fight against cybercrime? How is internal audit uniquely positioned and qualified to address these issues?

4. (Advanced) What other areas of a business are used to fight cyberthreats? How could those other areas complement what internal audit is able to do?

5. (Advanced) What is maturity analysis? What other option does a business have? How can maturity analysis used in the battle against cybercrime?

Reviewed By: Linda Christiansen, Indiana University Southeast

"As Cyberthreats Mount, Internal Audit Can Help Play Defense," by Deloitte CFO Journal Editor. The Wall Street Journal, June 30, 2016 ---
 http://deloitte.wsj.com/cfo/2016/06/30/as-cyberthreats-mount-internal-audit-can-help-play-defense/?mod=djem_jiewr_AC_domainid

Bolstered by technology expansion, a surge in data growth, evolving business models and motivated attackers, the threat from cyberattacks is significant and continuously evolving. One estimate suggests that cybercrime could cost businesses more than $2 trillion by 2019, nearly four times the estimated 2015 expense.* In response to the increasing threat, many audit committees and boards have set an expectation for internal audit to perform an independent and objective assessment of the organization’s capabilities of managing the associated risks. A first step in meeting this expectation is for internal audit to conduct a cyber risk assessment and distill the findings into a concise report for the audit committee and board, which can provide the basis for a risk-based, multiyear internal audit plan to help manage cyber risks.

“The forces driving business growth and efficiency are also opening pathways to cyber assaults,” says Michael Juergens, an Advisory managing principal at Deloitte & Touche LLP. “Internet, cloud, mobile and social technologies—now mainstream—are platforms inherently oriented for sharing. At the same time, outsourcing, contracting and remote workforces are shifting operational control,” he adds.

Many organizations are addressing cyberthreats with multiple lines of defense. For example, business units and the information technology (IT) function at many organizations integrate cyber risk management into day-to-day decision-making and operations, which comprises an organization’s first line of defense. Making up a second line of defense are information and technology risk management leaders who develop governance and oversight protocols, monitor security operations and take action as needed, often under the direction of the chief information security officer (CISO).

“Increasingly, many companies are recognizing the compelling need for a third line of cyber defense—independent review of security measures and performance by the internal audit function,” says Sandy Pundmann, an Advisory managing partner at Deloitte & Touche LLP. “Internal audit should play an integral role in assessing and identifying opportunities to strengthen enterprise security. Advising stakeholders on trends and leading practices in cyber and other areas is a growing expectation for internal audit leaders,” she adds.

At the same time, internal audit has a duty to inform the audit committee and board that the controls for which they are responsible are in place and functioning correctly—a growing concern across boardrooms as directors face potential legal and financial liabilities. Since many organizations have cyber readiness initiatives still in flight, some internal audit departments have elected to defer audit procedures until these projects are completed. While this may allow for a deeper level review, deferring cyber assurance procedures may not be the right answer.

Cyber Risk Assessment Framework

Many internal audit functions have developed and tested procedures for evaluating components of the organization’s preparedness for cyberthreats. These targeted audits, such as attack and penetration procedures, are valuable, but do not provide assurance across the spectrum of cyber risks. To provide a comprehensive view of an organization’s ability to be secure, vigilant and resilient in the face of cyber risks, internal audit should consider taking a broad programmatic approach to cyber assurance and not perform only targeted audits, which could provide a false sense of security.

Continued in article


Teaching Case from The Wall Street Accounting Weekly Review on July 8, 2016

Restructurings Account for Biggest Share of Adjustments
by: Theo Francis
Jun 30, 2016
Click here to view the full article on WSJ.com

TOPICS: Financial Accounting, Financial Reporting, GAAP, Non-GAAP Reporting, Pro Forma Reporting, Restructuring

SUMMARY: In its analysis of more than 800 companies that tweaked their 2015 net income figures, Calcbench extracted data from earnings releases about five key areas of adjustments, related to acquisitions, debt, legal activity, restructuring and stock-based compensation. A third of all the adjustments were for restructuring, but they made up 45% of the total dollar value across sectors. Acquisitions, which made up a quarter of adjustments, accounted for 31% of the dollar value. By contrast, 30% of adjustments were for stock-based compensation, but in dollar terms, they accounted for just 20% of the total. In other words, where companies make stock-based pay adjustments, they tend to be smaller; restructuring and acquisition adjustments tend to be bigger.

CLASSROOM APPLICATION: This article offers a good explanation of the adjustments made in non-GAAP reporting.

QUESTIONS: 
1. (Introductory) What are adjusted financial statements? How many companies participate in adjusting their financials?

2. (Advanced) Why do some companies adjust their financial statements? What are the main areas of adjustments? Which of these adjustments are most common? Why?

3. (Advanced) Which types of financial adjustments have the greatest impact in dollar value? What are the potential issues or problems with reporting with these adjustments?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
Accounting Choices Blur Profit Picture
by Tatyana Shumsky and Theo Francis
Jun 29, 2016
Online Exclusive

U.S. Corporations Increasingly Adjust to Mind the GAAP
by Theo Francis and Kate Linebaugh
Dec 15, 2015
Online Exclusive

"Restructurings Account for Biggest Share of Adjustments," by Theo Francis, The Wall Street Journal, June 30, 2016 ---
http://blogs.wsj.com/cfo/2016/06/29/restructurings-account-for-biggest-share-of-adjustments/?mod=djem_jiewr_AC_domainid

Nearly all large companies report adjusted financials now, as The Wall Street Journal reported Tuesday. But like unhappy families in a Tolstoy novel, the ways in which they adjust their numbers varies widely.

That holds true even beyond the sometimes baffling adjustments many companies make, like restaurant chains that omit the cost of opening new restaurants.

In its analysis of more than 800 companies that tweaked their 2015 net income figures, Calcbench extracted data from earnings releases about five key areas of adjustments, related to acquisitions, debt, legal activity, restructuring and stock-based compensation.

A third of all the adjustments were for restructuring, but they made up 45% of the total dollar value across sectors, according to data from the report, which Calcbench produced with consulting firm Radical Compliance.

Acquisitions, which made up a quarter of adjustments, accounted for 31% of the dollar value. By contrast, 30% of adjustments were for stock-based compensation, but in dollar terms, they accounted for just 20% of the total.

In other words, where companies make stock-based pay adjustments, they tend to be smaller; restructuring and acquisition adjustments tend to be bigger.

Similarly, adjustments by financial firms tend to be big: The sector accounted for just 8% of the adjustments, but almost a quarter of the dollar value. Most financial-firm adjustments were for acquisitions, about 70% of the total value.

Technology company adjustments are far more numerous — accounting for nearly 33% of the 4,555 adjustments Calcbench identified — but made up only 22% of the value. That makes sense, given that technology adjustments are heavily tilted toward stock-based pay

Overall, the majority of the adjustments serve to make profits look bigger. As The Wall Street Journal reported Tuesday, adjustments by profitable companies served to increase adjusted income figures by about 45% overall, while companies reporting net losses made those look almost 70% better.

But that masks a lot of variation. Net adjustments by the healthcare sector improved reported profits by $2.25 billion — but that includes $380 million of restructuring adjustments and $376 million of legal adjustments that served to depress pro-forma profits.

Continued in article


Teaching Case from The Wall Street Accounting Weekly Review on July 8, 2016

The Benefit of Donating Your Required IRA Distributions to Charity
by: Michael Kitces
Jul 05, 2016
Click here to view the full article on WSJ.com

TOPICS: Charitable Contributions, Individual Taxation, Qualified Charitable Distribution, Required Minimum Distributions

SUMMARY: After nearly a decade of on-again off-again rules, last December's Protecting Americans from Tax Hikes (PATH) Act of 2015 finally made permanent the rules allowing a so-called qualified charitable distribution (QCD) from an IRA to a charity. For older IRA owners facing their annual required minimum distribution (RMD) obligations, the QCD rules provide a more tax-efficient means to do charitable giving than simply taking RMDs and separately donating (other) money to claim a charitable tax deduction. The donation is not claimed as a deduction, though the distribution from the IRA is not reported in income, either.

CLASSROOM APPLICATION: This article is appropriate for an individual taxation class.

QUESTIONS: 
1. (Introductory) What is an RMD? Who are required to take them? Why?

2. (Advanced) What is a QCD? What are the advantages of a QCD? What are possible issues or problems associated with them?

3. (Advanced) Who can do a QCD? What rules must they follow?

4. (Advanced) What is PATH? How did PATH affect QCDs? Why was that change made? What issues did the change solve? How did PATH change tax planning? Was it a positive change for taxpayers or a negative one?

5. (Advanced) What are appreciated securities? What is the best way to donate them? Why is this effective?

Reviewed By: Linda Christiansen, Indiana University Southeast

"The Benefit of Donating Your Required IRA Distributions to Charity," by Michael Kitces, The Wall Street Journal, July 6, 2016 ---
http://blogs.wsj.com/experts/2016/07/04/the-benefit-of-donating-your-required-ira-distributions-to-charity/?mod=djem_jiewr_AC_domainid

After nearly a decade of on-again off-again rules, last December’s Protecting Americans from Tax Hikes (PATH) Act of 2015 finally made permanent the rules allowing a so-called qualified charitable distribution (QCD) from an IRA to a charity. For older IRA owners facing their annual required minimum distribution (RMD) obligations, the QCD rules provide a more tax-efficient means to do charitable giving than simply taking RMDs and separately donating (other) money to claim a charitable tax deduction.

The distinction is that under the QCD rules, an IRA can make a contribution directly from the IRA to a charity. The donation is not claimed as a deduction, though the distribution from the IRA is not reported in income, either. In fact, since the IRA itself is a pretax account, contributing directly from an IRA to a charity is the equivalent of a “perfect” pretax contribution.

Notably, the QCD rules do have two key requirements though:

1) The contribution must be made directly from the IRA to a public charity. As in, the check from the IRA should be made payable directly to the charity (not payable to the IRA owner who merely endorses the check to the charity).

2) The IRA owner must be at least age 70˝ on the date of the gift.

The reality that the IRA owner must be at least age 70˝ does significantly limit who can take advantage of the QCD rules. But that’s also what makes them so appealing: because anyone who is at least age 70˝ and eligible to do a QCD will also be old enough to face RMD obligations. And the QCD rules actually contemplated this; in fact, the tax code allows a QCD to also count as the RMD for the year.

For instance, if Jeremy had a $120,000 IRA and was 71 years old this year, he will have a $4,529 RMD obligation. If Jeremy takes the $4,529 RMD as a distribution, and separately donates that much money to charity, he will have $4,529 as (RMD) income and report a $4,529 charitable donation.

Except the problem is that the RMD counts as “above-the-line” income, increasing his adjusted gross income, which can impact everything from the taxability of his Social Security benefits, to the income-related adjustments to his Medicare Part B and Part D premiums, while the charitable contribution may not even be useful if Jeremy is already claiming the standard deduction.

By contrast, if Jeremy just distributes the $4,529 from his IRA directly to the charity, the IRA income never impacts his Social Security benefits and Medicare premiums, and it doesn’t matter if he claims a charitable deduction or not, because the money is already the equivalent of a perfect pretax contribution when it left his IRA.

Notably, the QCD rules do not limit IRA giving to “just” the amount of your annual RMD. You can contribute less (and take an RMD for the rest), or more (up to a maximum of $100,000 per taxpayer every tax year). Though it doesn’t make sense to do a QCD for more than you were going to donate to charities that year in the first place; while tax benefits are nice, you won’t finish with more money by giving a dollar away and getting a tax deduction for a portion of that dollar. So do your charitable giving because you want to be charitable, first; the QCD rules just help you get more tax leverage out of the deal.

Ultimately, it’s important to note that for those making significant charitable contributions, it’s still even more tax-efficient in most situations to donate “appreciated securities” (investments that have a gain) instead of doing a QCD. The reason is that a QCD may be a perfect pretax donation, but contributing investments with a large gain allows you to permanently avoid the capital-gains taxes and get a charitable deduction for the contribution. Donating investments also allows for a wider range of charitable giving vehicles, including using charitable remainder trusts or a donor-advised fund (neither of which are permitted for a QCD).

Continued in article

 


Teaching Case from The Wall Street Accounting Weekly Review on July 15, 2016

Accountants, Auditors to Get a New Ethics Rule Book
by: Richard Teitelbaum
Jul 12, 2016
Click here to view the full article on WSJ.com

TOPICS: Accounting, Accounting Deficiency, Code of Ethics, Ethics, IESBA

SUMMARY: The International Ethics Standards Board for Accountants is releasing new standards aimed at resolving potential conflicts of interest for internal and external accountants and auditors, who can feel bound by strict client confidentiality rules, even when they uncover wrongdoing. More than six years in the making, this new and expanded rule book gives accountants step-by-step guidance on what to do if they uncover corporate misdeeds, from money laundering to environmental abuses.

CLASSROOM APPLICATION: This article is good for including in any accounting classes as a way to integrate ethics throughout the accounting curriculum.

QUESTIONS: 
1. (Introductory) What is the IESBA? What is its function? What is it releasing?

2. (Advanced) Why is it important for accountants to have a code of ethics and to comply with it?

3. (Advanced) In what other ways is accountant conduct regulated? Are these ways effective? Why or why not? Why are there more than one set of standards or guidance?

4. (Advanced) What kinds of problems could a code of ethics prevent? What behavior continues despite an ethics code or regulation?

5. (Advanced) What new guidance does this new set of rules provide? What value does the guidance add?

6. (Advanced) What are the penalties for violation of this code? How does that affect the enforcement of ethical behavior in accounting?

Reviewed By: Linda Christiansen, Indiana University Southeast

"Accountants, Auditors to Get a New Ethics Rule Book," by Richard Teitelbaum, The Wall Street Journal, July 12, 2016 ---
http://www.wsj.com/articles/accountants-auditors-to-get-a-new-ethics-rule-book-1468283179?mod=djem_jiewr_AC_domainid

Accountants will soon get a new and expanded rule book that gives them step-by-step guidance on what to do if they uncover corporate misdeeds, from money laundering to environmental abuses.

The International Ethics Standards Board for Accountants plans to release new standards this week aimed at resolving potential conflicts of interest for internal and external accountants and auditors, who can feel bound by strict client confidentiality rules, even when they uncover wrongdoing.

More than six years in the making, the new standards come amid a spate of high-profile corporate missteps—from Volkswagen AG ’s emissions-cheating scandal to allegedly inadequate money-laundering controls at financial firms like HSBC Holdings PLC and U.S. Bancorp.

“The standards clarify that professional accountants must be active and not turn a blind eye to noncompliance,” said Stavros Thomadakis, chairman of the IESBA, whose rules are used in over 100 jurisdictions. “It’s trying to bring about early, early detection, if you will, but also early action by management or authorities.”

“In times of crisis, there may be more of a temptation to not comply,” he added.

Some experts have doubts about the usefulness of the guidelines, at least in the U.S., where the Securities and Exchange Commission already takes accountants to task for failing to raise a red flag when they learn of regulatory infractions.

“If the SEC prosecutes, and it turns out the auditor knew, the SEC has the power to go after the accountant or auditor,” said Shivaram Rajgopal, a professor of accounting and auditing at Columbia Business School. “Maybe it might help in other countries” with less rigorous standards, he said.

Others wonder whether more ethics policies are necessary. “All of the professional accounting firms have codes of ethics,” said Cynthia Clark, director of the Harold Geneen Institute of Corporate Governance at Bentley University. For example, “if I violated the ethics code at KPMG, I would likely be fired,” she said.

Continued in article


Teaching Case from The Wall Street Accounting Weekly Review on July 15, 2016

Businesses Say Proposed Tax Rule Is Too Complicated
by: Richard Rubin
Jul 07, 2016
Click here to view the full article on WSJ.com

TOPICS: Compliance Costs, Corporate Taxation, Inversions, Regulation

SUMMARY: The federal government says U.S. corporations will spend a combined $13 million annually complying with proposed tax rules on internal corporate debt. But a trade group estimates that could be the cost for just one company. That divide over compliance costs is one flashpoint in a widening regulatory dispute between companies and the Obama administration, and the tensions could rise in coming months as the Treasury tries to complete rules it says are intended to curb tax avoidance. Corporations and business groups, increasingly worried about the scope of the proposed Treasury rules, say U.S. officials underestimate the difficulty of creating systems to track and document internal loans and fail to understand how the rules disrupt common business structures that aren't about dodging taxes. The proposed rules are just one part of the Obama administration's multi-pronged attack on tax-driven deals, including so-called corporate inversions that companies registered outside the U.S. have used to reduce payments to the U.S. Treasury.

CLASSROOM APPLICATION: This article is excellent for a corporate tax class update, but also to use as an example of the costs to comply with tax laws and regulations.

QUESTIONS: 
1. (Introductory) What is internal corporate debt? Why do companies use it?

2. (Advanced) What is included in the proposed rules regarding internal corporate debt? What is the purpose of this proposal?

3. (Advanced) What costs are involved with the proposed tax rules? How do the compliance cost estimates from the government and from taxpayers differ? Why is there a difference?

4. (Advanced) How could compliance costs related to these new rules be expensive for businesses? What additional burdens could they cause?

5. (Advanced) What are corporate inversions? How could they be impacted by these new rules?

6. (Advanced) What other concerns to do companies have with these new rules, besides the cost of compliance ? How should the Treasury respond to these concerns?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
Obama Renews Call for Congress to Limit Tax Inversions
by Richard Rubin
Apr 05, 2016
Online Exclusive

Tax-Rule Changes Ripple Widely
by Richard Rubin
Apr 13, 2016
Online Exclusive

"Businesses Say Proposed Tax Rule Is Too Complicated," by Richard Rubin, The Wall Street Journal, July 7, 2016 ---
http://www.wsj.com/articles/businesses-say-proposed-tax-rule-is-too-complicated-1467797403?mod=djem_jiewr_AC_domainid

The federal government says U.S. corporations will spend a combined $13 million annually complying with proposed tax rules on internal corporate debt. But a trade group estimates that could be the cost for just one company.

That divide over compliance costs is one flashpoint in a widening regulatory dispute between companies and the Obama administration, and the tensions could rise in coming months as the Treasury tries to complete rules it says are intended to curb tax avoidance.

Corporations and business groups, increasingly worried about the scope of the proposed Treasury rules, say U.S. officials underestimate the difficulty of creating systems to track and document internal loans and fail to understand how the rules disrupt common business structures that aren’t about dodging taxes.

The proposed rules are just one part of the Obama administration’s multipronged attack on tax-driven deals, including so-called corporate inversions that companies registered outside the U.S. have used to reduce payments to the U.S. Treasury.

Comments are now pouring into the government ahead of a July 7 deadline. Companies such as S&P Global Inc. and Republic Services Inc. have proposed changes or raised concerns, such as how the rules would treat partnerships and their effect on the ability to claim foreign tax credits. Some firms, such as Nielsen Holdings PLC, have spoken publicly about how their taxes could climb over time under the regulations.

“In the last decade, this is one of the biggest business tax issues that we have worked on,” said Dorothy Coleman, vice president of tax and domestic economic policy at the National Association of Manufacturers, a business group that says it might cost one member $13 million to comply. “It took us by surprise and the business community by surprise.”

Republican lawmakers have complained about the breadth of the rules and asked for more time for companies to respond to the proposals. Democrats have warned about adverse effects on the financial-services, insurance and utilities industries. Top Treasury officials will meet with lawmakers on Wednesday.

But the Treasury Department is sticking to its plans to hold a July 14 hearing and finish the rules swiftly.

Continued in article


Teaching Case from The Wall Street Accounting Weekly Review on July 15, 2016

IRS Wants Facebook's Records on Transfer of Assets to Ireland
by: Deepa Seetharaman
Jul 08, 2016
Click here to view the full article on WSJ.com

TOPICS: Asset Valuation, Corporate Taxation, IRS

SUMMARY: U.S. tax officials sued Facebook Inc. to force the company to hand over documents related a transfer of assets to Ireland in 2010, part of a yearslong investigation into whether some of those assets were undervalued "by billions of dollars." According to the lawsuit, Facebook entered into agreements in September 2010 with Facebook Ireland Holdings Unlimited to transfer the rights to its "online platform" and its "marketing intangibles" outside the U.S. and Canada. It also entered into a cost-sharing agreement with the Irish subsidiary to cover future development. Facebook then hired the accounting firm Ernst & Young, now known as EY, to assign a value to the transfers. Such moves are common, particularly among technology firms, which shift assets around the globe with an eye toward reducing corporate taxes. Ireland's top corporate tax rate is 12.5%, much lower than the U.S. rate of 35%.

CLASSROOM APPLICATION: This article would be a good example to use in a corporate tax class or when covering the topic of asset valuation.

QUESTIONS: 
1. (Introductory) Why is the IRS suing Facebook? What is the timing of the actions and events related to the lawsuit?

2. (Advanced) What is EY? What does it do? How is it involved in this case? Could or should EY be a party in the lawsuit?

3. (Advanced) What is Facebook's relationship with Ireland? What is the company hoping to do?

4. (Advanced) What is the IRS alleging in this case? What is Facebook's response to the allegations?

5. (Advanced) Why was Facebook required to value some of its assets? What was valued? How are assets valued for these purposes? Why might they not be properly valued in this situation?

Reviewed By: Linda Christiansen, Indiana University Southeast

 

"IRS Wants Facebook's Records on Transfer of Assets to Ireland," by Deepa Seetharaman , The Wall Street Journal, July 8, 2016 ---
http://www.wsj.com/articles/irs-wants-facebooks-records-on-transfer-of-assets-to-ireland-1467923716?mod=djem_jiewr_AC_domainid

U.S. tax officials sued Facebook Inc. to force the company to hand over documents related a transfer of assets to Ireland in 2010, part of a yearslong investigation into whether some of those assets were undervalued “by billions of dollars.”

According to the lawsuit, which was filed by the Internal Revenue Service on Wednesday in U.S. District Court in San Francisco, Facebook entered into agreements in September 2010 with Facebook Ireland Holdings Unlimited to transfer the rights to its “online platform” and its “marketing intangibles” outside the U.S. and Canada. It also entered into a cost-sharing agreement with the Irish subsidiary to cover future development.

Facebook then hired the accounting firm Ernst & Young, now known as EY, to assign a value to the transfers.

Such moves are common, particularly among technology firms, which shift assets around the globe with an eye toward reducing corporate taxes. Ireland’s top corporate tax rate is 12.5%, much lower than the U.S. rate of 35%.

In Facebook’s case, corporate-tax experts said the company may have been trying to minimize the amount of income the parent company received from the Irish subsidiary, which would reduce Facebook’s tax bill.

Facebook rejected the analysis. “Facebook complies with all applicable rules and regulations in the countries where we operate,” a Facebook spokeswoman said Thursday.

EY said Thursday it “does not have any additional remarks at this time.”

The government said the IRS went to court because Facebook hasn’t responded to its recent requests and the statute of limitations on its probe expires July 31. Facebook had been ordered to produce the records in a San Jose, Calif., court on June 17, but “failed to appear” and didn’t produce the information requested, according to the filing.

Continued in article

 


Teaching Case from The Wall Street Accounting Weekly Review on July 15, 2016

Supply Chain Fraud Levels Largely Unchanged for Third Consecutive Year
by: Deloitte Risk Journal Editor
Jul 12, 2016
Click here to view the full article on WSJ.com

TOPICS: Forensic Accounting, Fraud, Supply Chain

SUMMARY: For the third consecutive year, about 30% of Deloitte poll respondents say their companies experienced supply chain fraud, waste or abuse in the preceding year. Yet, just 29.3% of the same respondents use analytics to mitigate supply chain fraud and financial risks. Further, two-thirds (67.1%) of the respondents are confident employees will report any schemes they see in the coming year. Additional poll results include: some employee groups pose larger supply chain fraud risk (project managers and invoice approvers and procurement professionals present the largest risk of supply chain fraud, waste and abuse in respondents' organizations); many organizations still don't use supply chain analytics; and analysis of invoices for fraud prior to payment is low.

CLASSROOM APPLICATION: This article would be a good addition to a fraud and forensic classes, or when discussing those topics in other accounting classes.

QUESTIONS: 
1. (Introductory) What is forensic accounting? What do forensic accountants do?

2. (Advanced) What is a supply chain? What fraud can occur in a supply chain?

3. (Advanced) What are some ways accountants can prevent fraud in a supply chain? How can accountants detect fraud? Which is easier to do - prevent fraud or detect it? Of the two, which is more important or valuable?

4. (Advanced) What are the statistics regarding supply chain fraud? What industries are more affected? What are some possible reasons for that?

5. (Advanced) What can companies do to manage losses from fraud? What areas and activities are likely to produce the greatest benefits for the least cost?

Reviewed By: Linda Christiansen, Indiana University Southeast

"Supply Chain Fraud Levels Largely Unchanged for Third Consecutive Year." by Deloitte Risk Journal Editor , The Wall Street Journal, July 12, 2016 ---
http://deloitte.wsj.com/riskandcompliance/2016/07/12/supply-chain-fraud-levels-unchanged-for-third-consecutive-year/?mod=djem_jiewr_AC_domainid

For the third consecutive year, about 30% of Deloitte poll respondents say their companies experienced supply chain fraud, waste or abuse in the preceding year. Yet, just 29.3% of the same respondents use analytics to mitigate supply chain fraud and financial risks. Further, two-thirds (67.1%) of the respondents are confident employees will report any schemes they see in the coming year.

“In my 20 years conducting forensic investigations, trust in employees and third parties is often misplaced,” says Mark Pearson, Deloitte Advisory principal, Deloitte Financial Advisory Services LLP. “As a result, many organizations are trapped in a pay-and-chase model for fighting supply chain fraud—invoices are paid first, then retribution is sought much later when fraud is found, if it’s found at all. But, the supply chain forensics leading practice is a comprehensive and proactive, predictive approach tailored to organizational structure and industry sector,” notes Mr. Pearson.

Two industries cite a rise in levels of perceived supply chain fraud between 2014 and 2016. Life sciences and health care respondents report an increase to 35% in 2016, up from 31% in 2014. Similarly, energy and resources respondents report an increase to 34% in 2016, compared to 27% in 2014.

Conversely, surveyed professionals in the technology, media and telecommunications sector report a drop to 27% in 2016, from 33% in 2014.

“As distress from falling oil and gas prices puts pressure on the energy and resources industry, many leaders are working hard to avoid leaving any cash on the table,” observes Larry Kivett, Deloitte Advisory partner, Deloitte Financial Advisory Services LLP. “Using supply chain analytics to identify and investigate supply chain financial risks can help stem fraud schemes that we increasingly see in today’s challenging, complex, and global environment,” he adds.

“From a life sciences and health care perspective, regulatory and legislative pressure is expected to heighten around pricing and transparency for plans, providers, pharmaceutical companies and devices makers. It’s a good time to verify that your supply chain is not hiding any unsavory vendors or other fraud, waste, and abuse that could cause reputational harm and costly remediation later,” notes Mr. Pearson.

Following are additional poll results.

—Some employee groups pose larger supply chain fraud risk. Project managers and invoice approvers (26%) and procurement professionals (24.7%) present the largest risk of supply chain fraud, waste and abuse in respondents’ organizations, according to the poll.

—Many organizations still don’t use supply chain analytics. While 13.7% of respondents’ organizations have analytics software, but don’t use it, another 19.3% don’t use analytics for supply chain financial risk management at all.

—Analysis of invoices for fraud prior to payment is low. Just 27% of respondents’ organizations analyze unpaid invoices for evidence of supply chain fraud, waste, and abuse prior to payment.

Turning Supply Chain Risk into Opportunity

Supply chains are rich places to look for competitive advantage because of their complexity and the significant role they play in a company’s cost structure. One way to identify such advantages is by using analytics to fine-tune supply chain management models so they are based on more than past demand, supply and business cycles.

Continued in article

 


Teaching Case from The Wall Street Accounting Weekly Review on July 15, 2016

Accounting for Income Taxes: Addressing Process-driven Risks
by: Deloitte Risk Journal Editor
Jul 07, 2016
Click here to view the full article on WSJ.com

TOPICS: Accounting for Income Taxes, Financial Accounting, Risk Assessment

SUMMARY: For many organizations, tax issues impact key business decisions and strategies making the risks associated with taxes a primary focus of management and audit committees. While tax risks vary, some of the most worrisome relate to income tax accounting because missteps in that area can result in material weaknesses and misstatements in financial reporting as well as compliance challenges. Traditionally, tax departments have played a role in planning, reporting and managing tax risk, but management and the board are starting to seek more from them.

CLASSROOM APPLICATION: This article regarding tax accounting and compliance risks is appropriate for both financial accounting classes and corporate tax classes.

QUESTIONS: 
1. (Introductory) How are income taxes reported on the income statement? How could they appear on the balance sheet? Could income taxes appear on the statement of cash flows?

2. (Advanced) What is a tax accrual? What is a tax deferral? How are these audited for accuracy?

3. (Advanced) What risks are discussed in the article? What issues do those risks pose?

4. (Advanced) How can those risks be addressed? What suggestions does the article provide?

5. (Advanced) Why is 'tax talent' important? What could an accounting major or new accounting professional do to become the "right type" of tax talent to succeed?

6. (Advanced) How are tax departments becoming more important to upper management? What can the tax professionals offer to the strategy and management of the company? What value do they offer?

Reviewed By: Linda Christiansen, Indiana University Southeast

 

"Accounting for Income Taxes: Addressing Process-driven Risks by: Deloitte Risk Journal Editor, The Wall Street Journal, July 7, 2016 ---
http://deloitte.wsj.com/riskandcompliance/2016/07/07/accounting-for-income-taxes-addressing-process-driven-risks/?mod=djem_jiewr_AC_domainid

For many organizations, tax issues impact key business decisions and strategies making the risks associated with taxes a primary focus of management and audit committees. While tax risks vary, some of the most worrisome relate to income tax accounting because missteps in that area can result in material weaknesses and misstatements in financial reporting as well as compliance challenges.

“Many of the issues related to material weaknesses and misstatements are process driven,” notes Patrice Mano, partner, Deloitte Tax LLP. Addressing tax accounting and compliance risks requires organizations to leverage processes, people and technology in ways that help management and boards recognize missteps early and correct them.

Controls to Address Risk

As companies evaluate accounting and compliance risks, it is critical to assess whether appropriate controls are in place and developed to protect transactional data. For example, controls can be designed with enough precision to detect or prevent material errors related to tax accruals and deferred taxes. The design precision also should extend to significant judgments and estimates, such as unrecognized tax benefits and valuation allowance, as well as non-routine transactions, including those related to acquisitions, divestitures and restructurings. Regulatory authorities, including the Public Company Accounting Oversight Board (PCAOB), appear to be particularly interested in such controls. For example, the PCAOB has made management review controls a focus of its inspections.

“With regard to regulatory authorities, the difficult part comes not from companies proving they have controls in place, but rather, that those control processes were performed,” says Vickie Carr, partner, Deloitte Tax LLP. “The proof is called meeting the ‘standard of evidence’ and if companies put some focus on the process, they often find simple ways of documenting the reviews,” she adds.

Meeting agendas, notes and minutes documenting that technical issues and conclusions were discussed among management are examples of how to show evidence of management review controls. Further, technology systems that generate schedules, as well as reports that illustrate proof and review of reconciliation back to financial statements and disclosures, also may serve as sources of proof that controls were used.

Continued in article


Teaching Case from The Wall Street Accounting Weekly Review on July 22, 2016

MTA's Costs Loom Large
by: Andrew Tangel
Jul 18, 2016
Click here to view the full article on WSJ.com

TOPICS: Net Position, GASB, Governmental Accounting, Pension Accounting

SUMMARY: New accounting rules are shining a light on more than $7 billion in pension liabilities facing the Metropolitan Transportation Authority. MTA pension costs came as no surprise to analysts, who are accustomed to seeing the information in MTA financial documents. The authority has simply changed the way it reports the data in its financial documents through the end of last year, following new rules from the Governmental Accounting Standards Board. The inclusion of more than $7 billion in net pension liabilities resulted in a reduction of the MTA's "net position," akin to a company's book value in corporate accounting.

CLASSROOM APPLICATION: This is a rare article to use for governmental accounting. It also could be used when covering pension accounting to discuss the rules in corporate and governmental entities.

QUESTIONS: 
1. (Introductory) What is the GASB? What is its area of authority?

2. (Advanced) What changes did the GASB make regarding pension accounting? What types of entities are affected? What was previously required? What is required by the new rules?

3. (Advanced) Why were the pension rules changed? What are the purposes of the changes? What additional information and value do the changes add?

4. (Advanced) How have the changes to the rules affected each of the financial statements? Should the changes to the statements be a surprise to the users of the financial statements? Why or why not?

5. (Advanced) The article states a difference between corporate balance sheets and government balance sheets. What is the difference? Should there be a difference between the two? Why or why not?

6. (Advanced) What additional new accounting rules will be effective next year? How will the MTA's financial statements be affected by those rules?

7. (Advanced) What is net position? What is its equivalent in financial accounting? How do they differ?

8. (Advanced) What changes in management of the MTA and similar entities could occur as a result of these changes in reporting?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
Government Retiree Costs to Be Put in the Spotlight
by Michael Rapoport
Jun 02, 2015
Online Exclusive

The Other Debt Bomb in Public-Employee Benefits
by Robert C. Pozen
Jan 15, 2015
Online Exclusive

Accounting Changes Proposed for State, City Retiree-Benefit Plans
by Michael Rapoport
Jun 16, 2014
Online Exclusive

 

"MTA's Costs Loom Large," by Andrew Tangel, The Wall Street Journal, July 10, 2016 ---
http://www.wsj.com/articles/mtas-costs-loom-large-1468803446?mod=djem_jiewr_AC_domainid

New accounting rules are shining a light on more than $7 billion in pension liabilities facing the Metropolitan Transportation Authority.

While the disclosures won’t force the MTA to raise tolls or cut service, they quantify the authority’s tab for commitments to pay retirees, and some critics detect a mounting potential burden on riders and taxpayers.

“I would hope there would be some sticker shock” with the pension-cost reporting, said Charles Brecher, director of research at the Citizens Budget Commission, a civic group based in Manhattan. “You want to inform people about the cost of these promises.”

The MTA pays steeper costs for employee pensions and other retirement benefits than its peers in London and Paris, Moody’s Investors Service analysts said in March report. For each ride, the MTA paid $3.06 in overall personnel costs in 2014, compared with $1.05 for Paris and 75 cents for London, according to the report. Nearly $1 of every MTA ride goes to health care, pension and retirement costs.

To be sure, as the report noted, French and British taxpayers foot more of the bill for social-welfare benefits such as health care and pensions.

But the MTA’s labor-related costs could reduce its budget flexibility and compete with capital improvements, the Moody’s report noted.

An MTA spokeswoman said the market understands the authority’s cost structure “and still rates our bonds highly.” A downgrade in the MTA’s bond ratings could increase its borrowing costs.

The MTA operates the New York City subway and buses in addition to two commuter railroads and key tunnels and bridges.

The relatively high cost of the MTA’s pension liabilities could increase pressure to raise fares and tolls or cut service. “If you have some downturn in your revenues, those are expenses you can’t cut so all the cuts have to come out what’s left of your budget,” said Marcia Van Wagner, a Moody’s analyst.

John Samuelsen, head of the union representing MTA employees who run New York City’s subway and buses, said the workers toil in often backbreaking jobs at relatively lower pay in exchange for a pension that offers them a “dignified retirement.”

Mr. Samuelsen, president of the Transport Workers Union Local 100, dismissed scrutiny from financial analysts, saying they didn’t understand how tough MTA jobs can be, citing assaults on bus drivers.

Continued in article


Teaching Case from The Wall Street Accounting Weekly Review on July 22, 2016

Got Convertible Bonds? Prepare for New Taxes
by: Katy Burne
Jul 16, 2016
Click here to view the full article on WSJ.com

TOPICS: Convertible Bonds, Dividend Income, Dividends, Taxable Income, Taxation

SUMMARY: The market for convertible bonds could be in for a shock, thanks to an Internal Revenue Service plan to begin collecting taxes on certain payouts from the hybrid securities. The securities are typically sold as ordinary interest-bearing bonds, but with the twist that they can be converted into stock. At issue are adjustments over the life of the bond that give holders extra stock as compensation for corporate moves that might hurt the price of the underlying stock, typically a dividend increase. The IRS long had viewed those adjustments as taxable compensation but hadn't been collecting the taxes, since they had fallen through the cracks. The Treasury Department, which administers IRS policy, is expected to finalize a rule to enforce taxation of the adjustments in short order.

CLASSROOM APPLICATION: This is a good update for an advance tax class, as well as for a financial accounting class because it adds a tax burden to conversion ratio adjustments.

QUESTIONS: 
1. (Introductory) What is a convertible bond? How does this type of bond differ from a bond that is not convertible?

2. (Advanced) What rule has the IRS proposed regarding convertible bonds? What are the reasons for this rule?

3. (Advanced) How did this issue come to the attention of the IRS? Why didn't the IRS have this rule and enforce collection in the past?

4. (Advanced) How will this rule affect taxpayers? How does it change a taxpayer's liability?

5. (Advanced) How could this rule affect corporate decisions and strategies? Is the rule likely to increase or decrease the issuance of convertible bonds? Why?

Reviewed By: Linda Christiansen, Indiana University Southeast

"Got Convertible Bonds? Prepare for New Taxes," by Katy Burne, The Wall Street Journal, July 16, 2016 ---
http://www.wsj.com/articles/got-convertible-bonds-prepare-for-new-taxes-1468603474?mod=djem_jiewr_AC_domainid

The market for convertible bonds could be in for a shock, thanks to an Internal Revenue Service plan to begin collecting taxes on certain payouts from the hybrid securities.

The securities are typically sold as ordinary interest-bearing bonds, but with the twist that they can be converted into stock. At issue are adjustments over the life of the bond that give holders extra stock as compensation for corporate moves that might hurt the price of the underlying stock, typically a dividend increase.

The IRS long had viewed those adjustments as taxable compensation but hadn’t been collecting the taxes, since they had fallen through the cracks. That could change soon.

The Treasury Department, which administers IRS policy, is expected to finalize a rule to enforce taxation of the adjustments in short order. A 90-day comment period on a draft proposal ended Tuesday, and investor representatives tried to convince government officials this past week to change course.

The IRS proposed in April to enforce taxation of the adjustments both in the future and retroactively for two years. About 10% to 15% of the $230 billion U.S. convertible-bond market has conversion-ratio adjustments that may be affected, by some industry estimates.

Citigroup Inc. sent a batch of letters in March warning investors they may owe back taxes and that the bank may debit money from certain accounts to cover the proposed IRS taxes. A spokesman for the bank declined to comment.

An IRS spokesman declined to comment.

A Treasury spokeswoman declined to discuss what the final rule would say, when it might be completed or what guidance might be given about calculation measures. “We believe that the existing rules make it clear that a change in the conversion ratio of a convertible bond may be deemed a dividend to such bondholders when done so in connection with the payment of dividends to stockholders,” the spokeswoman said.

She added that the changes will “help meet the needs of industry and stakeholders by clarifying rules” that will “enable withholding agents to fulfill their withholding obligations moving forward.”

The U.S. Chamber of Commerce said it was disappointed the government didn’t conduct an economic-impact study. It said changes to the taxes on the adjustments could have “significant impact on capital formation” because companies would find convertibles a less attractive form for financing and would have to introduce tracking systems for any investor gains.

The issue was brought to light inadvertently by a two-year-old tax report by the New York State Bar Association that alerted the government to the fact it wasn’t collecting the tax. The May 2014 paper was aimed at highlighting an issue the association believed was ambiguous under existing regulations. Market participants asked the IRS for clarification, and received it on April 12, when the IRS said the adjustments were taxable.

The change would treat the make-whole provisions called “conversion ratio adjustments” as taxable dividends even though investors don’t receive any cash payouts.

“It is odd that this rule has been a sleeping dog out there, and the IRS was awakened by a New York State Bar Association report,” said David Garlock, a principal at Ernst & Young specializing in taxation of debt instruments.

Investors, including hedge funds in a group called the Concerned Convertible Bondholders Coalition, said the adjustments shouldn’t be taxable because the feature is designed to cover the declining value of the call option in the bond after a dividend increase has eroded the bond’s value.

Continued in article


Teaching Case (GAPP verssus Non-GAAP Illustration) from The Wall Street Accounting Weekly Review on July 22, 2016

Electronic Arts to Cut Back on Reporting Adjusted Figures
by: Sarah E. Needleman
Jul 20, 2016
Click here to view the full article on WSJ.com

TOPICS: Financial Accounting, Financial Reporting, GAAP, Non-GAAP Reporting, SEC

SUMMARY: Electronic Arts Inc. will stop reporting many of the adjusted financial measures it has used for years, addressing regulators' stepped-up criticism of how companies apply customized metrics in earnings. The Securities and Exchange Commission in May 2016 issued new guidelines for the use of adjusted measures that don't comply with U.S. generally accepted accounting principles over concerns such metrics could make earnings appear better than they are. The changes won't have an impact on financial performance but could make it harder to compare to past results. EA said it would provide the data it used to calculate non-GAAP figures so others can make historical comparisons. Cash flow remains a key valuation measure for the business, the company said.

CLASSROOM APPLICATION: This article offers a good example of the company choosing to step away from non-GAAP reporting.

QUESTIONS: 
1. (Introductory) What is GAAP? How is it determined? What entities use GAAP?

2. (Advanced) What is non-GAAP reporting? Why do companies engage in non-GAAP reporting? What are the benefits of this type of reporting?

3. (Advanced) What is the SEC? What is its area of authority? What is the SEC's position on non-GAAP reporting?

4. (Advanced) What has Electronic Arts decided to do regarding its financial reporting? Why? What impact will this decision have on the company's financial reporting?

5. (Advanced) What issues or problems can non-GAAP reporting present to users of the financial statements?

6. (Advanced) Is this a wise move for Electric Arts? Should other companies do this? Why or why not?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
U.S. Corporations Increasingly Adjust to Mind the GAAP
by Theo Francis and Kate Linebaugh
Dec 14, 2015
Online Exclusive

SEC Chairman Warns Against Custom Accounting
by Tatyana Shumsky
Jun 28, 2016
Online Exclusive

What Exactly are Non-GAAP Numbers? Well, That Depends
by Tatyana Shumsky
Jul 05, 2016
Online Exclusive

Accounting Choices Blur Profit Picture
by Tatyana Shumsky and Theo Francis
Jun 28, 2016
Online Exclusive

"Electronic Arts to Cut Back on Reporting Adjusted Figures," by Sarah E. Needleman, The Wall Street Journal, July 20, 2016 ---
http://www.wsj.com/articles/electronic-arts-to-cut-back-on-reporting-adjusted-figures-1468968505?mod=djem_jiewr_AC_domainid

Move follows SEC criticism over companies’ use of ‘non-GAAP’ metrics in earnings

Electronic Arts Inc. will stop reporting many of the adjusted financial measures it has used for years, addressing regulators’ stepped-up criticism of how companies apply customized metrics in earnings.

The Securities and Exchange Commission in May issued new guidelines for the use of adjusted measures that don’t comply with U.S. generally accepted accounting principles over concerns such metrics could make earnings appear better than they are.

In a conference call with analysts Tuesday, EA said results for its most recently ended quarter, due Aug. 2, will be the last to include revenue, gross margin and per-share earnings on a non-GAAP basis.

The changes won’t have an impact on financial performance but could make it harder to compare to past results, analysts said. EA said it would provide the data it used to calculate non-GAAP figures so others can make historical comparisons. Cash flow remains a key valuation measure for the business, the company said.

“At the end of the day, every company should be valued on its ability to generate cash,” said Robert W. Baird & Co. analyst Colin Sebastian.

The SEC’s guidance applies to all publicly traded companies, though the issue is particularly relevant to the videogame industry. Under GAAP rules, revenue from games with online components is deferred for however long companies think players will use those services—typically six to nine months.

It reflects continuing expenses that go into online games, such as keeping servers running and fixing bugs, Mr. Sebastian said. The same rules apply to other software companies that accept payment from customers upfront for services provided over time, such as cloud-storage providers, he said.

Non-GAAP figures paint a more accurate picture of near-term financial performance since they show the full amount of revenue from games sold in the quarter, companies and analysts have said.

Continued in article


Teaching Case from The Wall Street Accounting Weekly Review on July 22, 2016

New Treasury Rules Would Make It Harder to Complete Tax-Free Spinoffs
by: Richard Rubin
Jul 15, 2016
Click here to view the full article on WSJ.com

TOPICS: Capital Gains Tax, Corporate Taxation, Spinoffs

SUMMARY: Companies would face new hurdles in completing tax-free spinoffs of appreciated assets under rules proposed by the U.S. Treasury Department. The government would make it harder for firms to complete some types of spinoffs, though the rules likely wouldn't alter the tax landscape for routine separations of two operating businesses. The rules provide a numerical standard - 5% - for the amount of a spun-off company that must be an active trade or business for the transaction to avoid capital gains taxes. This is known in tax circles as the "hot dog stand" area of the law, for the theory that companies could make a spinoff qualify for tax-free treatment by attaching a tiny fast-food restaurant to a much larger pot of assets.

CLASSROOM APPLICATION: This article is appropriate for financial accounting classes, as well as corporate tax classes.

QUESTIONS: 
1. (Introductory) What is a spinoff? Why would a company wish to do one? In what situations would they be appropriate? What benefits do they offer?

2. (Advanced) What are the details of the new rules introduced by the Treasury Department? How are the new rules different from the current rules? Why did the Treasury Department propose these changes?

3. (Advanced) If the proposed rules go into effect, how would it affect corporate strategy?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
Yahoo's Course Is Less Certain
by Douglas MacMillan and Liz Hoffman
Dec 10, 2015
Online Exclusive

Yahoo to Pursue Alibaba Stake Spinoff Without IRS Ruling
by Douglas MacMillan
Sep 28, 2015
Online Exclusive

Yahoo to Spin Off Remaining Alibaba Stake
by Douglas MacMillan
Jan 28, 2015
Online Exclusive

"New Treasury Rules Would Make It Harder to Complete Tax-Free Spinoffs," by Richard Rubin, The Wall Street Journal, July 16, 2016 ---
http://www.wsj.com/articles/new-treasury-rules-would-make-it-harder-to-complete-tax-free-spinoffs-1468500481?mod=djem_jiewr_AC_domainid

Five percent of a spun-off company must be an active trade or business to avoid capital gains taxes

Companies would face new hurdles in completing tax-free spinoffs of appreciated assets under rules proposed Thursday by the U.S. Treasury Department.

The government would make it harder for firms to complete some types of spinoffs, though the rules likely wouldn’t alter the tax landscape for routine separations of two operating businesses.

The rules provide a numerical standard—5%—for the amount of a spun-off company that must be an active trade or business for the transaction to avoid capital gains taxes. This is known in tax circles as the “hot dog stand” area of the law, for the theory that companies could make a spinoff qualify for tax-free treatment by attaching a tiny fast-food restaurant to a much larger pot of assets.

The rules also attempt to set clearer standards for determining when a spinoff is an impermissible “device” for distributing earnings and profits to shareholders. Under the proposal, the government would look askance at spinoff transactions in which at least two-thirds of one company is made up of nonbusiness assets and the other company has much less.

If there is too big a gap, measured using formulas in the proposed rule, the transaction would be deemed a “device” and would be taxable.

That automatic rule was a “surprise,” New York-based tax adviser Robert Willens wrote in a note to clients Thursday.

That change is the biggest difference from previous rules, and the use of formulas will put pressure on valuations of assets as companies and the IRS make calculations, said Scott Levine, a partner at Jones Day in Washington.

“At least we have bright lines we can point to,” Mr. Levine said. “We were in limbo for the past year.”

Treasury and the Internal Revenue Service signaled their intention in September 2015 to study this area of the law. The government expressed concerns about what “some taxpayers” were doing with spinoffs that resulted in one company owning a significant amount of cash, stock or other investments.

Continued in article


Teaching Case from The Wall Street Accounting Weekly Review on July 22, 2016

CFOs May Get More Accounting Guidance From IASB
by: Tatyana Shumsky
Jul 14, 2016
Click here to view the full article on WSJ.com

TOPICS: Financial Accounting, GAAP, IASB, IFRS

SUMMARY: The IASB, which sets International Financial Reporting Standards, is considering adding definitions of commonly used accounting terms, as well as guidance on the formatting of financial statements, according to Hans Hoogervorst, chairman of the International Accounting Standards Board. The move comes in response to the proliferation of custom metrics in both U.S. and international financial reporting that regulators and standard setters say are often misleading. Current IFRS rules prescribe the definition of a select few terms, including revenue and profit or loss. The Board is considering adding formal definitions to frequently used accounting metrics like operating profit and terms like earnings before interest and tax, or EBIT, Mr. Hoogervorst said. The Board is also considering guidance on formatting financial information, such as the line items of the income statement.

CLASSROOM APPLICATION: This update is appropriate for coverage of IFRS in financial accounting classes.

QUESTIONS: 
1. (Introductory) What is the IASB? What is its area of authority? What is IFRS? To what entities does it apply?

2. (Advanced) What is the IASB considering doing? Why? What kind of impact could it have for financial reporting?

3. (Advanced) In general, how does IFRS differ from GAAP? More specifically, does GAAP currently have more and/or better definitions? Is GAAP changing in the same way as IFRS is changing? Why or why not?

4. (Advanced) The article discusses custom accounting and custom metrics. What are those? Why are companies using them? Should companies be allowed to use them?

Reviewed By: Linda Christiansen, Indiana University Southeast

RELATED ARTICLES: 
Accounting Choices Blur Profit Picture
by Tatyana Shumsky and Theo Francis
Jun 29, 2016
Online Exclusive

"CFOs May Get More Accounting Guidance From IASB," by Tatyana Shumsky, The Wall Street Journal, July 14, 2016 ---
http://blogs.wsj.com/cfo/2016/07/13/cfos-may-get-more-accounting-guidance-from-iasb/?mod=djem_jiewr_AC_domainid 

International accounting standards setter is weighing rules for income statement formatting, Chairman says

The presentation of global financial reports could soon get more regimented, according to Hans Hoogervorst, chairman of the International Accounting Standards Board.

The IASB, which sets International Financial Reporting Standards, is considering adding definitions of commonly used accounting terms, as well as guidance on the formatting of financial statements, Mr. Hoogervorst said. The move comes in response to the proliferation of custom metrics in both U.S. and international financial reporting that regulators and standard setters say are often misleading.

“We believe that we have to try to create a little bit of order in this chaos,” Mr. Hoogervorst said.

Current IFRS rules prescribe the definition of a select few terms, including revenue and profit or loss. The Board is considering adding formal definitions to frequently used accounting metrics like operating profit and terms like earnings before interest and tax, or EBIT, Mr. Hoogervorst said. The Board is also considering guidance on formatting financial information, such as the line items of the income statement, he said.

For the IASB, the worry with custom accounting is that “it almost always gives a rosier picture” to investors, Mr. Hoogervorst said.

While U.S. companies are required to file their financial reports using U.S. Generally Accepted Accounting Principles, nearly 94% of the S&P 500 supplemented their 2015 earnings with non-GAAP data, CFO Journal reported in June. In Europe and other regions that rely on IFRS for financial reporting, the use of custom accounting measures is equally popular.

However, not all non-standard accounting terms deserve to be rigorously defined, Mr. Hoogervorst said. For example, earnings before interest, tax, depreciation and amortization or EBITDA is an inherently misleading measure that Mr. Hoogervorst said he wouldn’t want to define.

Continued in article

 




 

 

Humor for July 2016

Oops!

91-year-old woman fills in crossword at museum - only to discover it was a Ł60,000 artwork

‎7‎/‎14‎/‎2016‎ ‎5‎:‎48‎:‎51‎ ‎PM · by NRx · 5 replies

The Telegraph ^ | 06-14-2016 | Justin Huggler

A 91-year-old woman has been questioned by police in Germany — after she filled in the blanks in a piece of modern art based on a crossword puzzle. The pensioner, who has not been named under German privacy law, was questioned under caution after she filled in the work valued at €80,000 (Ł67,000) with a biro. "Reading-work-piece", a 1977 work by Arthur Köpcke of the Fluxus movement, essentially looks like an empty crossword puzzle. Next to the work is a sign which reads: “Insert words”. The hapless pensioner explained to police that she was simply following the instructions. “The lady...


Mozart's Got Talent (Humor) --- https://www.youtube.com/embed/gKpFhPdyQLM?rel=0


It's All In How You Look At Things
http://www.life-with-confidence.com/confidence-humor.html

A pessimist sees the glass as half empty, the optimist sees it as half full, and to the engineer, the glass is twice as big as it needs to be.

If the world didn't suck, you'd fall off.

A truly happy person is one who can enjoy the scenery on a detour.

Which runs faster, heat or cold?
Heat, everyone knows you can catch a cold.

My idea of housework is to sweep the room with a glance.

Opportunities always look bigger going than coming.

Experience is a wonderful thing. It enables you to recognize a mistake when you make it again.

Blessed are they who can laugh at themselves for they shall never cease to be amused.

If you try to fail, and succeed, which have you done?

We can't change the weather, we can only accept it which means we should all learn from the weather; it pays no attention to criticism.


Forwarded by Paula

A lexophile of  course!

  
How does Moses make tea?  Hebrews it.  
   Venison for dinner again?  Oh deer!  
   A cartoonist was found dead in his home.  Details are  sketchy.
   I used to be a banker, but then I lost  interest.
   Haunted French pancakes give me the  crępes.
   England has no kidney bank, but it does have a  Liverpool  .
   I tried to catch some fog, but I  mist.
   They told me I had type-A blood, but it was a  Typo.
   I changed my iPod's name to Titanic. It's syncing  now.
   Jokes about German sausage are the  wurst.
   I know a guy who's addicted to brake fluid, but he says he can stop any  time.
   I stayed up all night to see where the sun went, and then it dawned on  me.
   This girl said she recognized me from the vegetarian club, but I'd never  met herbivore.
   When chemists die, they  barium.
   I'm reading a book about anti-gravity.  I just can't put it  down.
   I did a theatrical performance about puns.  It was a play on  words.
   Why were the Indians here first?  They had  reservations.
   I didn't like my beard at first.  Then it grew on  me.
   Did you hear about the cross-eyed teacher who lost her job because she  couldn't control her pupils?
   When you get a bladder infection, urine  trouble.
   Broken pencils are  pointless.
   What do you call a dinosaur with an extensive vocabulary?  A  thesaurus.
   I dropped out of communism class because of lousy  Marx.
   All the toilets in  New York 's police stations have been  stolen.  The police have nothing to go on.
   I got a job at a bakery because I kneaded  dough.
   Velcro - what a rip  off!
   Don't worry about old age; it doesn't  last.

 


What came first: The diet or the donut?

Study: Fat People More Likely to Be Stupid

‎7‎/‎14‎/‎2016‎ ‎4‎:‎46‎:‎49‎ ‎PM · by bkopto · 63 replies

Breitbart ^ | 7/14/2016 | Ben Kew

A new study suggests that people are are overweight tend to be less intelligent than those who are not. According to the study, people who are overweight have less grey and white matter in key parts of the brain, meaning their brain develops an “altered reward processing,” effectively meaning they lack the ability to control their eating. The results were extracted from “very thorough” brain scans of 32 people from Baltimore....

300 Random Animal Facts (that I did not attempt to verify) ---
http://www.thefactsite.com/2010/09/300-random-animal-facts.html

 


Gov. Maggie Hassan signed H.B. 1547 into law to ban sexual assault on animals in New Hampshire. This bipartisan effort was initiated to address the disturbing and prevalent issue of animal sexual assault in the Granite State.
http://www.humanesociety.org/news/news_briefs/2016/06/nh-animal-sexual-assault-ban-062416.html
Jensen Comment
Time to move back to Texas where A&M sheep approach a fence backwards.
What do you call an Aggie with a sheep under each arm?  A pimp!
This is a joke I first herd when I was on leave in New Zealand.


The great Al Hirschfeld had been supplying his much-loved caricatures to the New York Times for 37 years when, in 1962, tipped over the edge by the newspaper's accounting department, he sent the following amusing letter to the Sunday editor, Lester Markel.
(Keep scrolling down here)
http://www.lettersofnote.com/search?q=+accounting

Letters of Note --- http://lettersofnote.com


NTSB says Delta plane landed at wrong airport in Sout---
https://www.yahoo.com/news/ntsb-says-delta-plane-landed-wrong-airport-185643679.html?nhp=1
Jensen Comment
This is not humorous per se, but a lot of comedians will use it for comic material. For example, GPS on Delta means Good Pilots Snoring or Gawking Pilots Sightseeing pr Gppfu Pilots Surprise.


Forwarded by Paula

WHY SENIORS STILL NEED NEWSPAPERS

I was visiting my daughter last night when I asked if I could borrow a newspaper.

"This is the 21st century" she said. "We don't waste money on newspapers. Here… use my iPad."

I can tell you this….. that friggin fly never knew what hit him..


Forwarded by Auntie Bev

LOST WORDS OF OUR YOUTH

Heavens to Murgatroyd! Would you believe the email spell checker did not recognize the word murgatroyd? Lost Words from our childhood: Words gone as fast as the buggy whip! Sad really!

The other day a not so elderly (65) (I say 75) lady said something to her son about driving a Jalopy and he looked at her quizzically and said "What the heck is a Jalopy? OMG (new) phrase! He never heard of the word jalopy!! She knew she was old but not that old.

Well, I hope you are Hunky Dory after you read this and chuckle.

About a month ago, I illuminated some old expressions that have become obsolete because of the inexorable march of technology. These phrases included "Don't touch that dial," "Carbon copy," "You sound like a broken record" and "Hung out to dry."

Back in the olden days we had a lot of moxie. We'd put on our best bib and tucker to straighten up and fly right.

Heavens to Betsy! Gee whillikers! Jumping Jehoshaphat! Holy moley! We were in like Flynn and living the life of Riley, and even a regular guy couldn't accuse us of being a knucklehead, a nincompoop or a pill. Not for all the tea in China!

Back in the olden days, life used to be swell, but when's the last time anything was swell?

Swell has gone the way of beehives, pageboys and the D.A.; of spats, knickers, fedoras, poodle skirts, saddle shoes and pedal pushers. Oh, my aching back. Kilroy was here, but he isn't anymore.

We wake up from what surely has been just a short nap, and before we can say, well I'll be a monkey's uncle! or, This is a fine kettle of fish! we discover that the words we grew up with, the words that seemed omnipresent, as oxygen, have vanished with scarcely a notice from our tongues and our pens and our keyboards.

Poof, go the words of our youth, the words we've left behind We blink, and they're gone. Where have all those phrases gone?

Long gone: Pshaw, The milkman did it. Hey! It's your nickel.

Don't forget to pull the chain. Knee high to a grasshopper.

Well, Fiddlesticks! Going like sixty. I'll see you in the funny papers. Don't take any wooden nickels.

It turns out there are more of these lost words and expressions than Carter has liver pills. This can be disturbing stuff !

We of a certain age have been blessed to live in changeable times. For a child each new word is like a shiny toy, a toy that has no age. We at the other end of the chronological arc have the advantage of remembering there are words that once did not exist and there were words that once strutted their hour upon the earthly stage and now are heard no more, except in our collective memory. It's one of the greatest advantages of aging.

See ya later, alligator!

 


Forwarded by Paula

A blonde lady motorist was about two hours from San Diego when she was flagged down by a man whose truck had broken down......

The man walked up to the car and asked, "Are you going to San Diego?"

"Sure," answered the blonde, "do you need a lift?"

"Not for me.

I'll be spending the next three hours fixing my truck. My problem is I've got two chimpanzees in the back that have to be taken to the San Diego Zoo. They're a bit stressed already so I don't want to keep them on the road all day.

Could you possibly take them to the zoo for me? I'll give you $200 for your trouble”

"I'd be happy to," said the blonde.

So the two chimpanzees were ushered into the back seat of the blonde's car and carefully strapped into their seat belts, and off they went.

Five hours later, the truck driver was driving through the heart of San Diego when suddenly he was horrified!

There was the blonde walking down the street, holding hands with the two chimps, much to the amusement of a big crowd.

With a screech of brakes he pulled off the road and ran over to the blonde. "What are you doing here?" he demanded,

"I gave you $200 to take these chimpanzees to the zoo!

"Yes, I know you did," said the blonde.

"But we had money left over so now we're going to Sea World."


Some new and some old forwarded by Paula

 

A distraught senior citizen 

phoned her doctor's office.

"Is it true," she wanted to know, 

"that the medication 

you prescribed has to be taken 

for the rest of my life?"

 

"'Yes, I'm afraid so,"' the doctor told her. 

There was a moment of silence 

before the senior lady replied,

 "I'm wondering, then,

 just how serious is my condition

because this prescription is marked

'NO REFILLS'.."


 

***********************

 

An older gentleman was 

on the operating table 

awaiting surgery 

and he insisted that his son, 

a renowned surgeon,

perform the operation. 

As he was about to get the anesthesia, 

he asked to speak to his son.

"Yes, Dad , what is it?"

"Don't be nervous, son;

do your best, 

and just remember, 

if it doesn't go well,

 if something happens to me, 

your mother

 is going to come and

 live with you and your wife...." 

(I LOVE IT!)


 
~~~~~~~~~~~~~~~~~


 

Aging: 

Eventually you will reach a point

 when you stop lying about your age

 and start bragging about it. This is so true. I love 

to hear them say "you don't look that old."

 

 ---------------------------------

 

The older we get,

 the fewer things

 seem worth waiting in line for.


 
---------------------------------

 

Some people

 try to turn back their odometers. 

Not me! 

I want people to know why

I look this way. 

I've traveled a long way 

and some of the roads weren't paved.


 
********************

 

When you are dissatisfied 

and would like to go back to youth,

think of Algebra.


  
-------------------------------

 

One of the many things 

no one tells you about aging

is that it is such a nice change 

from being young.

~~~~~~~~~~~

 

Ah, being young is beautiful,

 but being old is comfortable.

*********

 

First you forget names, 

then you forget faces. 

Then you forget to pull up your zipper... 

it's worse when 

you forget to pull it down.


```````````````

 Two guys, one old, one young, 

are pushing their carts around- WalMart 

when they collide. 

The old guy says to the young guy, 

"Sorry about that. I'm looking for my wife,

 and I guess I wasn't paying attention 

to where I was going."

 The young guy says, "That's OK, it's a coincidence.

 I'm looking for my wife, too...

 I can't find her and I'm getting a little desperate."

 The old guy says, "Well,

 maybe I can help you find her...

 what does she look like?" 

The young guy says,

 "Well, she is 27 years old, tall, 

with red hair,

blue eyes, is buxom...wearing no bra, 

long legs, 

and is wearing short shorts. 

What does your wife look like?'

 To which the old guy says, “Doesn't matter, 
Let's look for yours."

 




Humor July  2016 --- http://faculty.trinity.edu/rjensen/book16q3.htm#Humor0716.htm  

Humor June  2016 --- http://faculty.trinity.edu/rjensen/book16q2.htm#Humor063016.htm

Humor May  2016 --- http://faculty.trinity.edu/rjensen/book16q2.htm#Humor053116.htm

Humor April  2016 --- http://faculty.trinity.edu/rjensen/book16q2.htm#Humor043016.htm

Humor March  2016 --- http://faculty.trinity.edu/rjensen/book16q1.htm#Humor033116.htm

Humor February  2016 --- http://faculty.trinity.edu/rjensen/book16q1.htm#Humor022916.htm

Humor January  2016 --- http://faculty.trinity.edu/rjensen/book16q1.htm#Humor013116.htm

Humor December 1-31,  2015 --- http://faculty.trinity.edu/rjensen/book15q4.htm#Humor123115.htm.htm

Humor November 1-30,  2015 --- http://faculty.trinity.edu/rjensen/book15q4.htm#Humor113015.htm

Humor October 1-31,  2015 --- http://faculty.trinity.edu/rjensen/book15q4.htm#Humor103115

Humor September 1-30,  2015 --- http://faculty.trinity.edu/rjensen/book15q3.htm#Humor093015

Humor August 1-31,  2015 --- http://faculty.trinity.edu/rjensen/book15q3.htm#Humor081115

Humor July 1-31,  2015 --- http://faculty.trinity.edu/rjensen/book15q3.htm#Humor073115

Humor June 1-30,  2015 --- http://faculty.trinity.edu/rjensen/book15q2.htm#Humor043015

Humor May 1-31,  2015 --- http://faculty.trinity.edu/rjensen/book15q2.htm#Humor043015

Humor April 1-30, 2015 --- http://faculty.trinity.edu/rjensen/book15q2.htm#Humor043015

Humor March 1-31, 2015 --- http://faculty.trinity.edu/rjensen/book15q1.htm#Humor033115

Humor February 1-28, 2015 --- http://faculty.trinity.edu/rjensen/book15q1.htm#Humor022815

Humor January 1-31, 2015 --- http://faculty.trinity.edu/rjensen/book15q1.htm#Humor013115

 




And that's the way it was on July 31, 2016 with a little help from my friends.

 

Bob Jensen's gateway to millions of other blogs and social/professional networks ---
http://faculty.trinity.edu/rjensen/ListservRoles.htm

Bob Jensen's Threads --- http://faculty.trinity.edu/rjensen/threads.htm

Bob Jensen's Blogs --- http://faculty.trinity.edu/rjensen/JensenBlogs.htm
Current and past editions of my newsletter called New Bookmarks --- http://faculty.trinity.edu/rjensen/bookurl.htm
Current and past editions of my newsletter called Tidbits --- http://faculty.trinity.edu/rjensen/TidbitsDirectory.htm
Current and past editions of my newsletter called Fraud Updates --- http://faculty.trinity.edu/rjensen/FraudUpdates.htm
Bob Jensen's past presentations and lectures --- http://faculty.trinity.edu/rjensen/resume.htm#Presentations   

Free Online Textbooks, Videos, and Tutorials --- http://faculty.trinity.edu/rjensen/ElectronicLiterature.htm#Textbooks
Free Tutorials in Various Disciplines --- http://faculty.trinity.edu/rjensen/Bookbob2.htm#Tutorials
Edutainment and Learning Games --- http://faculty.trinity.edu/rjensen/000aaa/thetools.htm#Edutainment
Open Sharing Courses --- http://faculty.trinity.edu/rjensen/000aaa/updateee.htm#OKI

Bob Jensen's Resume --- http://faculty.trinity.edu/rjensen/Resume.htm
 

Bob Jensen's Homepage --- http://faculty.trinity.edu/rjensen/

Accounting Historians Journal --- http://www.libraries.olemiss.edu/uml/aicpa-library  and http://clio.lib.olemiss.edu/cdm/landingpage/collection/aah
Accounting Historians Journal
Archives--- http://www.olemiss.edu/depts/general_library/dac/files/ahj.html
Accounting History Photographs --- http://www.olemiss.edu/depts/general_library/dac/files/photos.html

 

 

 


Bob Jensen's Pictures and Stories
http://faculty.trinity.edu/rjensen/Pictures.htm

 

Bob Jensen's Homepage --- http://faculty.trinity.edu/rjensen/