New Bookmarks
Year 2009 Quarter 4:  October 1 - December 31 Additions to Bob Jensen's Bookmarks
Bob Jensen at Trinity University

For earlier editions of New Bookmarks go to 
Tidbits Directory --- 

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

Choose a Date Below for Additions to the Bookmarks File

October 31     November 30      December 31

July 31            August 31           September 30

April 30           May 31              June 30

January 31      February 28       March 31

Some Accounting News Sites and Related Links
Bob Jensen at Trinity University

Accounting  and Taxation News Sites ---

Fraud News ---

XBRL News ---

Selected Accounting History Sites ---

Some of Bob Jensen's Pictures and Stories ---

Free Tutorials, Videos, and Other Helpers ---

Bob Jensen's gateway to millions of other blogs and social/professional networks ---


Bob Jensen's Threads ---

Bob Jensen's Blogs ---
Current and past editions of my newsletter called New Bookmarks ---
Current and past editions of my newsletter called Tidbits ---
Current and past editions of my newsletter called Fraud Updates ---
Bob Jensen's past presentations and lectures ---   

Free Online Textbooks, Videos, and Tutorials ---
Free Tutorials in Various Disciplines ---
Edutainment and Learning Games ---
Open Sharing Courses ---

Peter, Paul, and Barney: An Essay on 2008 U.S. Government Bailouts of Private Companies ---

Health Care News ---

Bob Jensen's Resume ---


December 31, 2009

Bob Jensen's New Bookmarks on  December 31, 2009
Bob Jensen at Trinity University 


For earlier editions of Fraud Updates go to
For earlier editions of Tidbits go to
For earlier editions of New Bookmarks go to 

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

Bob Jensen's Blogs ---
Current and past editions of my newsletter called New Bookmarks ---
Current and past editions of my newsletter called Tidbits ---
Current and past editions of my newsletter called Fraud Updates ---

Accountancy, Tax, IFRS, XBRL, and Accounting History News Sites  ---

Cool Search Engines That Are Not Google ---

Accounting program news items for colleges are posted at
Sometimes the news items provide links to teaching resources for accounting educators.
Any college may post a news item.

How to author books and other materials for online delivery
How Web Pages Work ---

Bob Jensen's essay on the financial crisis bailout's aftermath and an alphabet soup of appendices can be found at

Federal Revenue and Spending Book of Charts (Great Charts on Bad Budgeting) ---

The Master List of Free Online College Courses ---

Free Online Textbooks, Videos, and Tutorials ---
Free Tutorials in Various Disciplines ---
Edutainment and Learning Games ---
Open Sharing Courses ---
The Master List of Free Online College Courses ---

Bob Jensen's threads for online worldwide education and training alternatives ---

"U. of Manitoba Researchers Publish Open-Source Handbook on Educational Technology," by Steve Kolowich, Chronicle of Higher Education, March 19, 2009 ---

Social Networking for Education:  The Beautiful and the Ugly
(including Google's Wave and Orcut for Social Networking and some education uses of Twitter)
Updates will be at

Humor Between December 1 and December 31, 2009  

Humor Between November 1 and November 30, 2009  

Humor Between October 1 and October 31, 2009 

Humor Between September 1 and September 30, 2009 

Humor Between August 1 and August 31, 2009 

Humor Between July 1 and July 31. 2009 

Humor Between June 1 and June 30. 2009  

Humor Between May 1 and May 31, 2009 ---    

Humor Between April 1 and April 30, 2009 ---   

Humor Between March 1 and March 31, 2009 ---  

Humor Between February 1 and February 28, 2009 ---   

Humor Between January 1 and January 31, 2009 ---


Happy Old Year
Summary of FASB Standards Issued in 2009 ---

AccountingWeb's Tax Software Review for Professionals, November 2009

Featured Tax Software

·         ATX

·         CrossLink

·         Drake

·         GoSystem Tax RS

·         Great Tax

·         Intuit ProLine Lacerte Tax

·         Intuit ProLine ProSeries

·         Intuit ProLine Tax Online Edition

·         Orange Tax Suite

·         ProSystem fx Tax

·         TaxACT

·         TaxWise

·         TaxWorks

·         UltraTax CS

Bob Jensen's accounting software helpers ---

Bob Jensen's taxation helpers ---

  • 2009 Best Places to Start/Intern According to Bloomberg/Business Week --- Click Here
    Also see the Internship and Table links at
    The Top five rankings contain all Big Four accountancy firms.
    Somehow Proctor and Gamble slipped into Rank 4 above PwC
    The accountancy firms of Grant Thornton and RMS McGladrey make the top 40 at ranks 32 and 33 respectively.

    Best Places to Intern ---
    I'm waiting for Francine to throw cold water on the "ever before" claim
    Especially note the KPMG Experience Abroad module below
    "Best Places to Intern:  Bloomberg BusinessWeek's 2009 list shows employers are hiring more interns to fill entry-level positions than ever before,"  by Lindsey Gerdes, Business Week, December 10, 2009 ---

    How valuable is a summer internship in a recession? Consider Goldman Sachs, the leading choice for students interested in a career on Wall Street. This year, the investment bank hired 600 fewer entry-level employees. That's not surprising given the stunted economy and the government bailout of banks. What is noteworthy is nearly 90% of Goldman's new hires were former interns. The previous year, Goldman wasn't as concerned about hiring a high percentage of students it had already invested time and money to trainonly 58% of entry-level hires had spent a summer at the company.

    The same is true for other employers. KPMG, a Big Four accounting firm that finds itself in tight competition with Deloitte, Ernst & Young, and PricewaterhouseCoopers, hired nearly 900 fewer entry-level employees this year. But 91% of those full-time hires were former interns, whereas only 71% of new hires in 2008 were interns.

    Internships have long been seen as a primary recruiting tool at many top employers—a 10-week job tryout to see who would be the best fit for full-time employment. But with full-time hiring down, even the largest employers are trying to maximize the investment they've made in interns by hiring a larger percentage to fill entry-level position than ever before. "It's true for all years, but I think it's even more so in years like this," says Sandra Hurse, a senior executive at Goldman who handles campus recruiting.

    Evaluating Employers

    With this ranking, Bloomberg BusinessWeek has put together its third annual guide to the best internships, providing information on the number of interns each company recruits, how many are offered full-time jobs, the number of interns expected to be hired next year, even the salaries students receive.To compile our list, we judged employers based on survey data from 60 career services directors around the country and a separate survey completed by each employer.We also consider how each employer fared in the annual Best Places to Launch a Career, our ranking of top U.S. entry-level employers released in September of each year.

    Our ranking of the best U.S.companies for undergraduate internships highlights employers who have put together an outstanding experience for students.Accounting firm Deloitte tops our list, followed by rivals KPMG (No.2) and Ernst & Young (No.3).The last of the Big Four accounting companies, PricewaterhouseCoopers, comes in at No.5, right behind consumer goods giant Procter & Gamble.

    The employers on our list understand that an outstanding internship experience is their most effective recruiting tool to snap up the top entry-level job candidates. That's why some companies have invested a considerable amount of money in their programs. Microsoft, for example, estimates it spends on average $30,000 per intern, when you factor in pay and benefits. Considering the company hired 542 undergraduate interns in 2009, that's roughly a $16 million investment.

    Experience Abroad

    Two years ago KPMG realized it had to make a substantial investment in its internship program if it hoped to woo top students from larger consulting and accounting firms. So the company decided to offer interns an opportunity to gain valuable overseas experience. KPMG lets student interns spend four weeks in the U.S. and four weeks abroad. "It's extremely competitive [to recruit top students], and this is a differentiator," says Blane Ruschak, executive director of campus recruiting at KPMG.

    A chance to work overseas is precisely what appealed to Andrew Fedele, 21, an accounting and economics double major at Pennsylvania State University. "I was sold pretty much when I first read about [KPMG's] global internship program." He spent four weeks in Chicago and four weeks in Johannesburg, South Africa. "South Africa has just such an interesting history. To go there and live with the locals and work with them was really exciting."

    What did KPMG get in return? Exactly what it hoped: Fedele accepted a full-time job almost immediately after KPMG made its offer at the end of the summer.

    Gerdes is a staff editor for BusinessWeek in New York.

    Bob Jensen's threads on careers are at

    From Business Week Magazine
    "Top Business School Stories of 2009:  The global financial crisis hammered the MBA job market, school endowments, and financial aid. Some questioned an MBA's value. Bring on 2010," by Alison Damast and Geoff Gloeckler, Business Week, December 23, 2009 --- 

    To call 2009 an interesting year for management education is perhaps an understatement bordering on the extreme. With the global financial crisis taking its toll on everything from the MBA job market and endowments to financial aid and the reputation of the MBA degree itself, 2009 promises to go down in history as a year to forget.

    For students and graduates of MBA programs, 2009 was the year that jobs and internship offers became harder to find, even at the top schools; a year when the scarcity of student loans and visas for international students threatened to derail even the best-laid B-school plans; and a year when programs began to rethink the way they teach such subjects as ethics and corporate responsibility. Business school endowments were hit hard and the high cost of tuition was at the fore of every prospective student's thinking.

    Of the 10 most popular business school stories on in 2009, seven directly related to the financial crisis. The others looked at a new competitor on the B-school admissions test front, a GMAT cheating alert in China, and three top MBA programs currently without deans. Take some time to go back over the biggest stories of the year and reminisce. For better or worse, 2009 will be a year that the B-school world won't soon forget.

    1. Job Market: The No. 1 concern this year for current MBAs, applicants, and recent grads was the job market. Students worried about finding internships and jobs after graduation, applicants wondered if joining the ranks of the unemployed to enroll in an MBA program was a good idea, and newly minted BBAs and MBAs wondered if their post-B-school jobs would hold up. These fears came out in comments readers left on the stories, with many weighing the pros and cons of accepting jobs with lower salaries and fewer responsibilities. Readers who earned MBAs in 2008 and 2007 also chimed in to voice their concerns, many saying they had yet to land that "dream job" and didn't expect to find it in the near future.

    MBA Job Outlook Dims

    MBA Tales: Searching for Work in a Recession

    MBAs Confront a Savage Job Market

    2. Loan Crisis: International students who planned to study at U.S. business schools had to scramble to find a student loan provider in 2009, when many of the loan programs they had used to fund their education disappeared. For years students had depended on the popular Citi Assist and Sallie Mae loan programs, which allowed applicants to obtain up to $150,000 without a co-signer to assume stewardship of the loan should the borrower default. Due to the credit crisis in the fall of 2008, those financial lifelines for many international students were pulled and many schools spent the first six months of 2009 trying to find alternative loan providers. It was a tense few months for foreign applicants, many of whom expressed their frustration in more than 250 comments on stories we published on the topic. For many, the uncertain H-1B visa situation, coupled with the loan situation, made the prospect of studying in America too big a risk to take.

    By the time spring rolled around, many schools had come up with solutions for foreign students—often just in time for the deadline deposit to reserve a seat in next year's class.

    Loan Crisis Hits the MBA World

    World to U.S.B-Schools: Thanks, but No Thanks

    3. MBAs: Public Enemy No. 1? Were B-schools responsible for the global economic crisis? It's a question that has consumed much of the B-school world for the better part of a year. In a story we ran in May, experts from inside and outside MBA programs weighed in on the debate. Philip Delves Broughton, a Harvard MBA and author of Ahead of the Curve: Two Years at Harvard Business School (Penguin Group, July 2008), directed blame at B-schools, calling the three-letter acronym, MBA, "scarlet letters of shame," and suggesting they stand for "Masters of the Business Apocalypse." Others, such as Richard Cosier, dean of Purdue's Krannert School of Business (Krannert Full-Time MBA Profile), defended MBA programs, saying, "It is my opinion that business schools will continue to produce students who will be part of the solution, rather than the problem."

    Readers, meanwhile, started a rousing debate on the topic via the story's comments. Some completely blamed business schools for the crisis, criticizing everything from teaching techniques and the competitive environment MBA programs seem to foster to the overall value of the degree. Others defended today's B-schools, saying business schools are about as responsible for the economic crisis as engineering schools are for global warming. In the end, the common sentiment seemed to be that business schools deserved some blame, but not all of it.

    MBAs: Public Enemy No.1?

    4. GRE vs. GMAT: For years, the Graduate Management Admission Council (GMAC) had a virtual monopoly over the admission testing arena at business schools. Its well-known entrance exam, the Graduate Management Admission Test (GMAT), was the standard test used to get into business schools in the U.S. and many other schools around the world for decades. That all changed this year when the Educational Testing Service (ETS) started to encroach into GMAC territory, courting business schools and encouraging them to allow students to submit the Graduate Record Examination (GRE) for admissions. ETS' efforts are starting to pay off. There are now approximately 285 business schools that allow students to submit the GRE in lieu of the GMAT exam, including the University of Pennsylvania's Wharton School(Wharton Full-Time MBA Profile), Harvard Business School(Harvard Full-Time MBA Profile), and New York University's Stern School of Business(Stern Full-Time MBA Profile). ETS says that it expects more than 300 schools to sign on in 2010.

    Continued in article

    "The Marshmallow and the Cherry," by Edward Tenner, The Atlantic, December, 2009 ---

    Earlier in the year Jonah Lehrer explained in the New Yorker how cool deferred gratification is and how we need to teach it to our kids, the younger the better. Now, in the New York Times, John Tierney suggests that it's really an insidious habit for grownups, sacrificing real enjoyment for the mirage of an even better future. Can everything good be bad for you?

    Of course the respective sets of behavioral research described might be consistent. Children who master delaying pleasure become superior achievers and thus have the frequent flier balances that they are so counterproductively hoarding. The same kindergartners who in a famous experiment triumphantly resisted the urge to eat a marshmallow probably will morph into affluent adults who save bottles of vintage Champagne for occasions so special they may never take place.

    One person at least long ago found the secret of combining the two ethics. The charismatic but workaholic advertising man
    David Ogilvy, the subject of a recent biography, loved to tell a story of his own childhood when coaching his staff on client presentations:

    When I was a boy, I always saved the cherry on my pudding for last. Then, one day, my sister stole it. From then on, I always ate the cherry first.

    Jensen Common
    This speaks in favor of increasing the dividend cash payout (yield) ratio ---

    "Ace Your Accounting Classes: 12 Hints to Maximize Your Potential," by David Albrecht, The Summa, December 30, 2009 ---

  • This article was published in the American Journal of Busienss Education.    I am entitled to place a copy on my personal web site, so am placing it here at this time.  Click here for a pdf copy.

    The complete citation is:

    Albrecht, W. David.  (2008).  Ace Your Accounting Classes:  12 Hints To Maximize Your Potentia, American Journal of Business Education, Volume 1, Number 1 (Quarter 3), pp. 1-8.   [hard copy]


    December 23, 2009 message from Roger Debreceny [roger@DEBRECENY.COM]

    The IASB is trialling podcast summaries of each meeting at . Being a systems person, I only take a moderate issue in the intricacies of the latest financial accounting standards setting. But the first 30 minute podcast with IASB board member Steve Cooper and fellow Kiwi, Alan Teixeira, Director of Technical Activities at the Board provided a very useful summary of key issues.

    Greetings to all on AECM for Christmas and the New Year.


    Bob Jensen's threads on accounting and tax news ---

    The motto of Judicial Watch is "Because no one is above the law". To this end, Judicial Watch uses the open records or freedom of information laws and other tools to investigate and uncover misconduct by government officials and litigation to hold to account politicians and public officials who engage in corrupt activities.
    Judicial Watch ---

    Judicial Watch Announces List of Washington's "Ten Most Wanted Corrupt Politicians" for 2009 ---

    Judicial Watch, the public interest group that investigates and prosecutes government corruption, today released its 2009 list of Washington's "Ten Most Wanted Corrupt Politicians." The list, in alphabetical order, includes:

    1. Senator Christopher Dodd (D-CT): This marks two years in a row for Senator Dodd, who made the 2008 "Ten Most Corrupt" list for his corrupt relationship with Fannie Mae and Freddie Mac and for accepting preferential treatment and loan terms from Countrywide Financial, a scandal which still dogs him. In 2009, the scandals kept coming for the Connecticut Democrat. In 2009, Judicial Watch filed a Senate ethics complaint against Dodd for undervaluing a property he owns in Ireland on his Senate Financial Disclosure forms. Judicial Watch's complaint forced Dodd to amend the forms. However, press reports suggest the property to this day remains undervalued. Judicial Watch also alleges in the complaint that Dodd obtained a sweetheart deal for the property in exchange for his assistance in obtaining a presidential pardon (during the Clinton administration) and other favors for a long-time friend and business associate. The false financial disclosure forms were part of the cover-up. Dodd remains the head the Senate Banking Committee.


    2. Senator John Ensign (R-NV): A number of scandals popped up in 2009 involving public officials who conducted illicit affairs, and then attempted to cover them up with hush payments and favors, an obvious abuse of power. The year's worst offender might just be Nevada Republican Senator John Ensign. Ensign admitted in June to an extramarital affair with the wife of one of his staff members, who then allegedly obtained special favors from the Nevada Republican in exchange for his silence. According to The New York Times: "The Justice Department and the Senate Ethics Committee are expected to conduct preliminary inquiries into whether Senator John Ensign violated federal law or ethics rules as part of an effort to conceal an affair with the wife of an aide…" The former staffer, Douglas Hampton, began to lobby Mr. Ensign's office immediately upon leaving his congressional job, despite the fact that he was subject to a one-year lobbying ban. Ensign seems to have ignored the law and allowed Hampton lobbying access to his office as a payment for his silence about the affair. (These are potentially criminal offenses.) It looks as if Ensign misused his public office (and taxpayer resources) to cover up his sexual shenanigans.


    3. Rep. Barney Frank (D-MA): Judicial Watch is investigating a $12 million TARP cash injection provided to the Boston-based OneUnited Bank at the urging of Massachusetts Rep. Barney Frank. As reported in the January 22, 2009, edition of the Wall Street Journal, the Treasury Department indicated it would only provide funds to healthy banks to jump-start lending. Not only was OneUnited Bank in massive financial turmoil, but it was also "under attack from its regulators for allegations of poor lending practices and executive-pay abuses, including owning a Porsche for its executives' use." Rep. Frank admitted he spoke to a "federal regulator," and Treasury granted the funds. (The bank continues to flounder despite Frank's intervention for federal dollars.) Moreover, Judicial Watch uncovered documents in 2009 that showed that members of Congress for years were aware that Fannie Mae and Freddie Mac were playing fast and loose with accounting issues, risk assessment issues and executive compensation issues, even as liberals led by Rep. Frank continued to block attempts to rein in the two Government Sponsored Enterprises (GSEs). For example, during a hearing on September 10, 2003, before the House Committee on Financial Services considering a Bush administration proposal to further regulate Fannie and Freddie, Rep. Frank stated: "I want to begin by saying that I am glad to consider the legislation, but I do not think we are facing any kind of a crisis. That is, in my view, the two Government Sponsored Enterprises we are talking about here, Fannie Mae and Freddie Mac, are not in a crisis. We have recently had an accounting problem with Freddie Mac that has led to people being dismissed, as appears to be appropriate. I do not think at this point there is a problem with a threat to the Treasury." Frank received $42,350 in campaign contributions from Fannie Mae and Freddie Mac between 1989 and 2008. Frank also engaged in a relationship with a Fannie Mae Executive while serving on the House Banking Committee, which has jurisdiction over Fannie Mae and Freddie Mac.


    4. Secretary of Treasury Timothy Geithner: In 2009, Obama Treasury Secretary Timothy Geithner admitted that he failed to pay $34,000 in Social Security and Medicare taxes from 2001-2004 on his lucrative salary at the International Monetary Fund (IMF), an organization with 185 member countries that oversees the global financial system. (Did we mention Geithner now runs the IRS?) It wasn't until President Obama tapped Geithner to head the Treasury Department that he paid back most of the money, although the IRS kindly waived the hefty penalties. In March 2009, Geithner also came under fire for his handling of the AIG bonus scandal, where the company used $165 million of its bailout funds to pay out executive bonuses, resulting in a massive public backlash. Of course as head of the New York Federal Reserve, Geithner helped craft the AIG deal in September 2008. However, when the AIG scandal broke, Geithner claimed he knew nothing of the bonuses until March 10, 2009. The timing is important. According to CNN: "Although Treasury Secretary Timothy Geithner told congressional leaders on Tuesday that he learned of AIG's impending $160 million bonus payments to members of its troubled financial-products unit on March 10, sources tell TIME that the New York Federal Reserve informed Treasury staff that the payments were imminent on Feb. 28. That is ten days before Treasury staffers say they first learned 'full details' of the bonus plan, and three days before the [Obama] Administration launched a new $30 billion infusion of cash for AIG." Throw in another embarrassing disclosure in 2009 that Geithner employed "household help" ineligible to work in the United States, and it becomes clear why the Treasury Secretary has earned a spot on the "Ten Most Corrupt Politicians in Washington" list.


    5. Attorney General Eric Holder: Tim Geithner can be sure he won't be hounded about his tax-dodging by his colleague Eric Holder, US Attorney General. Judicial Watch strongly opposed Holder because of his terrible ethics record, which includes: obstructing an FBI investigation of the theft of nuclear secrets from Los Alamos Nuclear Laboratory; rejecting multiple requests for an independent counsel to investigate alleged fundraising abuses by then-Vice President Al Gore in the Clinton White House; undermining the criminal investigation of President Clinton by Kenneth Starr in the midst of the Lewinsky investigation; and planning the violent raid to seize then-six-year-old Elian Gonzalez at gunpoint in order to return him to Castro's Cuba. Moreover, there is his soft record on terrorism. Holder bypassed Justice Department procedures to push through Bill Clinton's scandalous presidential pardons and commutations, including for 16 members of FALN, a violent Puerto Rican terrorist group that orchestrated approximately 120 bombings in the United States, killing at least six people and permanently maiming dozens of others, including law enforcement officers. His record in the current administration is no better. As he did during the Clinton administration, Holder continues to ignore serious incidents of corruption that could impact his political bosses at the White House. For example, Holder has refused to investigate charges that the Obama political machine traded VIP access to the White House in exchange for campaign contributions – a scheme eerily similar to one hatched by Holder's former boss, Bill Clinton in the 1990s. The Holder Justice Department also came under fire for dropping a voter intimidation case against the New Black Panther Party. On Election Day 2008, Black Panthers dressed in paramilitary garb threatened voters as they approached polling stations. Holder has also failed to initiate a comprehensive Justice investigation of the notorious organization ACORN (Association of Community Organizations for Reform Now), which is closely tied to President Obama. There were allegedly more than 400,000 fraudulent ACORN voter registrations in the 2008 campaign. And then there were the journalist videos catching ACORN Housing workers advising undercover reporters on how to evade tax, immigration, and child prostitution laws. Holder's controversial decisions on new rights for terrorists and his attacks on previous efforts to combat terrorism remind many of the fact that his former law firm has provided and continues to provide pro bono representation to terrorists at Guantanamo Bay. Holder's politicization of the Justice Department makes one long for the days of Alberto Gonzales.


    6. Rep. Jesse Jackson, Jr. (D-IL)/ Senator Roland Burris (D-IL): One of the most serious scandals of 2009 involved a scheme by former Illinois Governor Rod Blagojevich to sell President Obama's then-vacant Senate seat to the highest bidder. Two men caught smack dab in the middle of the scandal: Senator Roland Burris, who ultimately got the job, and Rep. Jesse Jackson, Jr. According to the Chicago Sun-Times, emissaries for Jesse Jackson Jr., named "Senate Candidate A" in the Blagojevich indictment, reportedly offered $1.5 million to Blagojevich during a fundraiser if he named Jackson Jr. to Obama's seat. Three days later federal authorities arrested Blagojevich. Burris, for his part, apparently lied about his contacts with Blagojevich, who was arrested in December 2008 for trying to sell Obama's Senate seat. According to Reuters: "Roland Burris came under fresh scrutiny…after disclosing he tried to raise money for the disgraced former Illinois governor who named him to the U.S. Senate seat once held by President Barack Obama…In the latest of those admissions, Burris said he looked into mounting a fundraiser for Rod Blagojevich -- later charged with trying to sell Obama's Senate seat -- at the same time he was expressing interest to the then-governor's aides about his desire to be appointed." Burris changed his story five times regarding his contacts with Blagojevich prior to the Illinois governor appointing him to the U.S. Senate. Three of those changing explanations came under oath.


    7. President Barack Obama: During his presidential campaign, President Obama promised to run an ethical and transparent administration. However, in his first year in office, the President has delivered corruption and secrecy, bringing Chicago-style political corruption to the White House. Consider just a few Obama administration "lowlights" from year one: Even before President Obama was sworn into office, he was interviewed by the FBI for a criminal investigation of former Illinois Governor Rod Blagojevich's scheme to sell the President's former Senate seat to the highest bidder. (Obama's Chief of Staff Rahm Emanuel and slumlord Valerie Jarrett, both from Chicago, are also tangled up in the Blagojevich scandal.) Moreover, the Obama administration made the startling claim that the Privacy Act does not apply to the White House. The Obama White House believes it can violate the privacy rights of American citizens without any legal consequences or accountability. President Obama boldly proclaimed that "transparency and the rule of law will be the touchstones of this presidency," but his administration is addicted to secrecy, stonewalling far too many of Judicial Watch's Freedom of Information Act requests and is refusing to make public White House visitor logs as federal law requires. The Obama administration turned the National Endowment of the Arts (as well as the agency that runs the AmeriCorps program) into propaganda machines, using tax dollars to persuade "artists" to promote the Obama agenda. According to documents uncovered by Judicial Watch, the idea emerged as a direct result of the Obama campaign and enjoyed White House approval and participation. President Obama has installed a record number of "czars" in positions of power. Too many of these individuals are leftist radicals who answer to no one but the president. And too many of the czars are not subject to Senate confirmation (which raises serious constitutional questions). Under the President's bailout schemes, the federal government continues to appropriate or control -- through fiat and threats -- large sectors of the private economy, prompting conservative columnist George Will to write: "The administration's central activity -- the political allocation of wealth and opportunity -- is not merely susceptible to corruption, it is corruption." Government-run healthcare and car companies, White House coercion, uninvestigated ACORN corruption, debasing his office to help Chicago cronies, attacks on conservative media and the private sector, unprecedented and dangerous new rights for terrorists, perks for campaign donors – this is Obama's "ethics" record -- and we haven't even gotten through the first year of his presidency.


    8. Rep. Nancy Pelosi (D-CA): At the heart of the corruption problem in Washington is a sense of entitlement. Politicians believe laws and rules (even the U.S. Constitution) apply to the rest of us but not to them. Case in point: House Speaker Nancy Pelosi and her excessive and boorish demands for military travel. Judicial Watch obtained documents from the Pentagon in 2008 that suggest Pelosi has been treating the Air Force like her own personal airline. These documents, obtained through the Freedom of Information Act, include internal Pentagon email correspondence detailing attempts by Pentagon staff to accommodate Pelosi's numerous requests for military escorts and military aircraft as well as the speaker's 11th hour cancellations and changes. House Speaker Nancy Pelosi also came under fire in April 2009, when she claimed she was never briefed about the CIA's use of the waterboarding technique during terrorism investigations. The CIA produced a report documenting a briefing with Pelosi on September 4, 2002, that suggests otherwise. Judicial Watch also obtained documents, including a CIA Inspector General report, which further confirmed that Congress was fully briefed on the enhanced interrogation techniques. Aside from her own personal transgressions, Nancy Pelosi has ignored serious incidents of corruption within her own party, including many of the individuals on this list. (See Rangel, Murtha, Jesse Jackson, Jr., etc.)


    9. Rep. John Murtha (D-PA) and the rest of the PMA Seven: Rep. John Murtha made headlines in 2009 for all the wrong reasons. The Pennsylvania congressman is under federal investigation for his corrupt relationship with the now-defunct defense lobbyist PMA Group. PMA, founded by a former Murtha associate, has been the congressman's largest campaign contributor. Since 2002, Murtha has raised $1.7 million from PMA and its clients. And what did PMA and its clients receive from Murtha in return for their generosity? Earmarks -- tens of millions of dollars in earmarks. In fact, even with all of the attention surrounding his alleged influence peddling, Murtha kept at it. Following an FBI raid of PMA's offices earlier in 2009, Murtha continued to seek congressional earmarks for PMA clients, while also hitting them up for campaign contributions. According to The Hill, in April, "Murtha reported receiving contributions from three former PMA clients for whom he requested earmarks in the pending appropriations bills." When it comes to the PMA scandal, Murtha is not alone. As many as six other Members of Congress are currently under scrutiny according to The Washington Post. They include: Peter J. Visclosky (D-IN.), James P. Moran Jr. (D-VA), Norm Dicks (D-WA.), Marcy Kaptur (D-OH), C.W. Bill Young (R-FL.) and Todd Tiahrt (R-KS.). Of course rather than investigate this serious scandal, according to Roll Call House Democrats circled the wagons, "cobbling together a defense to offer political cover to their rank and file." The Washington Post also reported in 2009 that Murtha's nephew received $4 million in Defense Department no-bid contracts: "Newly obtained documents…show Robert Murtha mentioning his influential family connection as leverage in his business dealings and holding unusual power with the military."


    10. Rep. Charles Rangel (D-NY): Rangel, the man in charge of writing tax policy for the entire country, has yet to adequately explain how he could possibly "forget" to pay taxes on $75,000 in rental income he earned from his off-shore rental property. He also faces allegations that he improperly used his influence to maintain ownership of highly coveted rent-controlled apartments in Harlem, and misused his congressional office to fundraise for his private Rangel Center by preserving a tax loophole for an oil drilling company in exchange for funding. On top of all that, Rangel recently amended his financial disclosure reports, which doubled his reported wealth. (He somehow "forgot" about $1 million in assets.) And what did he do when the House Ethics Committee started looking into all of this? He apparently resorted to making "campaign contributions" to dig his way out of trouble. According to WCBS TV, a New York CBS affiliate: "The reigning member of Congress' top tax committee is apparently 'wrangling' other politicos to get him out of his own financial and tax troubles...Since ethics probes began last year the 79-year-old congressman has given campaign donations to 119 members of Congress, including three of the five Democrats on the House Ethics Committee who are charged with investigating him." Charlie Rangel should not be allowed to remain in Congress, let alone serve as Chairman of the powerful House Ways and Means Committee, and he knows it. That's why he felt the need to disburse campaign contributions to Ethics Committee members and other congressional colleagues.

    "A Low, Dishonest Decade: The press and politicians were asleep at the switch.," The Wall Street Journal, December 22, 2009 ---

    Stock-market indices are not much good as yardsticks of social progress, but as another low, dishonest decade expires let us note that, on 2000s first day of trading, the Dow Jones Industrial Average closed at 11357 while the Nasdaq Composite Index stood at 4131, both substantially higher than where they are today. The Nasdaq went on to hit 5000 before collapsing with the dot-com bubble, the first great Wall Street disaster of this unhappy decade. The Dow got north of 14000 before the real-estate bubble imploded.

    And it was supposed to have been such an awesome time, too! Back in the late '90s, in the crescendo of the Internet boom, pundit and publicist alike assured us that the future was to be a democratized, prosperous place. Hierarchies would collapse, they told us; the individual was to be empowered; freed-up markets were to be the common man's best buddy.

    Such clever hopes they were. As a reasonable anticipation of what was to come they meant nothing. But they served to unify the decade's disasters, many of which came to us festooned with the flags of this bogus idealism.

    Before "Enron" became synonymous with shattered 401(k)s and man-made electrical shortages, the public knew it as a champion of electricity deregulation—a freedom fighter! It was supposed to be that most exalted of corporate creatures, a "market maker"; its "capacity for revolution" was hymned by management theorists; and its TV commercials depicted its operations as an extension of humanity's quest for emancipation.

    Similarly, both Bank of America and Citibank, before being recognized as "too big to fail," had populist histories of which their admirers made much. Citibank's long struggle against the Glass-Steagall Act was even supposed to be evidence of its hostility to banking's aristocratic culture, an amusing image to recollect when reading about the $100 million pay reportedly pocketed by one Citi trader in 2008.

    The Jack Abramoff lobbying scandal showed us the same dynamics at work in Washington. Here was an apparent believer in markets, working to keep garment factories in Saipan humming without federal interference and saluted for it in an op-ed in the Saipan Tribune as "Our freedom fighter in D.C."

    But the preposterous populism is only one part of the equation; just as important was our failure to see through the ruse, to understand how our country was being disfigured.

    Ensuring that the public failed to get it was the common theme of at least three of the decade's signature foul-ups: the hyping of various Internet stock issues by Wall Street analysts, the accounting scandals of 2002, and the triple-A ratings given to mortgage-backed securities.

    The grand, overarching theme of the Bush administration—the big idea that informed so many of its sordid episodes—was the same anti-supervisory impulse applied to the public sector: regulators sabotaged and their agencies turned over to the regulated.

    The public was left to read the headlines and ponder the unthinkable: Could our leaders really have pushed us into an unnecessary war? Is the republic really dividing itself into an immensely wealthy class of Wall Street bonus-winners and everybody else? And surely nobody outside of the movies really has the political clout to write themselves a $700 billion bailout.

    What made the oughts so awful, above all, was the failure of our critical faculties. The problem was not so much that newspapers were dying, to mention one of the lesser catastrophes of these awful times, but that newspapers failed to do their job in the first place, to scrutinize the myths of the day in a way that might have prevented catastrophes like the financial crisis or the Iraq war.

    The folly went beyond the media, though. Recently I came across a 2005 pamphlet written by historian Rick Perlstein berating the big thinkers of the Democratic Party for their poll-driven failure to stick to their party's historic theme of economic populism. I was struck by the evidence Mr. Perlstein adduced in the course of his argument. As he tells the story, leading Democratic pollsters found plenty of evidence that the American public distrusts corporate power; and yet they regularly advised Democrats to steer in the opposite direction, to distance themselves from what one pollster called "outdated appeals to class grievances and attacks upon corporate perfidy."

    This was not a party that was well-prepared for the job of iconoclasm that has befallen it. And as the new bunch muddle onward—bailing out the large banks but (still) not subjecting them to new regulatory oversight, passing a health-care reform that seems (among other, better things) to guarantee private insurers eternal profits—one fears they are merely presenting their own ample backsides to an embittered electorate for kicking.

    Video: Fora.Tv on Institutional Corruption & The Economy Of Influence ---

    Climategate on Finnish TV ---

    Bob Jensen's threads on corrupt politicians can be found at

    "Going to School on Revenue Recognition," by Tom Selling, The Accounting Onion, December 5, 2009 --- Click Here

    Jensen Comment
    Another question is consistency and whether inconsistencies suggest earnings management.

    "Strategic Revenue Recognition to Achieve Earnings Benchmarks," Marcus L. Caylor, Marcus L. Caylor, SSRN, January 14, 2008 ---
    This paper is a free download.

     I examine whether managers use discretion in the two accounts related to revenue recognition, accounts receivable and deferred revenue, to avoid three common earnings benchmarks. I find that managers use discretion in both accounts to avoid negative earnings surprises. I find that neither of these accounts is used to avoid losses or earnings decreases. For a common sample of firms with both deferred revenue and accounts receivable, I show that managers prefer to exercise discretion in deferred revenue vis-à-vis accounts receivable. I provide a reason for why managers might prefer to manage a deferral rather than an accrual: lower costs to manage (i.e., no future cash consequences). My results suggest that if given the choice, managers prefer to use accounts that incur the lowest costs to the firm.

    Bob Jensen's threads on revenue recognition frauds are at

    Creative Earnings Management, Agency Theory, and Accounting Manipulations to Cook the Books
    The Controversy Over Earnings Smoothing and Other Manipulations ---

    "Making Revenue Recognition Simple and Informative," by Tom Selling, The Accounting Onion, December 20, 2009 --- Click Here

    December 21, 2009 reply from Bob Jensen

    Hi Tom,

    Although I like many of the points you make in the recent posting, I’m still troubled with upfront membership fees since these are really deferred profits if the monthly dues truly add zero to profits (by only contributing to variable costs).

    Moral Hazard
    This is an area teaming with moral hazard, especially given the sad history of health clubs bankruptcies. I think this is an area that should be regulated by requiring that these deferred profits be placed in a trust fund managed by an independent trustee. The club should only be allowed to realize the profits on some type of amortization schedule with a guarantee that unpaid profits be returned to members in the case of failed clubs.

    Without Regulation
    However, you are perhaps correct in the case of “lifetime” health clubs since most health clubs capture these profits with bankruptcy in a relatively short period of time. My use of the word “most” is anecdotal since I’ve not researched the proportion that actually declare bankruptcy in a relatively short period of time --- but I know it is a lot of such clubs that really commenced with honest intentions as well as the ones that planned on running off with membership fees at get go.

    Bob Jensen

    December 21, 2009 reply from Barbara Scofield

    I find a theoretical framework for recognizing initial membership fees in that these fees represent a future cash savings for the customers in each subsequent year.  In the absence of having paid the initial "one-time"membership fee, an initial membership fee would be owed each year, which is actually the common practice for YMCA and many other gyms.  In the mind of the customer the initial "one-time" membership fee is the present value of the additional amount they would be willing to pay for a monthly-fee-only membership for the time period of their expected participation or annual membership fees.  Most initial fees disproportionately accrue to the gym because people move, not because the gyms go out of business.  If a company has historical information about the length of continuous participation of its members, then an allocation across that average time period would better match the transactions economic effects from the point of view of the customer.

    Barbara W. Scofield, PhD, CPA
    Chair of Graduate Business Studies
    Professor of Accounting
    The University of Texas of the Permian Basin
    4901 E. University Dr.
    Odessa, TX   79762
    432-552-2183 (Office)
    817-988-5998 (Cell)


    December 21, 2009 reply from Bob Jensen

  • Although many who join health clubs and spas are pleased with their choices, others are not. They've complained to the Federal Trade Commission ("FTC") about high-pressure sales tactics, misrepresentations of facilities and services, broken cancellation and refund clauses, and lost membership fees as a result of clubs going out of business. To avoid these kinds of problems, it's best to look closely at the spa's fees, contractual requirements and facilities before you join. Here are some suggestions to help you make the right choice.
    "Health Clubs," ---
    Also see Review the Contracts

  • Some spas ask you to join - and pay - the first time you visit and offer incentives like special rates to entice you to sign on the spot. Resist. Wait a few days before deciding. Take the contract home and read it carefully. Before you sign, ask yourself:

  • ·         Is everything that the salesperson promised written in the contract? If a problem arises after you join, the contract probably will govern the dispute. And if something is not written in the contract, it's going to be difficult to prove your case.

  • ·         Is there a "cooling-off" period? Some spas give customers several days to reconsider after they've signed the contract.

  • ·         Could you get a refund for the unused portion of your membership if you had to cancel, say, because of a move or an injury? What if you simply stopped using the spa? Will the spa refund your money? Knowing the spa's cancellation policies is especially important if you choose a long-term membership.

  • ·         Can you join for a short time only? It may be to your advantage to join on a trial basis, say, for a few months, even if it costs a little more each month. If you're not enjoying the membership or using it as much as you had planned, you won't be committed to years of payments.

  • ·         Can you afford the payments? Consider the finance charges and annual percentage rates when you calculate the total cost of your membership. Break down the cost to weekly and even daily figures to get a better idea of what it really will cost to use the facility. =

    The Controversy Over Revenue Reporting and HFV 


    "One Cheer for Barney Frank:  The credit raters lose their oligopoly," The Wall Street Journal, December 23, 2009 ---

    The House-passed rewrite of financial regulation is a disappointment for investors and taxpayers. But one portion of the bill represents significant reform—and a vast improvement from an early draft we described in October.

    Congressmen Barney Frank and Paul Kanjorski (D., Pa.) have produced legislation that would likely end the credit-ratings racket enjoyed by Standard & Poor's, Moody's and Fitch. During the housing bubble, these government-anointed judges of credit risk slapped their triple-A ratings on billions of dollars of mortgage-backed securities. The consequences for investors were catastrophic.

    The Frank-Kanjorski provision that recently passed the House not only eliminates all laws that require the use of these "Nationally Recognized Statistical Ratings Organizations." The bill also instructs all the major financial regulators to remove such requirements from their rules. This is a subtle but enormously important change from the October draft, because most of the federal edicts that guaranteed profits for S&P and the gang were contained in agency rules, not laws.

    The House-passed bill also repeals an exemption that credit-raters have enjoyed from the Securities and Exchange Commission's Regulation Fair Disclosure. No longer will they have access to corporate information that is denied to average investors.

    Also removed from the bill was a bizarre "joint liability" scheme in which all the credit raters would be responsible for each other's work, so that a bad report by Fitch could be grounds for a lawsuit against Moody's. Unable to restrain themselves entirely from bestowing gifts upon trial lawyers, House Democrats have instead increased liability for the raters on their own work.

    The Senate should avoid such public display of affection toward the plaintiffs bar but embrace the House language that strikes at the heart of the ratings cartel. Obliterating investor requirements to use credit-ratings agencies would amount to major reform all by itself. Perhaps the House and Senate should simply agree on that, pass a bill now, and then start over with a new mission for regulatory reform: break up the too big to fail racket.

    "How Moody's sold its ratings - and sold out investors," by Kevin G. Hall, McClatchy Newspapers, October 18, 2009 ---

    Bob Jensen's threads on the history of credit rater scandals ---


    December 14, 2009 message from Roger Debreceny [roger@DEBRECENY.COM]

    See .. about a new privacy lab at ASU.

    PS Julie is also on Twitter at 

    Roger Debreceny
    School of Accountancy
    Shidler College of Business
    University of Hawai'i at Manoa
    2404 Maile Way
    Honolulu, HI 96822, USA
    Google Voice: +1 (513) 393-9393

    roger(at) rogersd(at)

    "Court to rule on privacy of texting:  Case involves messages sent on a pager owned by an employer," by Robert Barnes, The Washington Post, December 15. 2009 --- Click Here

    The Supreme Court will decide whether employees have a reasonable expectation of privacy for the text messages they send on devices owned by their employers.

    The case the court accepted Monday involves public employees, but a broadly written decision could hold a blueprint for private-workplace rules in a world in which communication via computers, e-mail and text messages plays a very large role.

    A federal appeals court in California decided that a police officer in the city of Ontario had a right to privacy regarding the texts he sent on his department-issued pager, even though his chief discovered that some of them were sexually explicit messages to his girlfriend. That court said the chief's decision to read the messages without a suspicion of wrongdoing on the part of the officer violated Fourth Amendment protections against unreasonable searches.

    The ruling, by a panel of the U.S. Court of Appeals for the 9th Circuit, was the first of its kind, and the judges acknowledged that the "recently minted standard of electronic communication via e-mails, text messages, and other means opens a new frontier in Fourth Amendment jurisprudence that has been little explored."

    Continued in article

    Brink's Modern Internal Auditing: A Common Body of Knowledge, 7th Edition
    by Robert Moeller, Wiley
    ISBN: 978-0-470-29303-4
    792 pages
    April 2009


    William D. Eggers is the Global Director of Deloitte's Public Sector research program. John O'Leary is a Research Fellow at the Ash Institute of the Harvard Kennedy School. Their new book is If We Can Put a Man on the Moon: Getting Big Things Done in Government (Harvard Business Press, 2009).

    "Why the Success of "Obama Care" Could Be Riskier Than Failure," by William D. Eggers and John O'Leary, Harvard Business School Blog, December 23, 2009 ---

    When President Obama launched his health reform effort, more than anything he wanted to avoid the mistakes of the 1993-1994 attempt at health care reform. His advisors have said repeatedly over these past months that they want something passed.

    Now it appears they will get their wish. It's certainly true that one way "Obama Care" could fail — the one everybody has been worrying about — is by never being passed into law. Another way it can fail, however, is if a poorly designed bill passes and then wreaks havoc during implementation. Indeed, this sort of design and execution failure could do greater lasting damage to the goals of health care reform than mere failure to pass a bill.

    The Obama administration, and all reform-minded public agencies and organizations, would do well to avoid some of the mistakes of 2004, when an all-Republican Congress and White House rammed through a Medicare prescription drug benefit. The messy, ill-considered implementation of what in essence was a massive giveaway program generated huge initial ill-will among seniors, the very group the benefit was designed to serve.

    Ultimately, the GOP's Medicare prescription drug reform stands as a model for achieving short-term legislative success that creates an implementation nightmare. In more general terms, those pushing for change saw official approval as the finish line rather than, more accurately, as the starting line.

    Here are some of the key risks that the 2004 Congress should have had in mind in their push to get Medicare reform done — and which should be front-of-mind for change-leaders now:

    The risk of ramming it through. The process by which Medicare Part D became legislative reality wasn't pretty. It involved low-balled cost estimates, an unprecedented all-night vote, and high-pressure tactics from Republicans to sway votes that cost Tom DeLay an ethics rebuke. With all the high-stakes political gamesmanship, any actual review of the proposed policy for "implementability" was minimal to non-existent. A related lesson as the Democrats now drive health care and other reforms through Congress: political memory rarely fades. Cut-throat tactics lead inexorably to future in-kind retribution. Public leaders must stop the vicious cycle in which avenging political battle scars trumps practical lessons learned from prior missteps of execution.

    Forgetting who you're designing the reform for. Seniors were totally confused by their new "benefit." "This whole program is so complicated that I've stayed awake thinking, 'How can a brain come up with anything like this?'" lamented a seventy-nine-year old, retired business manager. Americans do not normally lie awake pondering the design of a federal program. But the Medicare prescription drug program was something special. "I have a PhD, and it's too complicated to suit me," said a seventy-three-year old retired, chemist.

    Giving the nation's elderly voters apoplexy was not what Republicans had intended. But lawmakers had designed the legislation primarily to curry favor with other "stakeholders" — big pharmaceutical firms, health plans, employers, rural hospitals, and senior advocates such as the AARP — instead of designing it to work in the real world for the "end consumer" of the reform, i.e. everyday senior citizens.

    The number of plans the typical senior had to sort through depended on where he or she lived. In Colorado, retirees faced a choice of 55 plans from 24 companies. Residents of Pennsylvania selected from 66 plans.

    "The program is so poorly designed and is creating so much confusion that it's having a negative effect on most beneficiaries," said one pharmacist. "It's making people cynical about the whole process — the new program, the government's help."

    Unrealistic timeline and scale. "No company would ever launch countrywide a new product to 40 million people all at once," explained Kathleen Harrington, the Bush political appointee at the Centers for Medicare and Medicaid Services who led the launch of Medicare Part D. "No one would ever say that you have to get all of the platforms, all of the systems developed for this and working within six months." Nobody except Congress, who in fact tried to do this, giving scant consideration to implementation challenges and the inherent difficulty in changing a well-established system.

    The launch from hell. The computer system cobbled together to support the new benefit crashed the very first day coverage took effect. System errors slapped seniors with excessive charges or denied them their drugs altogether. Computer glitches generated calls to the telephone hotlines, which quickly became overloaded.

    While eventually the program was turned around thanks to some heroic efforts by senior federal executives, the days and weeks following the January 2006 opening of benefit enrollment were a disaster — caused primarily by a dysfunctional design process and lack of an implementation mindset.

    Lessons learned. Both Medicare Part D, as well as what we have seen of the current, huge effort toward health care reform, highlight why government has such a hard time dealing with complex problems. But the basic truth is simple: ultimately, to be successful, a health reform bill has to do two things — it has to pass through Congress, and it has to actually work in the real world.

    These two considerations often work against each other. For political reasons, artificial deadlines are introduced. To appease interest groups, regulations are altered, or goodies buried in the bill. These measures are almost always taken to secure passage, but with little (or not enough) thought given to how they might hinder implementation.

    Given the problems that arose in the comparatively simple launch of a new drug benefit to seniors, policymakers should be examining every risk inherent in implementing any serious overhaul of one-seventh of our economy. The legislative process needs to produce health care reform that can work in the real world or the backlash from a failed implementation will be furious.

    William D. Eggers is the Global Director of Deloitte's Public Sector research program. John O'Leary is a Research Fellow at the Ash Institute of the Harvard Kennedy School. Their new book is If We Can Put a Man on the Moon: Getting Big Things Done in Government (Harvard Business Press, 2009).

    Bob Jensen's threads on health care are at

    "Public Policy as Public Corruption," by Michael Gerson, Townhall, December  23, 2009 ---

    "Black Education," by Walter E. Williams (a black economics professor), Townhall, December 23, 2009 ---

  • Detroit's (predominantly black) public schools are the worst in the nation and it takes some doing to be worse than Washington, D.C. Only 3 percent of Detroit's fourth-graders scored proficient on the most recent National Assessment of Education Progress (NAEP) test, sometimes called "The Nation's Report Card." Twenty-eight percent scored basic and 69 percent below basic. "Below basic" is the NAEP category when students are unable to demonstrate even partial mastery of knowledge and skills fundamental for proficient work at their grade level. It's the same story for Detroit's eighth-graders. Four percent scored proficient, 18 percent basic and 77 percent below basic.

    Michael Casserly, executive director of the D.C.-based Council on Great City Schools, in an article appearing in Crain's Detroit Business, (12/8/09) titled, "Detroit's Public Schools Post Worst Scores on Record in National Assessment," said, "There is no jurisdiction of any kind, at any level, at any time in the 30-year history of NAEP that has ever registered such low numbers." The academic performance of black students in other large cities such as Philadelphia, Chicago, New York and Los Angeles is not much better than Detroit and Washington.

    What's to be done about this tragic state of black education? The education establishment and politicians tell us that we need to spend more for higher teacher pay and smaller class size. The fact of business is higher teacher salaries and smaller class sizes mean little or nothing in terms of academic achievement. Washington, D.C., for example spends over $15,000 per student, has class sizes smaller than the nation's average, and with an average annual salary of $61,195, its teachers are the most highly paid in the nation.

    What about role models? Standard psychobabble asserts a positive relationship between the race of teachers and administrators and student performance. That's nonsense. Black academic performance is the worst in the very cities where large percentages of teachers and administrators are black, and often the school superintendent is black, the mayor is black, most of the city council is black and very often the chief of police is black.

    Black people have accepted hare-brained ideas that have made large percentages of black youngsters virtually useless in an increasingly technological economy. This destruction will continue until the day comes when black people are willing to turn their backs on liberals and the education establishment's agenda and confront issues that are both embarrassing and uncomfortable. To a lesser extent, this also applies to whites because the educational performance of many white kids is nothing to write home about; it's just not the disaster that black education is.

    Many black students are alien and hostile to the education process. They have parents with little interest in their education. These students not only sabotage the education process, but make schools unsafe as well. These students should not be permitted to destroy the education chances of others. They should be removed or those students who want to learn should be provided with a mechanism to go to another school.

    Another issue deemed too delicate to discuss is the overall quality of people teaching our children. Students who have chosen education as their major have the lowest SAT scores of any other major. Students who have an education degree earn lower scores than any other major on graduate school admission tests such as the GRE, MCAT or LSAT. Schools of education, either graduate or undergraduate, represent the academic slums of most any university. They are home to the least able students and professors. Schools of education should be shut down.

    Yet another issue is the academic fraud committed by teachers and administrators. After all, what is it when a student is granted a diploma certifying a 12th grade level of achievement when in fact he can't perform at the sixth- or seventh-grade level?

    Prospects for improvement in black education are not likely given the cozy relationship between black politicians, civil rights organizations and teacher unions.

    Dr. Williams serves on the faculty of George Mason University as John M. Olin Distinguished Professor of Economics and is the author of More Liberty Means Less Government: Our Founders Knew This Well.

    Bob Jensen’s threads on higher education controversies are at

    Another one from that Ketz guy.

    "Hertz Converts While the SEC Inverts," by: J. Edward Ketz, SmartPros, December 2009 ---

  • Hertz Global Holdings did a 180 recently by righting a dumb mistake it made earlier. Before getting swallowed up by a legal vortex it created, Hertz just walked away before it wasted a lot of shareholder money.

  • I applaud its managers for coming to their collective senses.

    As I discussed in an
    earlier column, Hertz announced on September 28 that it had sued Audit Integrity and its CEO Jack Zwingli for defamation.  This alleged defamation occurred because Audit Integrity asserted in one of its research reports that Hertz faced significant risk of corporate bankruptcy.

    Audit Integrity had named 19 other firms that also faced a significant chance of corporate failure, and managers at Hertz attempted to convince them also to sue Audit Integrity.  Executives at the other business enterprises did not make the same error.

    I described this case here in mid-October in my essay “
    Hertz Diverts and Subverts”.  My response indicated surprise that Hertz managers felt that they had a chance of surviving early motions to dismiss the case.  One look at the financial report would have revealed the unhealthy state of the business entity.  Negative earnings and negative retained earnings and a terrible debt-to-equity ratio are signals of distress to the investment community.

    Further, anybody could have employed Altman’s well known model of predicting bankruptcy and discovered Z-scores for Hertz that displayed very poor results.  It wouldn’t take a rocket scientist’s nanny to figure out that Hertz faces financial troubles.

    I assume that some Hertz managers or directors read my column.  After seeing the impeccable logic of my op-ed, they reconsidered the lawsuit against Audit Integrity.  Then, on or about November 15, Hertz dropped the lawsuit.  Publicly Hertz said that it had a good third quarter and wanted to move forward.  I accept their wanting to save face and not credit my logic for their decision.  It was a wise move even if I didn’t obtain proper attribution.

  • I was not successful on all counts, however.  In that essay I also encouraged the SEC and its chair Mary Schapiro to stop the intimidation of research analysts.  Audit Integrity also complained to the SEC about issuer intimidation, and in a letter to the firm, Mary Schapiro said she could not do anything.

  • Nothing?  I find it incredible that she cannot make a speech decrying corporate interference with legitimate work by research analysts.  I find it amazing that she cannot call up members of Congress and express her view that there ought to be a law against issuer intimidation.  I find it perplexing that she cannot or will not use the bully pulpit to stand up for investors, which I thought was the SEC’s raison d’être.

  • The Hertz decision is a win for everyone; unfortunately, it is marred by the inexplicable inaction of the SEC.  The battle for truth in accounting continues.

    "Why Accounting Needs Your Accruals," by Karen Berman and Joe Knight, Harvard Business School Blog, December 18, 2009 ---

    Managers across the country dread the call from accounting at this time of year — we need your accruals. Many managers feel that the process of putting together their accruals is tedious, and, dare we say, a waste of time. They wonder, "Why does accounting need this information? Is this another piece of information that goes into the black hole of a spreadsheet, never to be seen again?"

    Accruals, especially at this time of year, are critical to good accounting. They help to ensure you have good information about the financial health of your company. And, they help to keep the books "clean," that is, keeping things that happened in 2009 in 2009 so that the picture your company presents with its financials tells the 2009 story in its entirety.

    At its core, accrual accounting is fairly simple: the numbers in financial statements should reflect the work and activities that occurred in the time period of those statements. So, if the income statement is for December, then the revenue and expenses in that statement are for the revenue that was earned (for example, was the product delivered in December?) and the expenses that it took to make that revenue (for example, the cost of materials for the revenue that was earned in December). (A related and important accounting principle here is the matching principle: match expenses to the revenue the expenses helped to bring in.)

    Here's the problem: invoices, bills and cash don't always line up in the same month the activities occurred. Say an invoice comes in for something that happened a month ago. It should have been "accrued for," so that, even though there wasn't any invoice, the amount is in the books for the month that the activity occurred. On the revenue side, say a product was delivered, but the client didn't pay until two months later. That revenue had to be "accrued" for in the month of delivery, even though neither the invoice, nor the payment for the product happened in that month.

    Another example of accruals is when we pay for something in one month, but we get the benefit for more than just that one month. Say you pay your insurance bill for the whole year in January. That insurance covers 12 months, not just January. So, the company accrues for that, and the books reflect 1/12 of that payment in every month of the year.

    Too much accounting? Just remember that you are part of the process of creating as close a picture as possible of what happened in 2009. And that is important for a whole host of reasons, because the financial statements are used to help make lots of decisions, including those about hiring (or layoffs), raises, capital purchases, new product plans, and so on.

    Finally, here are four key things to remember about accruing:

    1. Accruals can apply to revenue, operating expenses and capital expenses. Salaries can be a big part of accruals. 2. You don't need an invoice to accrue. You do need to know how much the invoice will be. 3. You may have to make assumptions and include estimates in your accrual numbers. That's OK, just document them. 4. Think about the activities that occurred in 2009, and make sure they are reflected in the books for 2009. There may be some projects that go into 2010. Work with your accounting department to decide how to handle those.

    Karen Berman is founder and co-owner of the Business Literacy Institute, with Joe Knight. Joe is CFO at Setpoint Companies. They are the authors of Financial Intelligence.

    Jensen Comment
    This article probably does not show any business manager or accounting worker anything that they don't already know, and it probably makes little sense to anybody who never had the equivalent of Accounting 101.

    More to the point is why mangers and investors need accrual accounting statements rather than just a cash flow statement ---

    The 200th SmartPros Op/Ed Article from that timid (ha ha) Ketz guy
    Don't look for him beating the drums for IFRS in the U.S.!
    But there is a whole lot more in his columns that deal mostly with bad stuff in corporate accounting.

    "200th Column: Retrospection Op/Ed," By: J. Edward Ketz, SmartPros, December 2009 --- 
    And no end in sight (gratefully)

    Thanks Ed.
    I don't always agree with you, but mostly I do agree with you.
    You do have a way with words.

    That some bankers have ended up in prison is not a matter of scandal, but what is outrageous is the fact that all the others are free.
    Honoré de Balzac

    "Banks Bundled Bad Debt, Bet Against It and Won," by Gretchen Morgenson and Louise Story, The New York Times, December 23, 2009 ---
    My friend Larry clued me in to this link.

    In late October 2007, as the financial markets were starting to come unglued, a Goldman Sachs trader, Jonathan M. Egol, received very good news. At 37, he was named a managing director at the firm.

    Mr. Egol, a Princeton graduate, had risen to prominence inside the bank by creating mortgage-related securities, named Abacus, that were at first intended to protect Goldman from investment losses if the housing market collapsed. As the market soured, Goldman created even more of these securities, enabling it to pocket huge profits.

    Goldman’s own clients who bought them, however, were less fortunate.

    Pension funds and insurance companies lost billions of dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals who asked not to be identified because they have confidentiality agreements with the firm.

    Goldman was not the only firm that peddled these complex securities — known as synthetic collateralized debt obligations, or C.D.O.’s — and then made financial bets against them, called selling short in Wall Street parlance. Others that created similar securities and then bet they would fail, according to Wall Street traders, include Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc., an investment company whose parent firm was overseen by Lewis A. Sachs, who this year became a special counselor to Treasury Secretary Timothy F. Geithner.

    How these disastrously performing securities were devised is now the subject of scrutiny by investigators in Congress, at the Securities and Exchange Commission and at the Financial Industry Regulatory Authority, Wall Street’s self-regulatory organization, according to people briefed on the investigations. Those involved with the inquiries declined to comment.

    While the investigations are in the early phases, authorities appear to be looking at whether securities laws or rules of fair dealing were violated by firms that created and sold these mortgage-linked debt instruments and then bet against the clients who purchased them, people briefed on the matter say.

    One focus of the inquiry is whether the firms creating the securities purposely helped to select especially risky mortgage-linked assets that would be most likely to crater, setting their clients up to lose billions of dollars if the housing market imploded.

    Some securities packaged by Goldman and Tricadia ended up being so vulnerable that they soured within months of being created.

    Goldman and other Wall Street firms maintain there is nothing improper about synthetic C.D.O.’s, saying that they typically employ many trading techniques to hedge investments and protect against losses. They add that many prudent investors often do the same. Goldman used these securities initially to offset any potential losses stemming from its positive bets on mortgage securities.

    But Goldman and other firms eventually used the C.D.O.’s to place unusually large negative bets that were not mainly for hedging purposes, and investors and industry experts say that put the firms at odds with their own clients’ interests.

    “The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”

    Investment banks were not alone in reaping rich rewards by placing trades against synthetic C.D.O.’s. Some hedge funds also benefited, including Paulson & Company, according to former Goldman workers and people at other banks familiar with that firm’s trading.

    Michael DuVally, a Goldman Sachs spokesman, declined to make Mr. Egol available for comment. But Mr. DuVally said many of the C.D.O.’s created by Wall Street were made to satisfy client demand for such products, which the clients thought would produce profits because they had an optimistic view of the housing market. In addition, he said that clients knew Goldman might be betting against mortgages linked to the securities, and that the buyers of synthetic mortgage C.D.O.’s were large, sophisticated investors, he said.

    The creation and sale of synthetic C.D.O.’s helped make the financial crisis worse than it might otherwise have been, effectively multiplying losses by providing more securities to bet against. Some $8 billion in these securities remain on the books at American International Group, the giant insurer rescued by the government in September 2008.

    From 2005 through 2007, at least $108 billion in these securities was issued, according to Dealogic, a financial data firm. And the actual volume was much higher because synthetic C.D.O.’s and other customized trades are unregulated and often not reported to any financial exchange or market.

    Goldman Saw It Coming

    Before the financial crisis, many investors — large American and European banks, pension funds, insurance companies and even some hedge funds — failed to recognize that overextended borrowers would default on their mortgages, and they kept increasing their investments in mortgage-related securities. As the mortgage market collapsed, they suffered steep losses.

    Continued in article

    Bob Jensen's threads on banking and investment banking frauds are at

    Accounting for Collateralized Debt Obligations (CDOs)

    As to CDOs in VIEs, you might take a look at

    Evergreen Investment Management case at

     Bob Jensen's threads on CDO accounting ---

    Bob Jensen's threads on SPEs, SPVs, and VIEs ---

    How to download journal articles and books

    When I said yesterday in a reply to Pat that I use the Trinity University Library’s subscription to JSTOR to download free copies of AAA articles like The Accounting Review articles, I should’ve pointed out that, since I pay for the AAA Electronic Journals access, I use JSTOR only for articles published 1925-1998. In my case I access JSTOR using a password provided to me by the Trinity University Library that subscribes to JSTOR and many other electronic literature databases.

    Beginning in 1999, the AAA created digital archives that subscribers can access directly, but there is a subscription fee added on to membership dues to access those archives. Students may download, without charge, JSTOR archived articles through their college library subscription. JSTOR is not usually as immediately up to date for the most recent articles as the AAA site ---
    People without access to JSTOR can pay for copies of AAA journal articles published after 1998.

    Of course there are also free hard copies of journals available in most college libraries, and these articles can be photocopied or scanned for educational purposes. As you grow older, you find yourself almost choked out of your office with stacks of old journals. I commenced giving most of my hard copy journals away even before I retired. Services like JSTOR allow me to download and store articles of interest in a hard drive.

    MAAW has a convenient indexing of AAA journals back to when they were first published. This is a great free service generously and meticulously provided by Professor James Martin. However, after locating a historic AAA journal article, you will still have to use something like JSTOR to actually download the complete article ---
    Thank you for sharing James.

    I personally, however, have hung onto a lot of books that now perhaps have some antique value. Eventually, Google Advanced Book Search and similar archiving services will have most old accounting books available for free digital downloading. Google Advanced Book Search is finally up to speed for many, many antique accounting books ---
    Give it a try with an antique accounting book of particular interest to you such as Truth in Accounting by Kenneth MacNeal.

     Another thing about Google Books is that it often provides other information about books and links to articles about selected books. Feed in the term Pacioli and see what you get at

     One problem I still have with Google Advanced Book Search is that it will often link to later editions of old books rather than earliest editions. For example, on my desk I have a hard copy of the 1932 edition of Accountants’ Handbook edited by William A. Payton. When I use Google Advanced Book Search, however, I only find a link to the 1953 edition. If I search for the book title, Payton, and 1932 I do not find any hits.


    Happy hunting.
    I have hundreds of links to electronic literature at

    Bob Jensen's search helpers are at

    A New One from Francine
    "Continuing The Conversation: If Auditors Weren’t There, Why Not?" by Francine McKenna, re: The Auditors, Decmeber 14, 2009 ---

    Jim Peterson and I talk often.  It was my lucky day when I found him writing for the International Herald Tribune about auditors and litigation and the future of the profession.  There’s quite an archive there to draw from.  Jim not only has the experience but the chops to write about the subjects that I feel strongly about.  Albeit I’m a little more fun, but…I told a mutual admirer recently not to judge me more beautiful than Jim.  He hasn’t seen Jim in stilettos nor me in a bow tie…

    Jim opened a dialogue with me and the others who write frequently on this topic, like Dennis Howlett and Richard Murphy, via his post today at Re: Balance.  The subject is, “If not, why not…” We’re talking about the auditors’ failure to be a force either before, during, or after the financial crisis.

    “Here – in response to the always tart-tongued Francine — is why the auditors weren’t there:

    The simple if depressing reason is that their core product has long since been judged irrelevant. The standard auditor’s report is an anachronism — having lost any value it may once have had, except for legally-required compliance (here).

    If that single page disappeared from corporate annual reports, no honest user of financial information would admit to missing it. Nor, offered the choice, would any rational CFO pay the fees to obtain it.”

    If no one but me asks, since no one cares, then what are we doing here?  Only legally required compliance keeps us walking like dizzy children through this hall of mirrors, never reaching sunshine.

    “…the fundamental issue of trustworthiness – on which the entire value of the auditors’ franchise perilously rests – is put under scrutiny when they are effectively sidelined for want of influence and capacity to persuade.”

    Continued in article

    Where Were the Auditors as Poison Was Being Added to Mortgage Loans on Main Street ---

    Will the Big Auditing Firms Survive the Shareholder/Pension Fund Lawsuits ---


    Never ending fraud in Medicare billings: 
    Unaudited overpayments, unqualified items, and criminal vendors

    One spending sinkhole can be traced to large medical-equipment suppliers, device makers, and pharmaceutical companies, which government auditors and industry veterans describe as a recalcitrant bunch. Medical manufacturers know public agencies generally pay first and ask questions later—if ever. Medicare receives 4.4 million claims daily; fewer than 3% are reviewed before being paid within the legally required 30 days.

    "A Hole in Health-Care Reform: Overbilling by medical-equipment suppliers, device makers, and drug companies has cost taxpayers billions. New legislation will do little to stem the tide," by Chad Terhune, Business Week, December 10, 2009 --- 

    President Barack Obama and his Democratic allies on Capitol Hill say that a vast expansion of health coverage can be funded by squeezing out waste and fraud rather than cutting benefits. Whether that turns out to be true may help determine the success of the sweeping reform package being debated by Congress. Slashing costs is no easy task, and stopping fraud is even tougher. No less than $47 billion in Medicare spending went to dubious claims in the year ended Sept. 30, according to the U.S. Health & Human Services Dept. That's 10.7% of the $440 billion program that subsidizes care for the elderly. Medicaid, the government program for the poor, lets billions trickle away at roughly the same rate. The $10 million annual increase that Congress is allocating to fight fraud may not be enough to do the trick.

    One spending sinkhole can be traced to large medical-equipment suppliers, device makers, and pharmaceutical companies, which government auditors and industry veterans describe as a recalcitrant bunch. Medical manufacturers know public agencies generally pay first and ask questions later—if ever. Medicare receives 4.4 million claims daily; fewer than 3% are reviewed before being paid within the legally required 30 days.

    One way to get a sense of the scale of the seepage—and the challenge facing the Administration—is to look at whistleblower lawsuits filed under the federal False Claims Act. That law allows company employees to sue on behalf of the government to recover improperly claimed federal funds.

    A suit filed by William A. Thomas, a former senior sales manager at Siemens Medical Solutions USA, one of the nation's largest medical suppliers and a unit of German engineering giant Siemens (SI), offers a case study in the difficulty of containing costs. Thomas, a 15-year Siemens Medical veteran, alleges in federal court in Philadelphia that for years the company overbilled the Veterans Affairs Dept. and other government agencies by hundreds of millions of dollars for MRI and CT scan machines and other expensive equipment. These high-tech systems—used to examine everything from damaged knees to suspected cancers—cost $500,000 to $3 million apiece, sometimes more. Thomas, who retired from Siemens in 2008, claims that with no justification other than larger profits, his former employer charged its government customers far more than private-sector buyers for the same equipment.

    "Billions and billions could be saved with the right government regulation and oversight applied to health care," Thomas, 56, says in an interview. "But I think corporations will continue running circles around the federal government."

    In court filings, Siemens has denied any wrongdoing and has sought to have the Thomas suit dismissed. A company spokesman, Lance Longwell, declined to elaborate for this article, citing the litigation.

    The Thomas suit illustrates some of the vagaries of False Claims Act cases, hundreds of which are filed every year against government contractors in a range of industries. As the plaintiff, Thomas stands to pocket up to 30% of any court recovery, with the rest going to the Treasury. The Justice Dept., which can intervene in such suits to help steer them, announced last year that it will stay out of the case against Siemens for now. Yet Thomas' allegations have helped drive a parallel criminal investigation of Siemens' equipment marketing practices by the Defense Dept. and the U.S. Attorney's Office in Philadelphia.

    In April federal investigators searched for records at the headquarters of Siemens Medical in Malvern, Pa., a suburb of Philadelphia. Ed Bradley, special agent-in-charge of the Defense Criminal Investigative Service, confirmed that the investigation is continuing but declined to comment further.

    Longwell, the Siemens Medical spokesman, says the company is cooperating with criminal investigators. In March, just weeks before the search of its offices, Siemens won a new $267 million contract to provide radiology equipment to the U.S.

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    Jensen Comment
    The GAO has declared that many huge sink holes for fraud and waste are unauditable --- the Pentagon, the IRS, Medicare, and the list goes on and on. But the Congress that funds these programs is manipulated by special interest groups who do not want these audits. The new sink hole on the block is almost anything green.

    What is happening to America?

    Bob Jensen's threads on health care are at

    "Taxpayers distrustful of government financial reporting," AccountingWeb, February 22, 2008 ---

    The federal government is failing to meet the financial reporting needs of taxpayers, falling short of expectations, and creating a problem with trust, according to survey findings released by the Association of Government Accountants (AGA). The survey, Public Attitudes to Government Accountability and Transparency 2008, measured attitudes and opinions towards government financial management and accountability to taxpayers. The survey established an expectations gap between what taxpayers expect and what they get, finding that the public at large overwhelmingly believes that government has the obligation to report and explain how it generates and spends its money, but that that it is failing to meet expectations in any area included in the survey.

    The survey further found that taxpayers consider governments at the federal, state, and local levels to be significantly under-delivering in terms of practicing open, honest spending. Across all levels of government, those surveyed held "being open and honest in spending practices" vitally important, but felt that government performance was poor in this area. Those surveyed also considered government performance to be poor in terms of being "responsible to the public for its spending." This is compounded by perceived poor performance in providing understandable and timely financial management information.

    The survey shows:

  • The American public is most dissatisfied with government financial management information disseminated by the federal government. Seventy-two percent say that it is extremely or very important to receive this information from the federal government, but only 5 percent are extremely or very satisfied with what they receive.


  • Seventy-three percent of Americans believe that it is extremely or very important for the federal government to be open and honest in its spending practices, yet only 5 percent say they are meeting these expectations.


  • Seventy-one percent of those who receive financial management information from the government or believe it is important to receive it, say they would use the information to influence their vote.

    Relmond Van Daniker, Executive Director at AGA, said, "We commissioned this survey to shed some light on the way the public perceives those issues relating to government financial accountability and transparency that are important to our members. Nobody is pretending that the figures are a shock, but we are glad to have established a benchmark against which we can track progress in years to come."

    He continued, "AGA members working in government at all levels are in the very forefront of the fight to increase levels of government accountability and transparency. We believe that the traditional methods of communicating government financial information -- through reams of audited financial statements that have little relevance to the taxpayer -- must be supplemented by government financial reporting that expresses complex financial details in an understandable form. Our members are committed to taking these concepts forward."

    Justin Greeves, who led the team at Harris Interactive that fielded the survey for the AGA, said, "The survey results include some extremely stark, unambiguous findings. Public levels of dissatisfaction and distrust of government spending practices came through loud and clear, across every geography, demographic group, and political ideology. Worthy of special note, perhaps, is a 67 percentage point gap between what taxpayers expect from government and what they receive. These are significant findings that I hope government and the public find useful."

    This survey was conducted online within the United States by Harris Interactive on behalf of the Association of Government Accountants between January 4 and 8, 2008 among 1,652 adults aged 18 or over. Results were weighted as needed for age, sex, race/ethnicity, education, region, and household income. Propensity score weighting was also used to adjust for respondents' propensity to be online. No estimates of theoretical sampling error can be calculated.

    You can read the Survey Report, including a full methodology and associated commentary.

  • "The Government Is Wasting Your Tax Dollars! How Uncle Sam spends nearly $1 trillion of your money each year," by Ryan Grim with Joseph K. Vetter, Readers Digest, January 2008, pp. 86-99 ---

    1. Taxes:
    Cheating Shows. The Internal Revenue Service estimates that the annual net tax gap—the difference between what's owed and what's collected—is $290 billion, more than double the average yearly sum spent on the wars in Iraq and Afghanistan.

    About $59 billion of that figure results from the underreporting and underpayment of employment taxes. Our broken system of immigration is another concern, with nearly eight million undocumented workers having a less-than-stellar relationship with the IRS. Getting more of them on the books could certainly help narrow that tax gap.

    Going after the deadbeats would seem like an obvious move. Unfortunately, the IRS doesn't have the resources to adequately pursue big offenders and their high-powered tax attorneys. "The IRS is outgunned," says Walker, "especially when dealing with multinational corporations with offshore headquarters."

    Another group that costs taxpayers billions: hedge fund and private equity managers. Many of these moguls make vast "incomes" yet pay taxes on a portion of those earnings at the paltry 15 percent capital gains rate, instead of the higher income tax rate. By some estimates, this loophole costs taxpayers more than $2.5 billion a year.

    Oil companies are getting a nice deal too. The country hands them more than $2 billion a year in tax breaks. Says Walker, "Some of the sweetheart deals that were negotiated for drilling rights on public lands don't pass the straight-face test, especially given current crude oil prices." And Big Oil isn't alone. Citizens for Tax Justice estimates that corporations reap more than $123 billion a year in special tax breaks. Cut this in half and we could save about $60 billion.

    The Tab* Tax Shortfall: $290 billion (uncollected taxes) + $2.5 billion (undertaxed high rollers) + $60 billion (unwarranted tax breaks) Starting Tab: $352.5 billion

    2. Healthy Fixes.
    Medicare and Medicaid, which cover elderly and low-income patients respectively, eat up a growing portion of the federal budget. Investigations by Sen. Tom Coburn (R-OK) point to as much as $60 billion a year in fraud, waste and overpayments between the two programs. And Coburn is likely underestimating the problem.

    The U.S. spends more than $400 per person on health care administration costs and insurance -- six times more than other industrialized nations.

    That's because a 2003 Dartmouth Medical School study found that up to 30 percent of the $2 trillion spent in this country on medical care each year—including what's spent on Medicare and Medicaid—is wasted. And with the combined tab for those programs rising to some $665 billion this year, cutting costs by a conservative 15 percent could save taxpayers about $100 billion. Yet, rather than moving to trim fat, the government continues such questionable practices as paying private insurance companies that offer Medicare Advantage plans an average of 12 percent more per patient than traditional Medicare fee-for-service. Congress is trying to close this loophole, and doing so could save $15 billion per year, on average, according to the Congressional Budget Office.

    Another money-wasting bright idea was to create a giant class of middlemen: Private bureaucrats who administer the Medicare drug program are monitored by federal bureaucrats—and the public pays for both. An October report by the House Committee on Oversight and Government Reform estimated that this setup costs the government $10 billion per year in unnecessary administrative expenses and higher drug prices.

    The Tab* Wasteful Health Spending: $60 billion (fraud, waste, overpayments) + $100 billion (modest 15 percent cost reduction) + $15 billion (closing the 12 percent loophole) + $10 billion (unnecessary Medicare administrative and drug costs) Total $185 billion Running Tab: $352.5 billion +$185 billion = $537.5 billion

    3. Military Mad Money.
    You'd think it would be hard to simply lose massive amounts of money, but given the lack of transparency and accountability, it's no wonder that eight of the Department of Defense's functions, including weapons procurement, have been deemed high risk by the GAO. That means there's a high probability that money—"tens of billions," according to Walker—will go missing or be otherwise wasted.

    The DOD routinely hands out no-bid and cost-plus contracts, under which contractors get reimbursed for their costs plus a certain percentage of the contract figure. Such deals don't help hold down spending in the annual military budget of about $500 billion. That sum is roughly equal to the combined defense spending of the rest of the world's countries. It's also comparable, adjusted for inflation, with our largest Cold War-era defense budget. Maybe that's why billions of dollars are still being spent on high-cost weapons designed to counter Cold War-era threats, even though today's enemy is armed with cell phones and IEDs. (And that $500 billion doesn't include the billions to be spent this year in Iraq and Afghanistan. Those funds demand scrutiny, too, according to Sen. Amy Klobuchar, D-MN, who says, "One in six federal tax dollars sent to rebuild Iraq has been wasted.")

    Meanwhile, the Pentagon admits it simply can't account for more than $1 trillion. Little wonder, since the DOD hasn't been fully audited in years. Hoping to change that, Brian Riedl of the Heritage Foundation is pushing Congress to add audit provisions to the next defense budget.

    If wasteful spending equaling 10 percent of all spending were rooted out, that would free up some $50 billion. And if Congress cut spending on unnecessary weapons and cracked down harder on fraud, we could save tens of billions more.

    The Tab* Wasteful military spending: $100 billion (waste, fraud, unnecessary weapons) Running Tab: $537.5 billion + $100 billion = $637.5 billion

    4. Bad Seeds.
    The controversial U.S. farm subsidy program, part of which pays farmers not to grow crops, has become a giant welfare program for the rich, one that cost taxpayers nearly $20 billion last year.

    Two of the best-known offenders: Kenneth Lay, the now-deceased Enron CEO, who got $23,326 for conservation land in Missouri from 1995 to 2005, and mogul Ted Turner, who got $590,823 for farms in four states during the same period. A Cato Institute study found that in 2005, two-thirds of the subsidies went to the richest 10 percent of recipients, many of whom live in New York City. Not only do these "farmers" get money straight from the government, they also often get local tax breaks, since their property is zoned as agricultural land. The subsidies raise prices for consumers, hurt third world farmers who can't compete, and are attacked in international courts as unfair trade.

    The Tab* Wasteful farm subsidies: $20 billion Running Tab: $637.5 billion + $20 billion = $657.5 billion

    5. Capital Waste.
    While there's plenty of ongoing annual operating waste, there's also a special kind of profligacy—call it capital waste—that pops up year after year. This is shoddy spending on big-ticket items that don't pan out. While what's being bought changes from year to year, you can be sure there will always be some costly items that aren't worth what the government pays for them.

    Take this recent example: Since September 11, 2001, Congress has spent more than $4 billion to upgrade the Coast Guard's fleet. Today the service has fewer ships than it did before that money was spent, what 60 Minutes called "a fiasco that has set new standards for incompetence." Then there's the Future Imagery Architecture spy satellite program. As The New York Times recently reported, the technology flopped and the program was killed—but not before costing $4 billion. Or consider the FBI's infamous Trilogy computer upgrade: Its final stage was scrapped after a $170 million investment. Or the almost $1 billion the Federal Emergency Management Agency has wasted on unusable housing. The list goes on.

    The Tab* Wasteful Capital Spending: $30 billion Running Tab: $657.5 billion + $30 billion = $687.5 billion

    6. Fraud and Stupidity.
    Sen. Chuck Grassley (R-IA) wants the Social Security Administration to better monitor the veracity of people drawing disability payments from its $100 billion pot. By one estimate, roughly $1 billion is wasted each year in overpayments to people who work and earn more than the program's rules allow.

    The federal Food Stamp Program gets ripped off too. Studies have shown that almost 5 percent, or more than $1 billion, of the payments made to people in the $30 billion program are in excess of what they should receive.

    One person received $105,000 in excess disability payments over seven years.

    There are plenty of other examples. Senator Coburn estimates that the feds own unused properties worth $18 billion and pay out billions more annually to maintain them. Guess it's simpler for bureaucrats to keep paying for the property than to go to the trouble of selling it.

    The Tab* General Fraud and Stupidity: $2 billion (disability and food stamp overpayment) Running Tab: $687.5 billion + $2 billion = $689.5 billion

    7. Pork Sausage.
    Congress doled out $29 billion in so-called earmarks—aka funds for legislators' pet projects—in 2006, according to Citizens Against Government Waste. That's three times the amount spent in 1999. Congress loves to deride this kind of spending, but lawmakers won't hesitate to turn around and drop $500,000 on a ballpark in Billings, Montana.

    The most infamous earmark is surely the "bridge to nowhere"—a span that would have connected Ketchikan, Alaska, to nearby Gravina Island—at a cost of more than $220 million. After Hurricane Katrina struck New Orleans, Senator Coburn tried to redirect that money to repair the city's Twin Span Bridge. He failed when lawmakers on both sides of the aisle got behind the Alaska pork. (That money is now going to other projects in Alaska.) Meanwhile, this kind of spending continues at a time when our country's crumbling infrastructure—the bursting dams, exploding water pipes and collapsing bridges—could really use some investment. Cutting two-thirds of the $29 billion would be a good start.

    The Tab* Pork Barrel Spending: $20 billion Running Tab: $689.5 billion + $20 billion = $709.5 billion

    8. Welfare Kings.
    Corporate welfare is an easy thing for politicians to bark at, but it seems it's hard to bite the hand that feeds you. How else to explain why corporate welfare is on the rise? A Cato Institute report found that in 2006, corporations received $92 billion (including some in the form of those farm subsidies) to do what they do anyway—research, market and develop products. The recipients included plenty of names from the Fortune 500, among them IBM, GE, Xerox, Dow Chemical, Ford Motor Company, DuPont and Johnson & Johnson.

    The Tab* Corporate Welfare: $50 billion Running Tab: $709.5 billion + $50 billion = $759.5 billion

    9. Been There,
    Done That. The Rural Electrification Administration, created during the New Deal, was an example of government at its finest—stepping in to do something the private sector couldn't. Today, renamed the Rural Utilities Service, it's an example of a government that doesn't know how to end a program. "We established an entity to electrify rural America. Mission accomplished. But the entity's still there," says Walker. "We ought to celebrate success and get out of the business."

    In a 2007 analysis, the Heritage Foundation found that hundreds of programs overlap to accomplish just a few goals. Ending programs that have met their goals and eliminating redundant programs could comfortably save taxpayers $30 billion a year.

    The Tab* Obsolete, Redundant Programs: $30 billion Running Tab: $759.5 billion + $30 billion = $789.5 billion

    10. Living on Credit.
    Here's the capper: Years of wasteful spending have put us in such a deep hole, we must squander even more to pay the interest on that debt. In 2007, the federal government carried a debt of $9 trillion and blew $252 billion in interest. Yes, we understand the federal government needs to carry a small debt for the Federal Reserve Bank to operate. But "small" isn't how we would describe three times the nation's annual budget. We need to stop paying so much in interest (and we think cutting $194 billion is a good target). Instead we're digging ourselves deeper: Congress had to raise the federal debt limit last September from $8.965 trillion to almost $10 trillion or the country would have been at legal risk of default. If that's not a wake-up call to get spending under control, we don't know what is.

    The Tab* Interest on National Debt: $194 billion Final Tab: $789.5 billion + $194 billion = $983.5 billion

    What YOU Can Do Many believe our system is inherently broken. We think it can be fixed. As citizens and voters, we have to set a new agenda before the Presidential election. There are three things we need in order to prevent wasteful spending, according to the GAO's David Walker:

    • Incentives for people to do the right thing.

    • Transparency so we can tell if they've done the right thing.

    • Accountability if they do the wrong thing.

    Two out of three won't solve our problems.

    So how do we make it happen? Demand it of our elected officials. If they fail to listen, then we turn them out of office. With its approval rating hovering around 11 percent in some polls, Congress might just start paying attention.

    Start by writing to your Representatives. Talk to your family, friends and neighbors, and share this article. It's in everybody's interest.

    The Most Criminal Class is Writing the Laws ---


    "Ernst & Young Expands Its Commitment to Help Universities Prepare Students for IFRS," SmartPros, November 30, 2009 ---

    Ernst & Young LLP has announced that the Ernst & Young Foundation will direct an additional US$1 million toward further development of IFRS curriculum and other resources to help the next generation of accounting professionals meet the fast-changing needs of global financial markets.

    This new commitment expands the work of the Ernst & Young Academic Resource Center (EYARC), which was launched in the summer of 2008. The support from the Ernst & Young Foundation now totals US$2.5 million.

    The EYARC brings together Ernst & Young professionals and university faculty to develop time-critical learning materials focused on International Financial Reporting Standards (IFRS). In June 2009, the EYARC released 24 modules of comprehensive, user-friendly IFRS curriculum designed to be flexible with any teaching style. The modules include a user guide, lecture notes, slides, examples, homework problems, illustrative disclosures, case studies and international spotlights developed specifically for university education levels based on real-world experiences of Ernst & Young professionals. In addition, this past summer the EYARC offered a live, national training session to academics and also participated in a variety of faculty educational conferences.

    With the additional funding, the EYARC's development goals for the upcoming year include updating the technical content of the existing modules, expanding the coverage to include more judgment-based resources, and providing a principles-based pedagogical approach to the material. Audit and tax modules will be added to the curriculum as well and will include the impact of IFRS on these functions.

    "The Obama administration's summer 2009 white paper on financial reform includes an unequivocal call for transparency and international convergence of accounting and financial reporting standards," notes Ellen Glazerman, Ernst & Young LLP, Executive Director of the Ernst & Young Foundation. "After a successful first year and tremendous interest from the faculty community, we are proud to announce additional funding toward IFRS education."

    "Making an effort to maximize pedagogical flexibility, Ernst & Young's Academic Resource Center offers faculty extensive training and materials useful for developing IFRS curriculum at both the undergraduate and graduate levels," says Jennifer Blouin, Assistant Professor at the Wharton School of the University of Pennsylvania. "The class notes, cases and high level spotlights on convergence issues created by Ernst & Young's team of academics and practice professionals are invaluable."

    The E&Y press release on this news --- Click Here


    Neither of the above news items provides links to a new E&Y resource site that students can go to at the moment. One will probably be announced soon.


    Some other alternatives for faculty and students are summarized at


    Popular IFRS Learning Resources:
    Check out the popular IFRS learning Deloitte link is  
    Also see the free IFRS course (with great cases) --- Click Here
    Also see the Virginia Tech IFRS Course --- Send a request to John Brozovsky [jbrozovs@VT.EDU]


    I found from the UK that might be helpful for IFRS learning resources --- Click Here


    September 28, 2009 message from Ellen Glazerman, Ernst & Young LLP [ellen.glazerman@EY.COM]

    The Ernst & Young Foundation has teaching materials for IFRS (developed by faculty). They are free and cover Intermediate I, II and Advanced Accounting. We will be developing more this year. It is free to anyone with a .edu address. You just need to email and she will give you a password to access the material. It is set up to be used either as material to integrate into what you are currently teaching or as a stand-alone course. There are lecture notes, home work assignments, cases, etc. I hope you find it useful.

    Please feel free to contact me directly if you have any additional questions.



    Bob and Francine Debate the 2010 Employment Outlook in CPA Firms

    December 9, 2009 message from Francine McKenna [retheauditors@GMAIL.COM]

    Unfortunately Bob, the public accounting firms are hiring less and less right now. And they are also cutting professionals at all levels, including those who have less than 2 years of experience and don't even have a CPA yet.

    We may be stuck with the 150 hour requirement but we are not stuck with the way the audit firms and the schools look at how that requirement is going to be met. Are we sure the firms and other employers are still expecting the same things form the universities given this requirement and the challenges it presents for students?

    Thanks to Linda, Amy, and Bob for input.


    December 10, 2009 reply from Bob Jensen

    Hi Francine,

    Firstly I don’t think the CPA firm employment outlook is all that bad unless the Supreme Court strikes down Sarbanes-Oxley (SOX) and the PCAOB. Perhaps the big firms are cutting back only temporarily in fear of  losing SOX. Losing SOX at this point in time would be a disaster for auditing in general since the loss of audit fees might well push firms over the brink where auditing profits are no longer sufficient to off set the risk of billion dollar lawsuits.

    Until Wall Street managed to get SOX in front of the Supreme Court, the outlook for accounting graduates was much better than all other business school disciplines. There were other bright spots.

    Accounting Majors in Demand
    Even when the economy is down, there is room for top students in the profession.   The National Association of Colleges and Employers’ 2009 Student Survey found that, even though students in the class of 2009 were graduating with fewer jobs available, accounting majors are still in high demand. Accounting and engineering graduates were among those majors most likely to have already found jobs.   Accounting majors expect to earn an average starting salary of about $45,000, while engineering grads expect to earn $58,000.
    Journal of Accountancy, July 2009 ---

    Robert Half Survey Update ---
    "Employment outlook grim in 2009, but not for accountants," AccountingWeb, January 15, 2009 ---

    "Global Employment Financial Monitor for 2009-2010" (free download from Robert Half) ---

    Executive Summary
    The accounting and finance professions have not been immune to the effects of the global financial crisis. Two-thirds of hiring managers we surveyed said their accounting and finance departments have been affected by current economic conditions.

    Yet, for many employers, good accountants are still hard to find. More than half of all respondents said they were having difficulty locating skilled job candidates, and financial professionals remain in short supply in parts of the world. Even where job candidates compete for relatively few open positions, many managers are concerned about losing their most valuable team members to other job opportunities.

    As positions are consolidated and fewer new employees added, financial professionals are taking on more work and experiencing increased stress. In response, managers are taking steps to help their employees remain motivated and productive, survey results show.

    The hiring process is taking longer today, in part due to budget constraints but also because companies feel they can be more selective. When hiring at the executive level, businesses seek leaders with the industry experience and initiative necessary to seize any possible competitive edge.

    Manpower Survey Guide Issue 75 ---


    The small business outlook is indeed grim and that reverberates to accounting firm business and employment needs, but there are signs that the Obama Administration may pull out the stops to boost the small business economy. But don't hold your breath for success of a small business surge ---

    In my estimation, hiring of entry level graduates will surge ahead unless the Supreme Court destroys the entire auditing profession.

    Bob Jensen

    Bob Jensen's threads on careers and employment are at


    Supreme Court Justices Express Skepticism Concerning Constitutionality of PCAOB (December 7, 2009, Note the Date) --- v  Free Enterprise Fund.pdf

    Jensen Comment
    It will be very sad for the auditing profession and accountancy academe if the PCAOB is killed and buried. Industry and its friends at the WSJ have been trying for most of this decade to eliminate huge amounts of auditing fees by killing off Sarbanes-Oxley legislation (SOX).

    What happens to the audit firms when it's no longer a profitable service without eliminating virtually all substantive testing?

    We may start hearing from Bob Elliott all over again about how to supplement declining audit revenue ---

    What happens to entry-level hiring when substantive testing is cut way back and replaced with analytical review computer models?

    Before We Put On Our SOX
    By the 1990s, auditing services of CPA firms were becoming less and less profitable and professional. Auditing was viewed by clients as a necessary evil for which they were willing to accept the lowest bidder irrespective of audit quality. In fact for many companies like Enron, incompetent or "cooperative" auditing firms were sought after as preferred auditors. In order to cut costs of service, CPA firms either dropped auditing services or they replaced more and more substantive testing with inferior analytical reviews in auditing --- 

    Auditing firms were increasingly being sued for poor quality audit services ---

    This made auditing services even more risky and less profitable.

    The auditing firms created expanding consulting services that bolstered profitability far more than auditing services. The AICPA promoted newer types of  assurance services such as WebTrust, SysTrust, Elder Care, etc. --- 

    Whatever happened to the SysTrust seal of approval?

    The AICPA promotions of assurance services peaked out when strong advocate Bob Elliott was President and Vice Chair of the AICPA. Bob even appeared in a special edition of the PBS television program Nightly Business Report on May 31, 1999 just before Enron and Worldcom commenced to melt down --- 

    He always stressed how auditing was becoming less and less profitable and that expanded consulting/assurance services were essential for the survival of CPA firms.

    Bob Elliott's best analogy in the 1990s was his comparison of the auditing industry with the railroad industry. He stressed how the railroads failed to adapt to newer forms of technology and transportation services (e.g., the likes of mergers with airlines, FedEx, UPS, etc.). His message was that, to avoid being like a failed railroad industry, auditing firms had to change with technology and exploit the auditing firms' major asset --- a reputation for integrity.

    Sadly, the reputation for integrity of auditing firms took a huge hit at the dawn of the 21st Century. It was revealed how the auditing firm of Andersen was earning as much from consulting in Enron as it was from auditing. Andersen was in fact auditing systems that it helped install, including Enron's felonious SPEs. You can view one of the thousands of these fraudulent SPEs at

    You can read about the Enron and Worldcom scandals at  

    The entire can of worms in auditing services became more and more public in courts across the United States --- 

    The poor services of auditing firms became a focal point in the U.S. Congress when equity markets appeared of the verge of collapse due to fear and distrust of the financial reporting of corporations dependent upon equity markets for capital. The Roaring 1990s burned and crashed. In a desperation move Congress passed the Sarbanes-Oxley Act (SOX) of 2002 --- 

    SOX was a shot in the arm for the auditing industry. SOX forced the auditing industry to upgrade services with SOX legal backing that doubled or even tripled or quadrupled fees for such services. Clients continue to grumble about the soaring costs of audits, but in my opinion SOX was a small price to pay for saving our equity capital markets.

    Now in 2009 the Supreme Court may force the auditing profession to take its SOX off and do cheap audits.

    Welcome back Kotter;
    Welcome back Chewco ---
    Welcome back Andy (I think he will be out in 2012)

    NASBA will rev up the CCE, Certified Cognitor Examination --- Click Here
    Also at 

    December 10, 2009 reply from Francine McKenna [retheauditors@GMAIL.COM]

    Hi Bob,

    You are buying the hype.  I have thousands of comments on my blog because the firms are cutting. Students are panicked.  Less internships, less offers to interns, less interviews to those who didn't intern (or more often none) and delays on start dates.

    The Sarbanes-Oxley gravy days have ben over for two years, since AS% kicked in.  Clients have taken upper hand and asked firms to cut or at least not grow audit fees. There has been no replacement for SOX revenue, especially given delays in IFRS and XBRL.

    Sorry, but the stories about strength of accounting hiring and stability of the profession in the public accounting firms is all PR.



    o    » Follow-Up On More Big 4 Layoffs - 502

    o    » Update: Deloitte Statement on Layoffs - 499

    o    » Deloitte - The Worst May Be Yet To Come - 438

    o    » Veteran's Day In PwC Advisory: Say Auf Wiedersehen - 355

    o    » Taking Your Pulse - 140

    o    » What I'd Do: Part 2 - First We Focus On The Client - 137

    o    » Hey Big 4! If I Were You, Here's What I'd Do (Instead...) - 135

    o    » Deloitte: Can You Still Do Those Things You Do? - 110

    o    » Big 4 Starting Salaries - The Facts - 98

    o    » It's A Race To The Finish - But There Are No Winners - 82


    Please don't misunderstand me... I am not pessimistic about the accounting profession. It's my profession. I would not keep writing about it if I was not optimistic that by bringing issues to light they can be addressed positively.

    I am pessimistic about the large public accounting firm business model. I don't think it's viable anymore and does not protect shareholders.

    With regard to data about hires and hiring outlook, both AICPA and Robert Half have a vested interest in saying everything is going to be fine. Robert Half is a publicly traded staffing company focusing on accounting and finance temporary placement. Their clients (and their recruits) are accounting and finance professionals. If they admit the market for accounting professionals is in the toilet or going there, they admit their own business outlook is dismal.

    I hope that public accounting hiring is not same or greater in 2010 than this year. And that's sad all the way around. Unless the economy improves dramatically overnight, I think we have a ways to go before we start seeing anyone truly optimistic about business prospects. If the public accounting firms, the largest ones, hire as many or more graduates they will keep cutting experienced staff as they have been doing for the east eighteen months at least. For Deloitte it's been longer. And they are still cutting, even over the holidays.

    The anomaly of the mid size regional firms seeing growth now is interesting and true. I have seen it. It's a subject for another note.

    I would have said two years ago that my info was more anecdotal. But given the traffic to the blog and the number of comments and the same info coming in at the other publication I write for, Going COncern, I think significant "layoffs" are a stark reality. The info I have about cuts may be biased, but it's true. The firms are balancing their bad forecasting about how long Sarbanes would last, and how quickly they would replace it with IFRS and XBRL work, on the backs of their experienced staff. They are substituting experienced staff with lower priced college recruits.

    The public accounting staffing supply chain from the universities to the firm is a two-three year process. The firms have a hard time turning off the spigot when business turns down because of the commitments they have already made to students one or two years prior beginning with the internship. They also care deeply about the university relationships. And they may start up the assembly line before the economy fully recovers because it take two to three years starting with an offer of an internship for a student to be a finished product ready for full time work and even longer to be certified. They would rather keep cheaper staff resources coming in at the new graduate level and work leaner than have an over abundance of more expensive experienced staff and people unassigned and eating into partner payouts. That's just the way the for-profit, multinational pseudo corporate style accounting firms work.

    December 11, 2009 reply from Bob Jensen

    Very nice reply Francine.

    I agree with most points, although I’ve no reason to suspect Robert Half of making up phony survey answers from over 200,000 respondents around the world.

    And I’ve no reason to suspect the Bureau of Labor Statistics for phony data that rates the prospects for growth in accounting jobs to be better than the average for all other job categories. The BLS, however, is looking at all sizes of accounting and auditing firms and is less skewed toward the large international accounting firms. Indeed the hope for the future may lie in the smaller and medium size firms as the courts bury the large firms in the sub-prime mortgage lawsuits. Also the BLS is not focusing only on entry-level opportunities for new graduates.

    Anecdotal still remains anecdotal if it is not a more formalized study. Your correspondents might in fact be a biased subset if they seek you out when knowing your biases. Polls vary when they favor some sectors over other sectors even if the favoritism is not intentional.

    I do hate to see the big firms suffer, because they are nearly all of our hope for those entry-level jobs for top accounting graduates. I am proud of the big firms for being rated the “best places to launch a career” --- even ultimately an academic career since most doctoral programs want applicants to have professional experience.

    Big Four Firm Get Top Spots in Business Week's “2009 Best Places To Launch A Career, The Big Four Alumni Blog, September 10, 2009 ---

    BusinessWeek just released its 2009 rankings of its much-anticipated “2009 Best Places To Launch A Career” list and for a second year, Big Four firms completely dominate the list, capturing the top four spots in the rankings. This year, only 69 companies made the list compared to 119 in 2008 due to more stringent criteria, making the 2009 list “both more exclusive and more competitive.” Thus, this year, there was more relative competition to make the list and this year’s rankings are at least 40% tougher than the previous year.

    Deloitte, Ernst & Young, PricewaterhouseCoopers and KPMG are respectively ranked 1st to 4th on the list, beating out such leading contenders as Google (not even ranked), Goldman Sachs (2009 rank 6, 2008 rank 4), General Electric (2009 rank 16), Booz Allen Hamilton (2009 rank 63) and Microsoft (2009 rank 18).

    Other notables associated with the Big Four firms are Accenture (2009 rank 11, up an astonishing 36 ranks from 2008 rank 47), Protiviti (2009 rank 49, remarkably up 46 ranks from 2008 rank 95).

    Two of the Big Six Accounting firms also make the list. Grant Thornton (2009 rank 51, 2008 rank 76) and RSM McGladrey Pullen (2009 rank 66, 2008 rank 104).

    Continued in article


    Last year's rankings were similar --- Click Here Places to Launch a Career

    Your comments are well stated with respect to efforts of the large accounting firms to maintain relations with universities and to support the funding of programs and the placements of top graduates. Accounting would not be a popular major for top students on campus if graduates did not relatively have a better chance for launching careers than most other disciplines on campus.

    On a relative basis accountancy schools are doing fairly well. Law schools are having a much more difficult time placing graduates, and surprisingly nursing graduates are having much more difficulty finding full-time jobs as hospitals are facing budget crises and nursing turnover rates declined (many nurses who want to retire to start families are now supporting unemployed or underemployed spouses, including one of our RN daughters in Wisconsin).

    “Employment change. Employment of accountants and auditors is expected to grow by 18 percent between 2006 and 2016, which is faster than the average for all occupations. This occupation will have a very large number of new jobs arise, almost 226,000 over the projections decade. An increase in the number of businesses, changing financial laws, and corporate governance regulations, and increased accountability for protecting an organization’s stakeholders will drive growth.”
    Bureau of Labor Statistics Job Outlook, 2008-2009 Edition ---

    I think most colleges are relying more on the long-term BLS outlook rather than the doom and gloom articles dated in the deep part of this recession.

    Thanks Francine.
    You’ve added a lot thus far to the AECM with some fresh ideas and observations.

    Bob Jensen

    December 11, 2009 reply from John Brozovsky [jbrozovs@VT.EDU]

    As an academic and a father I would prefer the firms keep hiring the college grads and let go the 'more highly paid experienced staff'.  Getting that first job is clearly a harder hurdle than getting the next job.  Particularly the next job if you have big-4 on your resume.  We always used to bemoan the fact that everyone left the big-4 (5, 6, 8) on their own.  Evidently they are not leaving on their own now, probably because the economy appears to be in bad shape and job prospects weak, so the firms are pushing them out.

    At the college level our graduates are having a bit harder time getting the job but most are still getting them. The main problem pool is international students.  We had to make some additional contacts to place an international student that had a 4.0 in an MBA program before moving over and getting a master's in accounting (no grades there yet-part of the problem with hiring in the fall of a one year program).  We placed him with a big 4 firm but in prior years this would not have required the extra effort.


    December 11, 2009 reply from Francine McKenna [retheauditors@GMAIL.COM]


    I understand your preference and I would wish that things would be different for everyone.  But...

    You're right that the attrition levels are very low right now in the largest firms.  People are staying because of the weak prospects outside.  I just Tweeted another article:

    Securities Litigation Fears Escalate as Companies Cut Compliance and Internal Audit Staff from a group called Monadnock Research.  MR - Businesses have become more concerned about becoming a target of securities litigation, according to a recent study from Deloitte. Fueling this fear, 27.4 percent of respondents report losing headcount in the compliance and internal audit functions over the past 18 months. Individuals surveyed about which activities would reduce corruption and fraud risks, respondents cited more fraud awareness training (32.4 percent); expansion of internal audit monitoring procedures (23.1 percent); more robust fraud risk assessment (18.3 percent); and more oversight from the board and audit committee (7.5 percent). . . 

    This is a subscription only publication but if you googled internal audit and compliance cuts you can find others with a similar trend described.

    So the firms are pushing out "experienced" hires to continue to make room for lower cost new hires form the universities. Unfortunately, "experienced" is not what it used to be.  The industry accounting hire model is mostly based on getting fully trained Big 4 "experienced " professionals who leave of their own accord for better opportunities, with 4-10 years experience.  They were typically coming with their CPA, had been through several busy seasons and had led audits although maybe not yet promoted to Manager.  

    Nowadays, staff are being cut with <1 year of experience all the way to pre-partner.  The staff with less than three years of experience are being asked in some cases to repay CPA signing bonuses and review course subsidies.  They may not yet have their CPA and they do not have enough experience to be considered "experienced" in the typical way industry had ben accustomed.  Industry and government are not prepared to take over where the large public accounting firms have left off. Where are the jobs now for someone with only 1-2 years experience in the Big 4?  They can not go to another firm since they are hiring only new grads and specific expertise at higher levels. Any ideas?  I get lots of mail and comments with that question?  Do any of the professors want to volunteer to answer my mailbag once a week? That would be a great blog feature:  Ask the Professor?  What Do I Do Now?

    And the universities continue to allow the firms to come to campus and tout job opportunities, stability, and great working environments.  And the magazines still print that firms are best places to work or start your career even given the number of big firm employees suing for wrongful discharge and who swear they will never recommend the firm in their new company.  Yes, that always existed when someone left involuntarily, but now it exists in the thousands for each firm in a short amount of time. And the schools still pride themselves on their excellent placement.

    Have the schools reopened placement centers to their accounting graduates who have been cut for the firms with less than three years experience? Have they adjusted their placement statistics?  If you say to me, "oh, they just could not cut it..." you will be wrong in most cases now.  The cuts at the firms have gone beyond performance.  Even the firms have admitted (at least Deloitte and KPMG) and made press releases about cuts being caused by the economy (and their own bad planning) not individual performance.

    Interesting you mention the international students.  Yes, the schools responded to the firms need for more and more graduates by bringing in more and more international students. As you can see, now the firms hardly ever sponsor visas. And when the cuts started at Deloitte, for example, two years ago, the international students were the first to be let go given the time and expense of maintaining their status. Many called me in mad scrambles to quickly find another sponsor and stay in the country. Most had to return to their "home" country.

    As Internal Audit Staffs Shrink, Will Fraud Rise?

    A new study finds that compliance staffs haven't escaped layoffs, leaving companies more exposed to risk.
    Kate O'Sullivan, | US
    December 10, 2009

    Few corporate departments have been spared layoffs in recent months, and internal audit and compliance are no exceptions. According to a new poll by Deloitte Financial Advisory Services, 27% of executives reported reductions in these areas at their companies in the past 18 months, despite the fact that compliance experts and internal auditors were heavily recruited just a few years ago, in the wake of the Sarbanes-Oxley Act.

    The implications for companies are worrisome. "We know that in a recessionary time, fraud risk and corruption risk rise, so there's a tension there," says Kerry Francis, chairman of Deloitte Financial Advisory Services. "You've got a decrease in compliance personnel, and in this economic environment there's pressure on employees and pressure on management — and that causes some people to do things that they shouldn't."

    For those compliance staffers left behind, the role becomes more daunting. Particularly as companies cut travel budgets, the ability to do thorough site visits is limited, says Francis. "How does internal audit now execute their responsibilities?" she asks. "How can they be more strategic in their review and monitoring? There are lots of challenges facing the remaining personnel." More than ever, close coordination among internal audit, legal, and compliance personnel "is critical," she says.

    Despite the reduction in compliance personnel, 50% of respondents to the Deloitte survey, who included CFOs, CEOs, board members, and middle managers in finance and risk management, said their compliance and ethics programs are strong. Another 36% said they are adequate. Many public companies and some private companies invested significantly in their compliance programs after the passage of Sarbox in 2002, notes Francis, and they may now feel confident that those programs are effective even with a reduced staff. But that confidence may not always be justified. "What seems to be slipping is the actual testing or review or active monitoring of transactions or behaviors," she points out. "That's the risk."

    Companies may be able to offset some of the increased risk by setting a very strong ethical tone at the top. But CFOs will have to wait a few years to see whether highly visible ethical leadership can truly compensate for fewer compliance checks, as much of the fraud being committed today won't come to light for years. The average Securities and Exchange Commission fraud case today spans seven years from the beginning of an alleged scheme to settlement or litigation, says Francis.


    An Upbeat Accounting Recruitment Message in a Down Economy
    December 10, 2009 reply from David Fordham, James Madison University [fordhadr@JMU.EDU]

    Francine, Ed, Bob, et al:

    Also completely anecdotal but on the other side of the coin:

    I have no knowledge or evidence about audit fees, firm profits, or even demand for audit services, since I've been way too busy to spend time with recruiters this semester. But based on what my colleagues are telling me, the cold air has not seeped down to us yet.

    We had more firms at our "meet the firms" night last month than we've ever had before (56). The number of organizations who recruited accounting majors here set a new school record (66). Our percentage of May grads who have job offers already (74%)is exactly the same as it was this time last year, which was up about 5% before the year before and up 8% from the year before. The actual COUNT of grads who are graduating and who have jobs is up about 5% over last year. We haven't yet run our salary survey (to my knowledge) but from the scuttlebutt in talking with students, the starting salaries for our grads haven't dropped noticeably, if at all. I still have firms calling me begging to be guest speakers for my classes, which means they apparently still have time to spend a day driving over here to class, and still have money enough to spend the night and go to a basketball game or something.

    We graduate around 120 accounting BBA's per year, and about 75-80 MSA grads each year (almost all of whom were accounting BBA's the year before). The bachelor number has been relatively steady the past few years, but the MSA enrollment has quadrupled over the last 3-4 years as the Virginia 150-hr kicked in a couple years ago.

    Regarding curriculum, we too have moved several courses from the undergrad to the grad level, and our undergrad accounting degree no longer has sufficient accounting hours to meet the 30-hour minimum to sit for the exam in Virginia. Students not going for the MSA have to add the CIS minor to get their 150 hours -- and that minor includes an accounting technology course which puts them over the 30-hour accounting hurdle. But those who can get in (minimum GPA, GMAT hurdles, etc.) all go into the Masters program.

    The masters program not only has some accounting courses that used to be undergrad, it also has the original pioneering Becker Boot-Camp (totally non-credit) starting the week after graduation. With the Becker boot camp, we are now in the top ten first-time pass-rates on the Exam. Since practically all our MSA's go into public accounting, the arrangement has been a boon to the students. Practically all of them have the course paid for by their employer after passing the exam.

    Again, we are probably not typical. The only way we know the economy is down is that our salaries remain frozen after several years, our travel was frozen and while unfrozen now, remains under heavy restrictions, and my computer is now more than five years old. Fortunately, donations are up, so I still plan to be at the AAA-IS next month.

    Of course, I have to admit, about 2/3rds of our market is Big Four in the Washington/Baltimore area which may be totally atypical to the rest of the world. But most (>90%) of our grads start in public accounting (Big 4, second tier, and a sprinkling of smaller firms), with almost all of the remainder going to government (the GAO, Secret Service, DoD, and Dept of Justice all have more offers out to our students this year than last, and are far more aggressive about trying to get their reps in front of the students than they have ever been in the past).

    Purely anecdotal, and quite likely atypical, but from our unusual vantage point, accounting is still strong. We have no shortage of students wanting to major in accounting. Because we remain under a hiring freeze, we have had to manage enrollments by increasing our minnimum GPA to declare the major, and are implementing an entrance exam to enroll in intermediate.

    David Fordham
    James Madison University

    Mary, Mary not so contrary about the new financial regulations passed by the House (in spite of the WSJ lament):
    "SEC Chairman Schapiro Statement on House-Passed Financial Regulatory Reform Legislation," SEC News Release, December 11, 2009 --- 

    "They Weren’t There: Auditors And The Financial Crisis," by Francine McKenna, re: The Auditors, December 7, 2009 ---


    When the power brokers of the business world meet, the accountants are never far behind.

    While other industries have downsized through the turmoil of the financial crisis, the “Big Four” accounting firms — PricewaterhouseCoopers, KPMG, Deloitte Touche Tohmatsu, and Ernst & Young — will end the year with more employees than before the crisis started.  Despite a rocky decade that included the Enron scandal — whose accounting shenanigans also took down Arthur Andersen, then one of the world’s largest accounting firms — and the financial crisis, the accounting industry has emerged stronger than ever before.

    “When I called the CEO of one of our very large clients in the U.S. — it would be inappropriate to tell you who — there was a time when you would call them and his secretary would say, ‘he’s very busy, he’s tied up in a meeting,’ ” said James Quigley, CEO of Deloitte. “What they say now is, ‘he’s on the plane right now — would you like me to patch you through?

    CNN’s Kevin Voigt from the APEC Conference November 12, 2009

    Oh really?

    Fellow bloggers Adrienne Gonzalez and Caleb Newquist have already ripped up this CNN interview.  We are all embarrassed for this journalist.  He listened to a bunch of horse manure orchestrated by the audit firms’ public relations flacks and they published it with no verification, challenge, or context.

    That’s the other “expectations gap” we face as journalists when trying to add an independent, objective, and inevitably critical voice to the story of the accounting industry.  If a journalist doesn’t cover the audit firms and the business of accounting on a regular basis, they “expect” accounting industry stories to be boring and maybe a little tedious or hard to understand.  They also “expect” it to be difficult to verify numbers, statistics, and trends about the revenues, profits, and headcounts of the largest audit firms. So… Maybe they take their word for it.  After all, they’re accountants. (It’s sadly true that there’s a dearth of publicly available financial information about the audit firms, especially in the US.)

    But I was struck, actually flabbergasted, by the fat head remark above from Jim Quigley of Deloitte. He claims that big-time CEOs answer his phone calls these days. Exactly what is the CEO of Deloitte Touche Tohmatsu,  Deloitte’s global, non-auditing, “coordinating” umbrella firm doing calling CEOs about anything important nowadays?  Seems like meddling to me. Deloitte, in particular, has a lot fewer clients to call these days anyway. Maybe instead of the CEO of the global firm calling, the local partners should have shown some spine, such as with Bear Stearns and Washington Mutual?

    I’ve been writing about the subprime crisis, the one that morphed into the financial crisis, since 2007.  My first post to mention subprime was March 14, 2007.  In that post, discussinKPMG and New Century, I talked about something that even the esteemed short David Einhorn missed: Repurchase risk was not being disclosed.  I’m still writing about repurchase risk and the banks are still obfuscating it with the acquiescence of their auditors.

    Continued in article

    "Ernst & Young Prevails in $140 Million Case Brought by Frontier Creditors Trust Andrew Longstreth," The American Lawyer, December 14, 2009 ---

    When the creditors of bankrupt companies draw up lists of litigation targets, auditing firms are often right there at the top. So it was for the creditors trust of the bankrupt insurer, Frontier Insurance Group. The trust, represented by John McKetta III of Graves Dougherty Hearon & Moody, alleged that Ernst & Young underestimated the reserves Frontier needed to hold, making the company look healthy when it was actually insolvent. It claimed $140 million in damages, plus interest.

    But E&Y decided to make a stand. It refused to chip up, and instead headed for a jury trial before White Plains, N.Y., federal district court Judge Cathy Seibel. On Wednesday, after 12 days of trial, jurors needed only two hours to exonerate the auditor.

    "This case shows that E&Y is willing to go to trial in a case it believes has no merit, even where the threatened damages are substantial," said Ernst & Young's outside counsel, Dennis Orr of Morrison & Foerster. Orr told us that Ernst & Young hopes other potential litigants get the message.

    Trust counsel McKetta said no decision had been made about the trust's next move in the case. But he was gracious in defeat, complimenting Seibel, the jury, and even the team at Morrison & Foerster. "They did a terrific job," McKetta said.

    Ernst & Young stomps on a "vexatious litigant pursuing clearly frivolous claim."
    "E&Y has AOL-Time Warner case thrown out," by Paul Grant, Accountancy Age, December 1, 2009 ---

    Ernst & Young is finally in the clear over its role in the controversial 2001 AOL-Time Warner merger after the last of hundreds of lawsuits was dismissed in New York yesterday (30 Nov).

    District judge Colleen MacMahon granted the Big Four’s motion to dismiss the 2003 lawsuit brought by AOL shareholder Dominic Amorosa as the time limit for securities fraud cases had expired and the cases had failed to connect the statements made by the auditor to stock losses.

    Amorosa had accused E&Y of approving false and misleading financial statements and concealing AOL’s improper methods of booking online advertising revenue. E&Y claimed Amorosa, who dropped out of a class action lawsuit to file his own case, was a “vexatious litigant pursuing clearly frivolous claims”.

    Bob Jensen's threads on E&Y litigation are at


    "EY Settles SEC Charges Re: Bally’s Fraud-Lives To Audit Another Day," by Francine McKenna, re: The Auditors, Decenber 17, 2009 ---

    Rueters News Item via Forbes ---

     Ernst & Young has agreed to pay $8.5 million to settle civil charges that it violated accounting rules in connection with a fraud at Bally Total Fitness Holding Corp, the U.S. Securities and Exchange Commission said Thursday.

    The SEC accused the accounting firm of issuing unqualified audit opinions that said that Bally's 2001 and 2003 financial statements conformed with U.S. accounting rules.

    Continued in article

    Francine's Commentary ---

    “These opinions were false and misleading,” the SEC said in a statement.

    “Ernst & Young has agreed to pay $8.5 million to settle civil charges that it violated accounting rules in connection with a fraud at Bally Total Fitness Holding Corp, theU.S. Securities and Exchange Commission said Thursday.

    The SEC accused the accounting firm of issuing unqualified audit opinions that said that Bally’s 2001 and 2003 financial statements conformed with U.S. accounting rules.

    Six of the accounting firm’s current and former partners also agreed to settle SEC accounting violation charges as part of this investigation, the SEC said.

    In settling the allegations, Ernst & Young and the former and current partners did not admit to any wrongdoing, the SEC said.

    “These settlements allow us and several of our partners to put this matter behind us and resolve issues that arose more than five years ago,” Ernst & Young said.”

    What none of the stories that just hit tell you, though, is that at least two of the EY partners charged, Fletchall and Sever, held leadership positions with the AICPA in the past.

    Three of the partners were members of EY’s leadership team/national office, giving advice, guidance, and making decisions about accounting standards on behalf of engagement teams nationwide.

    Did Mr. Fletchall get off with a slap on the wrist given his AICPA leadership position, AICPA PAC contributions and significant campaign contributions to Senator Christopher Dodd? Mr. Fletchall is used to telling the SEC what it should do. Quite used to it.

    EY can put an old case behind them… Yes, of course, since it’s December of 2009 and it’s taken the SEC six years to resolve a case from 2001-2003. No wonder the firms’ answer to any settlement or disciplinary proceeding is always, “that’s in the past.”

    EY had independence issues recently and was supended from taking on new audit clients for six months. How many strikes does a firm get? Why no strong statement, sanction or other disciplinary action from the PCAOB for the partners or the firm in relation to this case? Maybe because Mr. Fletchall was also a member of the PCAOB’s Standang Advisory Group.

    This case points out the long-tail impact of a bad audit, in causing distress to accounting firms, many years after the audit has been completed. And we don't think this is the end of the affair, there are a lot of other pending accounting investigations with the SEC, Huron Consulting for example, and the outcomes for firms convicted of wrong doing are going to be high. The SEC is just emerging itself from getting a bad rap in the Madoff affair, so may be getting a little more aggressive and assertive than in previous years. Also investors would hope for drastic changes in the audit process of accounting firms, if the firms’ integrity as ultimate protectors of investors’ interests has to be fully and firmly re-established.
    "Big Ernst and Young Settlement on Bally Fitness, Large Implications," Big Four Blog, December 18, 2009 ---

    Bob Jensen's threads on E&Y litigation ---

    Will the big international auditing firms survive the subprime mortgage litigation ---

    Where were the auditors? 

    The lead article in the November 2009 issue of The Accounting Review is like a blue plate special that differs greatly from the usual accountics offerings on the TAR menu over the past four decades. TAR does not usually publish case studies, field studies, or theory papers or commentaries or conjectures that do not qualify as research on testable hypotheses or analytical mathematics. But the November 2009 lead article by John Dickhout is an exception.

    Before reading the TAR tidbit below you should perhaps read a bit about John Dichaut at the University of Minnesota, apart from the fact that he's an old guy of my vintage with new ideas that somehow leapt out of the accountics publishing shackles that typically restrain creative ideas and "search" apart from "research."

    "Gambling on Trust:  John Dickhaut uses "neuroeconomics" to study how people make decisions," OVPR, University of Minnesota --- 

    On the surface, it's obvious that trust makes the economic world go round. A worker trusts that he or she will get paid at the end of the week. Investors trust that earnings reports are based on fact, not fiction. Back in the mid-1700s, Adam Smith-the father of economics-built portions of his theories on this principle, which he termed "sympathy." In the years since then, economists and other thinkers have developed hundreds of further insights into the ways that people and economies function. But what if Adam Smith was wrong about sympathy?

    Professor John Dickhaut of the Carlson School of Management's accounting department is one of a growing number of researchers who uses verifiable laboratory techniques to put principles like this one to the test. "I'm interested in how people make choices and how these choices affect the economy," says Dickhaut. A decade ago, he and his colleagues developed the trust game, an experiment that tracks trust levels in financial situations between strangers. "The trust game mimics real-world situations," he says.

    Luckily for modern economics-and for anyone planning an investment-Dickhaut's modern-day scientific methods verify Adam Smith's insight. People tend to err on the side of trust than mistrust-are more likely to be a little generous than a little bit stingy. In fact, a basic tendency to be trusting and to reward trustworthy behavior may be a norm of human behavior, upon which the laws of society are built. And that's just the beginning of what the trust game and the field of experimental economics can teach us.

    Trust around the world

    Since Dickhaut and his co-authors first published the results of their research, the trust game has traveled from the Carlson School at the University of Minnesota all the way to Russia, China, and France. It's tested gender differences and other variations.

    "It's an experiment that bred a cottage industry," says Dickhaut. Because the trust game has proved so reliable, researchers now use it to explore new areas. George Mason University's Vernon Smith, 2002 Nobel Laureate for his work in experimental economics, used the trust game in some of his path-breaking work. University of Minnesota researcher and Dickhaut co-author Aldo Rustichini is discovering that people's moods can be altered in the trust games so that participants become increasingly organized in their behavior, as if this can impact the outcome. This happens after the participants are repeatedly put in situations where their trust has been violated.

    Although it's too soon to be certain, such research could reveal why people respond to troubled times by tightening up regulations or imposing new ones, such as Sarbanes-Oxley. This new research suggests that calls for tighter rules may reveal more about the brain than reduce chaos in the world of finance.

    Researchers who study the brain during economic transactions, or neuroeconomists, scanned the brains of trust game players in labs across the country to discover the parts of the brain that "light up" during decision-making. Already, neuroeconomists have discovered that the section of the brain investors use when making a risky investment, like in the New York Stock Exchange, is different than the one used when they invest in a less risky alternative, like a U.S. Treasury bill.

    "People don't lay out a complete decision tree every time they make a choice," Dickhaut says. Understanding the part of the brain accessed during various situations may help to uncover the regulatory structures that would be most effective-since people think of different types of investments so differently, they might react to rules in different ways as well. Such knowledge might also point to why behaviors differ when faced with long- or short-term gains.

    Dickhaut's original paper, "Trust, Reciprocity, and Social History," is still a hit. Despite an original publication date of 1995, the paper recently ranked first in ScienceDirect's top 25 downloads from the journal Games and Economic Behavior.

    Risky business

    Dickhaut hasn't spent the past 10 years resting on his laurels. Instead, he's challenged long-held beliefs with startling new data. In his latest research, Dickhaut and his coauthors create lab tests that mimic E-Bay style auctions, bidding contests for major public works projects, and others types of auctions. The results may be surprising.

    "People don't appear to take risks based on some general assessment of whether they're risk-seeking or risk-averse," says Dickhaut. In other words, it's easy to make faulty assumptions about how a person will respond to risk. Even people who test as risk-averse might be willing to make a risky gamble in a certain type of auction.

    This research could turn the evaluation of risk aversion upside down. Insurance company questionnaires are meant to evaluate how risky a prospective client's behavior might be. In fact, the questionnaires could simply reveal how a person answers a certain kind of question, not how he or she would behave when faced with a risky proposition.

    Bubble and bust, laboratory style

    In related research, Dickhaut and his students seek that most elusive of explanations: what produces a stock-market collapse? His students have successfully created models that explain market crash situations in the lab. In these crashes, brokers try to hold off selling until the last possible moment, hoping that they'll get out at the peak. Buyers try to wait until the prices are the lowest they're going to get. It's a complicated setting that happens every day-and infrequently leads to a bubble and a crash.

    "It must be more than price alone," says Dickhaut. "Traditional economics tells us that people are price takers who don't see that their actions influence prices. Stock buyers don't expect their purchases to impact a stock's prices. Instead, they think of themselves as taking advantages of outcomes."

    He urges thinkers to take into account that people are always trying to manipulate the market. "This is almost always going to happen," he says. "One person will always think he knows more than the other."

    Transparency-giving a buyer all of the information about a company-is often suggested as the answer to avoiding inflated prices that can lead to a crash. Common sense says that the more knowledge a buyer has, the less likely he or she is to pay more than a stock is worth. Surprisingly, Dickhaut's findings refute this seemingly logical answer. His lab tests prove that transparency can cause worse outcomes than in a market with poorer information. In other words, transparent doesn't equal clearly understood. "People fail to coordinate understanding," explains Dickhaut. "They don't communicate their expectations, and they might think that they understand more than they do about a company."

    Do stock prices balloon and crash because of genuine misunderstandings? Can better communication about a stock's value really be the key to avoiding future market crashes? "I wish you could say for sure," says Dickhaut. "That's one of the things we want to find out."

    Experimental economics is still a young discipline, and it seems to raise new questions even as it answers old ones. Even so, the contributions are real. In 2005 John Dickhaut was awarded the Carlson School's first career research award, a signal that his research has been of significant value in his field. "It's fun," he says with a grin. "There's a lot out there to learn."

    Reprinted with permission from the July 2005 edition of Insights@Carlson School, a publication of the Carlson School of Management.


    "The Brain as the Original Accounting Institution"
    John Dickhaut
    The Accounting Review 84(6), 1703 (2009) (10 pages)
    TAR is not a free online journal, although articles can be purchased ---

    The evolved brain neuronally processed information on human interaction long before the development of formal accounting institutions. Could the neuronal processes represent the underpinnings of the accounting principles that exist today? This question is pursued several ways: first as an examination of parallel structures that exist between the brain and accounting principles, second as an explanation of why such parallels might exist, and third as an explicit description of a paradigm that shows how the benefits of an accounting procedure can emerge in an experiment

    The following are noteworthy in terms of this being a blue plate special apart from the usual accountics fare at the TAR Restaurant:

    John was saved from the wrath of the AAA Accountics Tribunal by also having an accountics paper (with complicated equations) published in the same November 2009 edition of TAR.
    "Market Efficiencies and Drift: A Computational Model"
    John Dickhaut and Baohua Xin
    The Accounting Review 84(6), 1805 (2009) (27 pages)

    Good work John!

    What are the two manufacturing models (old versus new) attributed to Japanese creativity?

    The older creative model is sometimes called the Kanban Model. Instead of having a linear manufacturing model invented by Henry Ford, the "line" is really a grouping of U-shaped work stations containing something where workers are trained to take over for each other on any work station inside the U. Hence a special feature is that there is less likely to be a major slow down at bottlenecks in Henry Ford's original line. The U-Shaped stations are often grouped in parallel lines to reduce the bottleneck risk even further.

    The Japanese model also consisted of the concept of Just-In-Time inventory in which the raw material needed for production arrives at the plant, in theory, at the instant it is needed on the line. Hence huge cushions of raw material are no longer needed ---
    However, JIT does not always work as well in the U.S. as it does in Japan. Firstly, the suppliers and buyers of raw materials are much more closely related in Japan's virtual men's club of business systems. Secondly, Japan is much smaller than the United States and has a much, much more efficient freight train service that overcomes trucking road jams. Manufacturers have much greater trust that raw materials really will arrive on schedule.

    The JIT system, if successful, changes cost accounting as well as costs themselves. The costs of carrying inventory (especially financing costs) are almost eliminated.

    But the Kanban is much, much more ---

    The Kanban is also important because it led to innovations in cost accounting and managerial accounting in general. Most importantly the Japanese were innovative in accounting for the costs of poor quality or quality control breakdowns.

    The "new" Japanese manufacturing model is featured in the case below:

    Teaching Case
    From The Wall Street Journal Accounting Weekly Review December 3, 2009

    Sharp's New Plan Reinvents Japan Manufacturing Model
    by Daisuke Wakabayashi
    Dec 01, 2009
    Click here to view the full article on

    TOPICS: Cost Accounting, Fixed Costs, Just-In-Time Inventory Management

    SUMMARY: In Sakai city, Sharp has just opened, six months early, the most expensive manufacturing site ever built in Japan. "Even Sharp...acknowledged that the company only gave the green light to proceed during a boom period for LCD-panel demand, and that a similar choice might not be made in today's market." Two factors are expected to reduce costs of operations at the site: One is the size of the glass used to make the LCDs. Sharp is using the industry's biggest...which allow the company to produce 18 40-inch LCD panels from a single substrate-more than double the eight 40-inch panels per sheet it uses at its other LCD television panel-making factory. The other factor: Sharp has [moved] suppliers on site [in] a kind of hyper-"just-in-time" delivery system."

    CLASSROOM APPLICATION: The article can be used to cover just in time and other manufacturing cost issues in management or cost accounting.

    1. (Introductory) What is the Japanese manufacturing model referred to in the headline?

    2. (Advanced) In general, how do just-in-time systems help to save costs in any manufacturing facility?

    3. (Introductory) How has this model been changed by the factory built by Sharp? Why does the author call it a "hyper-'just-in-time' delivery system?

    4. (Advanced) What savings from economies of scale, besides the just-in-time system, are Sharp executives hoping to obtain from the new manufacturing plant?

    5. (Advanced) What risks are evident in Sharp's decision to invest in technology in Japan rather than spend funds on labor elsewhere? In your answer, comment on the risks of high fixed costs in economic downturns.

    Reviewed By: Judy Beckman, University of Rhode Island

    "Sharp's New Plan Reinvents Japan Manufacturing Model," by Daisuke Wakabayashi, The Wall Street Journal, December 1, 2009 ---

    Sharp Corp.'s new production complex in western Japan is massive by any measure: It cost $11 billion to build and covers enough land to occupy 32 baseball stadiums. But it carries a meaning as large as its physical size. It's a litmus test for the future of Japanese high-tech manufacturing.

    The facility, considered the most expensive manufacturing site ever built in Japan, started churning out liquid-crystal display panels last month, and Sharp's new flagship televisions featuring the energy-efficient LCD panels go on sale in the U.S. next month. Sharp moved forward the factory's planned opening by six months, saying the new plant would help it be more competitive.

    "When you look to the next 10 or 20 years, the existing industrial model doesn't have a future," Toshihige Hamano, Sharp's executive vice president in charge of the Sakai facility, said in an interview. "We had to change the very concept of how to run a factory."

    Located in Sakai city along Osaka prefecture's waterfront, the complex represents Japanese industry's biggest gamble in LCD panels to remain competitive with rivals from South Korea, Taiwan, and China.

    The factory's size accommodates two main factors. One is the size of the glass used to make the LCDs. Sharp is using the industry's biggest, or "10th generation," sheets, which allow the company to produce 18 40-inch LCD panels from a single substrate—more than double the eight 40-inch panels per sheet it uses at its other LCD television panel-making factory.

    The other factor: Sharp has decided to try and cut costs by moving suppliers on site, a kind of hyper-"just-in-time" delivery system.

    The plant currently employs 2,000 people—roughly half from Sharp and half from its suppliers—although the work force will ultimately reach 5,000 as it adds production of solar panels as well.

    It remains to be seen whether it makes sense for Sharp to keep seeking ever more-sophisticated production in Japan, or, as competitors have, to simply use less advanced production techniques at lower costs in places like China.

    CLSA research analyst Atul Goyal warned in a report last month that the company is making a mistake by "chasing technology" with the new factory.

    In the past, such efforts by Japanese electronics makers have resulted in costly capital investments, only to be confronted with limited appetite for cutting-edge technology and then eventually outflanked by a cheaper alternative.

    Even Sharp's Mr. Hamano acknowledged that the company only gave the green light to proceed during a boom period for LCD-panel demand, and that a similar choice might not be made in today's market.

    Rival Samsung Electronics Co. has said it is looking into building a new LCD-panel factory using even bigger glass sheets than Sharp, while LG Display Co. has said it plans to build a new factory in China using current glass size.

    Sharp announced the Sakai project two years ago when LCD demand was surging and the company had produced five straight years of record profit. When consumer spending ground to a halt in late 2008, Sharp didn't cut costs and curb production quickly enough. Saddled with excess inventory, Sharp posted the first annual loss in nearly 60 years in the fiscal year ended March 31, 2009.

    The experience taught Sharp a painful lesson that its supply chain needed to be leaner and its production more efficient, especially if the factory was going to be in Japan, where the strong yen and expensive labor force put the company at a disadvantage to its Asian competitors.

    Sharp aims to streamline the costly LCD-panel production process by moving 17 outside suppliers and service providers inside its factory walls to work as "one virtual company."

    In the past, Sharp kept suppliers within driving distance. Now they are all within the same facility. Supplies are sent not by truck from a nearby factory but by automated trolleys snaking from one building to another.

    The suppliers, which include Asahi Glass Co. and Dai Nippon Printing Co., built and paid for their own facilities and are renting the land from Sharp.

    Despite their location inside the plant, Sharp says its suppliers are permitted to sell their products to other companies.

    At Sakai, Sharp has also linked its computer systems with suppliers so an order to the factory alerts suppliers right away. In the past, Sharp would email or call suppliers and place orders, creating a longer lag time.

    Sharp wouldn't disclose how much, if any, cost savings will result from manufacturing LCD panels at Sakai, but analysts estimate a 5% to 10% savings.

    Corning Inc. the world's largest maker of LCD glass substrates, built a factory next to Sharp's Sakai plant. Corning says the arrangement reduced total order cycle time from an average of one to two weeks to a matter of hours. Corning also says the proximity reduced the damage risk in transporting massive glass sheets on trucks.

    While Sharp is a long-standing customer, Corning said it was concerned initially that building a factory on site would mean that it was "hitching its wagon" to Sharp since it's the only customer for such large glass substrates. Ultimately, Corning decided to proceed based on its faith in Sharp's Sakai plans.

    "There's nothing like it anywhere," said James Clappin, president of Corning Display Technologies.

    December 5, 2009 reply from James R. Martin/University of South Florida [jmartin@MAAW.INFO]

    I have been working on MAAW's Japanese Management Section for about 15 years. For a considerable amount of material on JIT, Kanban, etc. see:

    See also:

     Bibilography, articles summaries, chapter on JIT,etc.

    James R. Martin

    Bob Jensen's threads on accounting theory are at

    Sue Haka, former AAA President, commenced a thread on the AAA Commons entitled
    "Saving Management Accounting in the Academy,"
    A succession of comments followed.

    The latest comment (from James Gong) may be of special interest to some of you.
    Ken Merchant is a former faculty member from Harvard University who form many years now has been on the faculty at the University of Southern California.

    Here are my two cents. First, on the teaching side, the management accounting textbooks fail to cover new topics or issues. For instance, few textbooks cover real options based capital budgeting, product life cycle management, risk management, and revenue driver analysis. While other disciplines invade management accounting, we need to invade their domains too. About five or six years ago, Ken Merchant had written a few critical comments on Garrison/Noreen textbook for its lack of breadth. Ken's comments are still valid. Second, on the research and publication side, management accounting researchers have disadvantage in getting data and publishing papers compared with financial peers. Again, Ken Merchant has an excellent discussion on this topic at an AAA annual conference.

    Bob Jensen's threads on Real Options are at

    Bob Jensen's somewhat ignored threads on managerial and cost accounting are at

    ICMA Announces Reorganization of Certified Management Accountant (CMA) Exam
    December 15, 2009 message from James R. Martin/University of South Florida [jmartin@MAAW.INFO]

    According to Brausch and Whitney (Strategic Finance, December 2009, p. 9) the changes to the CMA exam are intended to dramatically increase the value of the CMA in the market.

    Beginning in the spring of 2010 the exam will include only two four-hour exams, each consisting of 100 multiple choice questions and two 30-minute essay questions. For more specifics see

    When I became a CMA in 1977, (Certificate 733) the exam was made up of five 3.5-hour exams spread out over three days. My initial reaction to the current change is that more people will take and pass the exam, but the value of the CMA will decline. I hope I am wrong about this, but I think the IMA is shooting themselves in the foot.

    I would like to know what other people think about the change, particularly those who are CMA's. Will the effect of the change on the value of the CMA be positive or negative?

    Another thought: Someone could do a survey of current accounting faculty, practicing accountants, and CMA's, and get a publication out of this.

    "ICMA Announces Reorganization of Certified Management Accountant (CMA) Exam," SmartPros, December 2, 2009 ---

    The Institute of Certified Management Accountants (ICMA), the certification division of the Institute of Management Accountants (IMA), today announced a significant reorganization of its renowned Certified Management Accountant (CMA) curriculum and examination format.

    The CMA exam, which continues to be a career-enhancing credential valued and sought by employers, will be updated next spring to align even more closely with the critical knowledge and skills accountants and financial professionals use every day.

    By focusing specifically on a body of advanced accounting and financial knowledge, the program will now consist of two exam parts rather than four. The updated exam’s subject matter places greater emphasis on the issues most critical to accountants and financial professionals in business, including financial planning, analysis, control and decision support.

    “The new CMA program will maintain the rigor and relevance for which the CMA is highly regarded. At the same time, we have made changes to the program to adapt to the changing profession and the needs of today’s business professionals,” said ICMA Senior Vice President Dennis Whitney.

    With more than 30,000 CMA certificates awarded to date, the CMA program continues to demonstrate its value to professionals. In fact, according to IMA’s 2008 Annual Salary Survey, members holding the CMA designation earned an average of 24 percent more in salary than their non-certified peers.

    “We are confident the enhancements to the CMA program will ensure the credential’s continued relevance and value in organizations around the world as the most appropriate designation for accountants and financial professionals working in business,” said Joseph A. Vincent, CMA, ICMA Board of Regents Chair.

    In tandem with the introduction of the new CMA program, the association also introduced new IMA and CMA brand logos.

    Enrollment in the new CMA program will begin in spring 2010. Candidates may take the new CMA examinations starting May 1, 2010. For more information about the CMA certification program, please visit 

    December 16, 2009 reply from Ron Huefner [rhuefner@ACSU.BUFFALO.EDU]

    As the holder of CMA certificate number 2, let me weigh in on this discussion.

    In my view, the CMA has never caught on among students and young professionals, because it does not convey an image of any particular skill set or employment role, relative to other non-CPA certifications. The Certified Internal Auditor (CIA), Certified Fraud Examiner (CFE) and Chartered Financial Analyst (CFA) all convey the image of a particular set of skills and a fairly well defined job function. But I'd find it hard to define the skill set suggested by the CMA. As to job function, "management accountant" is not a common job title. Thus it's hard for students to get any feel for this field.

    The IMA has had the same problem of conveying an image. They have toyed with "finance" as their image. They gave a CMA-parallel exam -- the CFM, Certified in Financial Management -- for a while, but eventually dropped it. The flagship journal, "Management Accounting", was long ago renamed "Strategic Finance." But it's not clear this has solved their image problem. Nor does it seem they are viewed seriously as a finance organization.

    Part of the problem is that there is an extremely wide range of job functions under the notion of "management accounting," so it is hard for a clear image to come through.

    Until a sense of the implied skill set and the job function(s) of the CMA can be developed, I don't think it's going to get much traction among students.

    Ron Huefner

    Ronald J. Huefner
    Distinguished Teaching Professor
    University at Buffalo

    Jensen Comment
    James Martin maintains the massive management accounting knowledge base at

    The CMA examination is administered by the Institute of Management Accountants (IMA) ---

    "Beware Misguided Accountants," by Gary Cokins, Big Fat Finance Blog, December 1st, 2009 ---

    . . .

    Imagine that several centuries ago there was a navigator who served on a wooden sailing ship that regularly sailed through dangerous waters. It was the navigator’s job to make sure the captain safely and efficiently sailed the ship from one point to another. In the performance of his duties, the navigator relied on a set of sophisticated instruments. Without the effective functioning of these instruments, it would be impossible for him to chart the ship’s safest and most efficient course.

    One day the navigator realized that one of his most important instruments was calibrated incorrectly. As a result, he provided the captain inaccurate navigational information. No one but the navigator knew of this calibration problem, and the navigator decided not to inform the captain. He was afraid that the captain would blame him for not detecting the problem sooner and then require him to find a way to report the measurements more accurately. That would require a lot of work.

    As a result, the navigator always made sure he slept near a lifeboat so that if the erroneous navigational information led to a disaster, he wouldn’t go down with the ship. Eventually, the ship hit a reef that the captain believed to be miles away. The ship was lost, the cargo was lost, and many sailors lost their lives. The navigator, always in close proximity to the lifeboats, survived the sinking and later became the navigator on another ship.

    Perils of poor managerial accounting

    Can a similar story be told in today’s times? Centuries later, there was a management accountant who worked for a company in which a great deal of money was invested. It was this management accountant’s job to provide information on how the company had performed, its current financial position, and the likely consequences of decisions being considered by the company’s president and managers. In the performance of his duties, the management accountant relied on a managerial cost accounting system that was believed to represent the economics of the company. Without the effective functioning of the costing practices reported from this system, it would be impossible for the accountant to provide the president with the accurate and relevant cost and profit margin information he needed to make economically sound decisions.

    One day the management accountant realized that the calculations and practices on which the cost system was based were incorrect. It did not reflect the economic realities of the company. The input data was correct, but the reported information was flawed. A broadly averaged cost allocation factor was used with no causal relationship to the outputs being costed. As a result, the current and forward-looking information he provided to support the president’s decision making was incorrect. No one but the management accountant knew this problem existed. He decided not to inform the president. He was afraid that the president would blame him for not detecting the problem sooner and then require him to go through the agonizing effort of developing and implementing a new, more accurate and relevant cost system using activity based costing (ABC) principles. That would require a lot of work. Wouldn’t it?

    Meanwhile, the management accountant always made sure he kept his network with other professionals intact in case he had to find another position. Not surprisingly, the president’s poorly informed pricing, investment, and other decisions led the company into bankruptcy. The company went out of business, the owners lost their investment, creditors incurred financial losses, and many hard-working employees lost their jobs. However, the management accountant easily found a job at another company.

    The accountant as a bad navigator

    Why do so many accountants behave so irresponsibly? The list of answers is long. Some believe the costing error is not that big. Some think that extra administrative effort required to collect and calculate the new information will not offset the benefits of better decision making. Some think costs don’t matter because the focus should be on sales growth. Whatever reasons are cited, accountants’ resistance to change is based less on ignorance and more on misconceptions about what determines and influences accurate costing.

    Today commercial ABC software and their associated analytics have dramatically reduced the effort to report good managerial accounting information, and the benefits are widely heralded. Furthermore, the preferred ABC implementation method is rapid prototyping with iteratively scaled modeling, which has destroyed myths about implementing ABC as being too complicated and lengthy. An ABC system can be implemented in a few weeks, not months.

    Reasonably accurate cost and profit information is one of the pillars of performance management’s portfolio of integrated methodologies. Accountants unwilling to adopt logical costing methods, and managers who tolerate the perpetuation of flawed reporting, should change their ways. Stay on the ship or get off the ship before real damage is done.

    Thank you for the heads up Francine!
    "Fifteen Risk Factors for Poor Governance A self-diagnostic to identify risk factors for poor governance and reporting," by Walter Smiechewicz (who at one time worked for the scandalous Countrywide), Directorship, September 8, 2009 ---

    Some of the best indicators of our overall physical health come from blood tests. Unfortunately, too often we don’t begin to watch and manage these numbers until later on in life. Of course, it’s never too late to improve your diet and exercise, but we’re always left thinking, “if only I’d paid attention to this earlier.”

    With so many recent corporate crises, it is plain it’s suffice to say that a great many corporate board members and executives are experiencing similar regret right now. Perhaps this could have been avoided if they too had practiced routine diagnostic check ups. Like an individual blood test, board members need to know the risks their company is facing, and as with any health risk, they also need to be able to mitigate those exposures.

    Sounds great, but the devils in the details, right? Perhaps not.

    As chief consultant for governance and risk at Audit Integrity, I’ve examined the worst U.S. companies from an “integrity” standpoint in order to help board members and general auditors see how their company’s health stacks up. Audit Integrity’s metrics have shown which companies are 10 times more likely to face SEC Actions; five times more likely to face class action litigation; and four times more likely to face bankruptcy.

    Using Audit Integrity’s proprietary AGR (Accounting, Governance, and Risk) score, 196 companies were identified as laggards or high-risk companies. These companies have been proven to have higher odds of SEC actions and class action litigation, loss of shareholder value, and increased odds of material financial restatement and bankruptcy. All are North American, non-financial, publicly traded companies with over $2 billion in market capitalization with an average-to-weak financial condition.

    Next, I tested the 119 metrics that Audit Integrity flags and discovered that 15 of those metrics appeared consistently as identifiers of problematic companies; the first metric was prevalent in 65 percent of the 196 high-risk companies and the 11th evident in 40 percent. The other 8,000 companies tested had low incidences of these same metrics. A list – dubbed the Risky Business Catalogue – details the common metrics within high-risk companies. Board members, the C-suite, and general auditors should note if their company is a candidate for the RBC. The evidence is not saying that significant issues are imminent if a company has one of the RBCs, but a combination of RBC metrics indicate risk factors to the entity’s business model and strategy.

    RBC’s metrics include:

    1. The company has entered into a merger within the last 12 months. While there is certainly nothing wrong with corporate M&A activity, it’s common for policies to be revised and system integrations to be rushed. Company directors need to caution general auditors to be extra vigilant post merger and increase testing of balance sheet accounts.

    2. The CEO and CFO’s compensation is more highly weighted toward incentive compensation than base compensation. This situation can cause negative motivations and earnings to be increased more creatively to ensure a larger portion of executive pay packages. Close attention should be paid to revenue recognition.

    3. The Board Chairman is also the CEO. An age-old debate, but indispuditedly conflicts of interest invariably result when a company CEO is also its Chairman. Separate the roles to improve governance and reduce compromised oversight.Compromised reliability exists because the very architecture of governance has a built in conflict when the Chairman is also CEO.

    4. The company has undergone a restructuring in the last 12 months. Restructuring may be completely valid, but also can be employed to conceal the lack of sustainable earnings growth. Directors, by role definition, should be intimately involved in restructuring procedures decisions and promised outcomes.

    5. The company has encountered a public regulatory action in the last 12 months. Many corporate stakeholders hold true to the statement that where there’s smoke, there’s fire. Directors should no longer accept “no worries” explanations on regulatory matters. Compliance tests should be employed routinely and if regulatory action does occur, management needs to take action.

    6. The amount of goodwill carried on the balance sheet, when compared to total assets, is high. When intangible assets such as goodwill grow, boards should ask more probing questions about how the business model generated these assets and about concomitant valuation protocols. General Auditors should confirm that models are comprehensively back tested and impairment procedures are adhered to assiduously.

    7. The ratio of the CEO’s total compensation to that of the CFO is high. If a CEO is awarded a much larger paycheck than anyone else (particularly particularally the CFO), it increases governance risk and leads to a top-directed culture, thus limiting collaboration. Boards need to be involved in all executive compensation issues including that which drives pay packages for the CFO, Chief Risk Officer, as well as internal auditors,. etc.

    8. Operating revenue is high when compared to operating expenses. Riskier companies have revenue recognition in excess of what is expected based on operating revenues. Directors should fully understand revenue recognition policies and instruct management to test them to be sure they are not aggressive.

    9. A Divestiture(s) has occurred in the last 12 months. Data shows that riskier companies have more divestures, usually because it is an opportunity for more aggressive accounting activity. Board members should inquire as to how this action fits the strategy.

    10. Debt to equity ratio is high. When a business relies too heavily on debt it reveals that markets are not independently funding the business model or strategy. Boards should know why the markets are not investing in their entity and therefore why debt is so heavily relied upon. Board members should also be knowledgeable on the quality of their equity and not just the amount. Lastly, they should understand management’s funding overall funding strategy and the strength of contingent funding plans.

    11. A repurchase of company stock has taken place in the last 12 months. A repurchase of stock is usually presented to investors as an avenue to increase market demand for the stock, thereby elevating overall shareholder value. Management must provide reasoning for why there are no other ways to invest excess funds. Boards should also request the general auditor to review insider sales during the period of share repurchase programs.

    12. Inventory valuations to total revenue is increasing. When inventory increases in relation to revenue it should raise control questions about inventory valuation. It could indicate changing consumer preferences, which should spur an analysis of a corporation’s business model.

    13. Accounts receivables to sales is increasing. This situation can typically be indicative of relaxed credit standards. Directors should ask whether sales are decreasing due to market conditions and instruct the general auditor to probe receivables to determine their viability.

    14. Asset turnover has slowed when compared to industry peers. If assets are increasing and sales are not flowing it could indicate less productive assets are being brought, or retained, on the balance sheet. Conversely, if sales are decreasing, executives and auditors will again want to analyze changing customer preferences.

    15. Assets driven by financial models make up a larger portion of balance sheet. A collection of other accounting metrics indicates that boards, the C-suite, and general auditors should pay special attention to the controls, assumptions, and governance surrounding assets whose valuations are model driven. This is particularly true if assets that are valued by financial models make up a larger portion of the entities balance sheet.

    To be sure, any one of these in isolation as an indicator of accounting and governance risk can be debated. Company divestitures and M&A can be a healthy indicator. But if a corporation fails more than a few of these metrics, board members need to take action.

    It is easy to dismiss any one of these metrics when you find it is an issue in your company. Human nature is quick to retort – maybe for others but not for us. However, like time and tide, the numbers too, wait for no one. So, if you have any of these AGR metrics, you need to begin confronting these risk characteristics today to improve your corporate health and avoid the much more drastic financial equivalent of cardiovascular surgery tomorrow.

    Walter Smiechewicz is chief consultant for governance and risk at Audit Integrity, a research firm that provides accounting and governance risk analysis

     December 5, 2009 reply from Bob Jensen

    Here are some added thoughts:

    The risk factors are excerpted from AICPA Statement on Auditing Standards 82, “Consideration of Fraud in a Financial Statement Audit” (1997). That statement was issued to provide guidance to auditors in fulfilling their responsibility “to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.” Although there risk factor cover a broad range of situations, they are only examples. In the final analysis, audit committee members should use sound informed judgment when assessing the significance and relevance of fraud risk factors that may exist. Reporting Red Flags.pdf
    There may be an update on this material.

    Reflections on the audit committee's role ---

    You might browse some of the Financial Analysis Lab materials at Georgia Tech (directed by Chuck Mulford) ---
    This is one of the best centers of academic study of financial reporting and fraud.

    Mulford and Gene Comiskey some great books on red flags in financial reporting.  These include the following:

    ·         Creative Cash Flow Reporting: Uncovering Sustainable Financial Performance

    ·         The Financial Numbers Game: Detecting Creative Accounting Practices

    ·         Financial Warnings: Detecting Earning Surprises, Avoiding Business Troubles, Implementing Corrective Strategies
    This is a bit dated (1996) but it is a classic that I keep within arms reach.


    Fraudulent Revenue Accounting
    "Detecting Circular Cash Flow:  Healthy doses of skepticism and due care can help uncover schemes to inflate sales," by John F. Monhemius and Kevin P. Durkin, Journal of Accountancy, December 2009 ---

    Following an initial customer confirmation request with no response, a first-year auditor mails a second and third request, all under the supervision of the auditor-in-charge assigned to the account. Field work begins on the audit, but there is still no response from the customer. Another auditor scanning the cash journal from the beginning of the year through the current date notes that all outstanding invoices have subsequently been paid from this customer during this period. Customer check copies are provided, and remittances indicate that payment has been received in settlement of all outstanding invoices at fiscal year-end for this customer. But has the existence of accounts receivable from this customer at fiscal year-end really been established?

    Fraudsters have been creating increasingly complex and sophisticated schemes designed to rely on potential weaknesses in the execution of audit procedures surrounding key assertions such as existence. A financial statement auditor can use his or her professional judgment while carrying out audit procedures to detect such a scheme.

    Given the difficult economic times of the past year, special care should be given to consider fraud while performing audit engagements. One fraud scheme that has been encountered with increasing frequency involves the inflation of accounts receivable and sales through the creation of a circular flow of cash through a company to give the appearance of increasing revenue and existence of accounts receivable. This article addresses this fraud technique when used to materially overstate assets and inflate borrowing capacity under an asset-based revolving line of credit. This article also points out red flags that may help uncover such a scheme.


    A typical asset-based revolving line of credit allows a company to borrow funds for working capital. The borrowing limit is based on a formula that takes into account various working capital assets and related advance rates. A typical availability formula allows for loan advances equal to a set percentage of asset balances.

    This article focuses on an accounts receivable- backed line of credit, an asset that is prone to manipulation in this specific fraud scheme. Typical advances against accounts receivable range from 75% to 85% of eligible accounts receivable. Items excluded from eligible collateral would include invoices aged over 90 days, affiliate receivables or any other invoice that would create a nonprime receivable from the lender’s perspective. The loan agreement in an asset-based loan facility requires management to submit an availability calculation periodically. This allows the lender to monitor collateral levels and exposure. A generic accounts receivable availability calculation is illustrated in Exhibit 1.

    Continued in article

    Bob Jensen's threads on revenue accounting frauds
    Revenue Reporting Frauds ---

    Bob Jensen's Fraud Updates ---

    Third Disgraced Pennsylvania Revenue Secretary to Resign in the Rendell Administration.
    "Whip DeWeese, revenue chief Stetler charged in corruption probe," by Brad Bumsted, Pittsburgh Tribune Review, December 15, 2009 ---

    Former state House Speaker H. William DeWeese, former Revenue Secretary Steve Stetler and DeWeese aide Sharon Rodavich were charged today in an ongoing legislative corruption investigation led by Attorney General Tom Corbett.

    DeWeese, D-Greene County, Stetler and Rodavich were charged with theft, conspiracy and conflict of interest. The charges against DeWeese and Rodavich stem from their allegedly raising money for DeWeese's campaigns with state-paid workers, resources and time.

    "The grand jury showed that DeWeese's legislative dstaff and campaign staff were virtually one and the same," Corbett said. DeWeese aides testified to the grand jury that "campaign work for DeWeese was expected" from legislative staff.

    They are the latest ensnared in a nearly 3-year-old probe, which has resulted in charges against 22 other current and former Democrat and Republican staffers and lawmakers. DeWeese is the second former speaker charged in the investigation. Republican John Perzel of Philadelphia was charged Nov. 12 with spending millions of taxpayer dollars on campaigns.

    DeWeese saw his former chief of staff, Mike Manzo, and former right-hand man Mike Veon charged in the first round of indictments, handed down in July 2008. DeWeese, a 33-year veteran of the House, has been a force in state politics for nearly two decades, including a stint in 1993 as Speaker.

    Stetler, a former House member from York who oversaw Democratic campaigns, resigned this morning as a member of Gov. Ed Rendell's Cabinet, a senior administration official said.

    Corbett's announcement comes as the General Assembly is in the midst of approving table games at casinos. The charges could create chaos in a legislature stung by a series of disclosures since the investigation began in February 2007. Recent polls show public opinion of the body at its lowest level ever, after earlier charges and a 101-day budget impasse.

    The Tribune-Review reported last week that DeWeese met three times with the attorney general's investigative team and his attorney Walter Cohen said he was cooperating fully. DeWeese was not seeking immunity, Cohen said.

    Cohen said today he received no information about Corbett's charges.

    Last week, the attorney general's office lost the first corruption case to go to trial. Former Rep. Sean Ramaley of Baden was acquitted on six felony counts of holding a sham job in Veon's Beaver Falls office.

    Prosecutors alleged Ramaley used the job to campaign. A Dauphin County jury cleared him after his lawyer Philp Ignelzi of Pittsburgh told jurors there was reasonable doubt about each charge.

    Five Democrats in that case have agreed to plead guilty. Veon, facing multiple charges of theft, conflict of interest and conspiracy, is slated for trial Jan. 19 along with aides. That case revolves around the use of millions of dollars in taxpayer-financed bonuses to reward staffers who worked campaigns. Veon, Annamarie Peretta-Rosepink and Brett Cott, strongly maintain their innocence.

    Last month, former House Speaker John Perzel, R-Philadelphia, was accused with 9 other Republicans of directing a scheme to divert $10 million in tax money to pay for sophisticated computer equipment and programs that Perzel allegedly wanted to give Republicans an edge in elections. Perzel through his attorney says he is innocent of all charges.

    Bob Jensen's fraud updates are at

    Hard Copy of FASB Codification Available

    FASB Codification Bound Vols. FASB Codification—Four Volumes (This bound edition is expected to be available the week of December 21. Your credit card will not be charged until the publication is shipped. For orders of 6 or more sets please call 800.748.0659.)

    This print edition also includes the codification of FASB Statements No. 166, Accounting for Transfers of Financial Assets, and No. 167, Amendments to FASB Interpretation No. 46(R), although the codification of these two Statements has not been released in the online version as of October 31, 2009. FASB Statement No. 164, Not-for-Profit Entities: Mergers and Acquisitions, has not been codified as of October 31, 2009 and is not included in this bound edition.

    Volume 1 includes the Notice to Constituents which provides information to aid in understanding the topical structure, content, style, and history of the FASB Codification and also contains the following Areas:
    1. General Principles (Topic 105)
    2. Presentation (Topics 205 through 280)
    3. Assets (Topics 305 through 360)
    4. Liabilities (Topics 405 through 480)
    5. Equity (Topic 505).
    Volume 2 includes:
    1. Revenue (Topic 605)
    2. Expenses (Topics 705 through 740)
    3. Part of the Broad Transactions Area (Topics 805 through 815).
    Volume 3 includes:
    1. The remainder of the Broad Transactions Area (Topics 820 through 860)
    2. Part of the Industry Area (Topics 905 through 944).
    Volume 4 includes:
    1. The remainder of the Industry Area (Topics 946 through 995)
    2. The Master Glossary.


    The FASB Codification database may be accessed (not free) at

    Bob Jensen's (negative) threads on the Codification Database are at

    FASB Statement 167: Consolidation of Variable Interest Entities

    FASB significantly revamped its consolidation standards for variable interest entities when it released Statement No. 167 in June 2009. Those standards rework existing rules under FIN 46R for when a company must include a VIE on its books with a potentially huge impact on corporate balance sheets.

    The criteria for determining an entity's VIE status have shifted, based now more on a company's "obligations" and "power" over an entity than on ownership percentage or absorption of losses. Complicating matters further are new disclosure requirements to explain consolidation decisions.

    New standards cover fiscal years after Nov. 15, 2009, so they affect financials published as soon as March or April 2010. Advisors must prepare now for the standards, which require reevaluation of existing entity relationships, regardless of whether VIEs were previously consolidated.

    How Will This Statement Change Current Practice?
    This Statement amends Interpretation 46(R) to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics:

    a. The power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance

    b. The obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. Additionally, an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance.

    This Statement amends Interpretation 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. Before this Statement, Interpretation 46(R) required reconsideration of whether an enterprise is the primary beneficiary of a variable interest entity only when specific events occurred. This Statement amends Interpretation 46(R) to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity, which was based on determining which enterprise absorbs the majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both.

    This Statement amends certain guidance in Interpretation 46(R) for determining whether an entity is a variable interest entity. It is possible that application of this revised guidance will change an enterprise’s assessment of which entities with which it is involved are variable interest entities.

    This Statement amends Interpretation 46(R) to add an additional reconsideration event for determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance.

    Under Interpretation 46(R), a troubled debt restructuring as defined in paragraph 2 of FASB Statement No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, was not an event that required reconsideration of whether an entity is a variable interest entity and whether an enterprise is the primary beneficiary of a variable interest entity. This Statement eliminates that exception.

    This Statement amends Interpretation 46(R) to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The enhanced disclosures are required for any enterprise that holds a variable interest in a variable interest entity. This

    Statement nullifies FASB Staff Position FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities. However, the content of the enhanced disclosures required by this Statement is generally consistent with that previously required by the FSP.

    How Will This Statement Improve Financial Reporting?]
    This Statement amends Interpretation 46(R) to replace the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which enterprise has a controlling financial interest in a variable interest entity.

    This Statement requires an additional reconsideration event when determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance. It also requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity. These requirements will provide more relevant and timely information to users of financial statements.

    This Statement amends Interpretation 46(R) to require additional disclosures about an enterprise’s involvement in variable interest entities, which will enhance the information provided to users of financial statements.

    What Is the Effect of This Statement on Convergence with International Financial Reporting Standards?
    The International Accounting Standards Board (IASB) has a project on its agenda to reconsider its consolidation guidance. The IASB issued two related Exposure Drafts, Consolidation and Derecognition, in December 2008 and March 2009, respectively. The IASB project on consolidation is a broader reconsideration of all consolidation guidance (not just the guidance for variable interest entities).

    Although this Statement was not developed as part of a joint project with the IASB, the FASB and IASB continue to work together to issue guidance that yields similar consolidation and disclosure results for special-purpose entities. The ultimate goal of both Boards is to provide timely, transparent information about interests in specialp purpose entities. However, the timeline and anticipated effective date of the IASB project is different from the effective date of this Statement.

    This Statement addresses the potential impacts on the provisions and application of Interpretation 46(R) as a result of the elimination of the qualifying special-purpose entity concept in Statement 166. Ultimately, the two Boards will seek to issue a converged standard that addresses consolidation of all entities.

    What's Right and What's Wrong With SPEs, SPVs, and VIEs ---

    Calling All CPA Auditors for New Clients

    "New SEC Madoff rule," New York Post, December 17, 2009 ---

    The Securities and Exchange Commission approved final rules yesterday requiring some investment advisers who manage customer funds to undergo annual surprise audits.

    The rule is prompted by the Bernard Madoff scandal, requiring certain SEC-registered advisers who have custody of clients&apos; assets to retain an independent public accountant to conduct an annual exam.

    If funds are found missing, the accountants must notify the SEC.

    Bob Jensen's threads on mutual fund and index fund scandals are at

    A close-up look at the IT infrastructure behind the Madoff affair

    December 17, 2009 message from Scott Bonacker [lister@BONACKERS.COM]

    There is an article in the new Bank Technology News that might be of interest to anyone teaching internal controls or fraud detection. Or if you're just curious.

    "Special Feature The IT Secrets from the Liar's Lair Two years ago, IT executive Bob McMahon wondered why his highly-profitable employer, Bernard L. Madoff Investment Services, didn't replace antiquated systems with more modern and efficient off-the-shelf technology. On Dec. 11, 2008, when Madoff was arrested, he got his answer.A close-up look at the IT infrastructure behind the Madoff affair."

    Scott Bonacker CPA
    Springfield, MO

    "The IT Secrets from the Liar's Lair," by John Dodge, Bank Technology News, December 2009 ---

    Two years ago, IT executive Bob McMahon wondered why his highly-profitable employer, Bernard L. Madoff Investment Services, didn't replace antiquated systems with more modern and efficient off-the-shelf technology. The Madoff systems were expensive to maintain and made it difficult to grow the business by expanding into new classes of securities. McMahon's job: To organize and document projects that would create custom technology for the firm's trading operations.

    On Dec. 11, 2008, he got his answer.

    That day, Bernie Madoff was arrested and charged with stealing tens of billions of his clients' money over decades. McMahon realized if "technologists" had replaced the proprietary systems with more modern and open computers, they would have invariably found the absence of data on countless stock trades that supposedly took place. In a sense, the preservation of old computer technology helped Madoff successfully go undetected for years until his massive Ponzi scheme collapsed that day.

    Over the past six weeks, Securities Industry News, a sister publication of Bank Technology News, has dug into and beyond the court records to construct an extensive picture of how Madoff actually operated: The systems and technology he and underlings used to create - or fake - the most detailed set of customer accounts underlying a fraud in the history of the securities industry.

    Included are details of a declaration filed Oct. 16 on behalf of the court-appointed trustee, Irving Picard, investigating the case, and information filed in court when two IT employees were arrested in mid-November. The documents, and subsequent interviews, describe how the real and the fake trading floors worked, and why the securities investors believed they owned are never going to be declared "missing." The answer: Because they never existed in the first place.


    "I asked myself how Bernie could have hidden and maintained this for so long. A lot of it was because he had proprietary and legacy systems. And he relied on IT people he hired and paid," to not upset the status quo, says McMahon.

    As a project manager, he always felt like an odd duck at Bernard L. Madoff Investment Services (BLMIS), an outfit which seemed to lack standards and procedures routine at former employers of his such as the International Securities Exchange and CheckFree Investment Services (now Fiserv, Inc.). Little was documented and the company seemed to be overwhelmed keeping the older systems from breaking down.

    "I immediately recognized there was massive institutional chaos in the way the place was managed. No one found value in participating in project management meetings or in writing things down. There was no documentation," says McMahon, today an operational performance consultant for Standard & Poors.

    McMahon lasted less than a year at Madoff's firm. He was hired in February 2007, by long-time BLMIS chief information officer Elizabeth Weintraub. She died in September of that year. Differences over updating the systems and formalizing procedures with Weintraub's two successors led to his dismissal the following January, by McMahon's account.

    Nader Ibrahim, who was on the support desk from 2000 to 2003, confirmed that the atmosphere in the BLMIS IT department was often tense and unusual.

    "We did not have titles, which was definitely suspicious to me. We all knew who each other worked for, but nobody knew what the other person was doing," he said. "Everything was on a need-to-know basis. There was a lot of secrecy."

    But the real secret about Madoff's purported trading for thousands of investment advisory clients, investigators say, is that it never happened.

    To be fair, it's not as if Madoff didn't have a real trading floor. Madoff's legitimate market-making business was located on the 19th floor of 885 Third Ave., in New York, using one IBM Application System/400 computer, known within the firm as "House 5.'' BLMIS' information technology operation was located on the 18th floor, where McMahon had his cube and was supposed to organize and document projects involving custom technology for the trading operation.

    What was on the 17th floor? The fake trading floor where a second IBM AS/400 known internally as "House 17" processed historical price information on securities allegedly bought for clients. The end result was phony trade confirmations and wholly manufactured-but official-looking-statements for 4,903 investment advisory clients.


    Madoff's legitimate traders used a mix of green-screen and "M2" Windows-based desktop computers. These ran in-house trading software referred to as MISS, which McMahon recalled standing for something like "Madoff Investment Systems and Services." The internally-named and developed M2s ran MISS as a Windows application and were used by younger traders who wanted familiar software instead of the rigid green screen system, developed around 1985, where only text appeared on screen and instructions were in almost cryptic codes entered into command lines.

    Support for House 5 was almost like that of a large investment bank's support of its trading operations. Nothing was too good, in theory, for the Madoff trading operation on the 19th floor. Even if it was not necessary.

    "Madoff did not buy anything off the shelf. The IT team was doing proprietary software development. Maybe J.P. Morgan Chase needs all this heavy technology, but a hedge fund with 120 people doesn't have to be in systems development," says McMahon, adding that a similarly-sized firm might have a half dozen IT people. Both McMahon and Ibrahim pegged the number of people actively supporting technology at BLMIS at between 40 and 50.

    But large staff and support for House 5 has not thrown off investigators. Court-appointed trustee Irving Picard, who is charged with liquidating Madoff's remaining assets, has instead focused on "House 17,'' where the daily administration of the Ponzi scheme was executed.

    Picard hired an investigator, Joseph Looby, an accounting forensics expert who probably knows the most about the technology that aided Madoff in stealing client funds other than former members of Madoff's staff. Looby is an expert in electronic fraud and senior managing partner with FTI Consulting Inc. in New York.

    Looby's 20-page declaration on Picard's behalf with the U.S. Bankruptcy Court for Southern District of New York on Oct. 16 amounts to the deepest examination yet of the foundational technology behind Madoff's fraud. The declaration seeks to deny paying Madoff's victims based on their last statements, dated Nov. 30, 2008, because the values stated were based on investments that were allegedly never bought or sold (see graphic at right).

    Reached in his Times Square office, Looby, like Picard, said he could not elaborate on his examination of "House 17. But in the declaration, he reported that "House 5" supported Madoff's market-making operation and was networked to third parties outside the firm that would logically support a trading operation. One, for example, was the depository and clearing firm Depository Trust & Clearing Corp. (DTCC).

    "[House 5] was an AS/400, consistent with a legitimate securities trading business," Looby wrote. In the declaration, he often compares House 5's legitimacy to House 17's illegitimacy.

    House 17, for reasons that are now obvious, was shut off to anyone but Madoff's former chief finance officer and right-hand-man Frank DiPascali Jr. as well as his alleged accomplices. That list now includes Jerome O'Hara, 46, and George Perez, 43, who have both been charged in civil and criminal complaints with helping DiPascali create the phoney statements that supported the Ponzi scheme. O'Hara and Perez face 30 years in prison and more than $5 million in fines if convicted. DiPascali sits in a New York jail awaiting sentencing after pleading guilty to 10 felony counts on Aug. 11. He faces 125 years and his sentencing is scheduled for May 2010. In the interim, investigators are hoping to get his cooperation to implicate others.

    "They want to squeeze him for more than what he's giving now so he can avoid 125 years in prison," says Erin Arvedlund, author of "Too Good to be True: The Rise and Fall of Bernie Madoff." The former reporter for Barron's in a widely-cited 2001 story challenged Madoff's implausible if not impossible returns and asked why hundreds of millions in uncollected commissions were left on the table. It appears now there were no trades made, from which to derive commissions. "[House 17] was a closed system, separate and distinct from any computer system utilized by the other BLMIS business units; consistent with one designed to mass produce fictitious customer statements," according to Looby's declaration. House 17's expressed purpose was to maintain phony records and crank out millions of phony IRS 1099s on capital gains and dividends, trade confirmations, management reports and customer statements. "The AS/400 was like a giant Selectric typewriter. When you're making up numbers like that, you're using your computer as a typewriter," says computer consultant Judith Hurwitz, president of Hurwitz & Associates in Newton, Mass.


    House 17 held 4,659 active accounts overseen by DiPascali where Madoff purportedly executed a "split strike conversion" strategy on large cap stocks. In basic terms, it's a "collar," putting a floor and a ceiling on returns. A floor on potential losses is created by purchasing a put on a stock. The sale of a call then puts a ceiling on the returns. The "split" in "strike" prices is considered a "vacation trade.'' The trader doesn't worry about what happens until the expiration dates on the put or call options arrive.

    The strategy was allegedly applied for the thousands of customers on "baskets" of large cap stocks. According to the faked BLMIS statements, these accounts typically yielded 11 to 17 percent returns annually.

    Another 244 "non-split strike" accounts produced phony returns in excess of 100 percent and were managed by BLMIS employees other than DiPascali.

    The "non-split strike" accounts included many "long time" Madoff customers and feeder funds such as those operated by Stanley Chais or Jeffry Picower and against whom Picard has filed civil suits to reclaim billions in profits alleged to be illegal. Picower of Palm Beach was found dead in his pool Oct. 25. Chais maintains he's innocent.

    In the declaration, Looby repeatedly asserts that no securities were ever bought for BLMIS investment advisory customers. Proceeds sent in by clients for that purpose were "instead primarily used to make distributions to or payments on behalf of, other investors as well as withdrawals and payments to Madoff family members and employees," the declaration states.

    Here's how it worked: BLMIS employees fed the AS/400 constantly with stock data, enough to support trades that would satisfy the expectations promised to Madoff's thousands of eventual victims. To support the fantasy returns, so-called "baskets" of S&P100 stocks would be bought and sold, on behalf of clients. Looby did not specify the typical size of a basket, but they were proportional to the proceeds a client had remitted to BLMIS. "If a basket was $400,000 and a customer had $800,000 available, two baskets of securities and options would be purportedly "purchased" for the account," Looby wrote. The types of stocks can be seen in a Madoff statement. Proceeds from purported basket sales existed only on "House 17" and on the paper it put out, which indicated the funds were put into safe U.S. Treasury bonds. Meanwhile, funds remitted by clients were being diverted to a JPMorgan Chase & Co. bank account known as "703."

    The complaints against O'Hara and Perez add further rich detail to how Madoff and his accomplices used aging but extensive computer technology to maintain the fraud. They also seem to confirm what common sense suggests about such a massive and enduring fraud: Madoff and DiPascali had to have technical help.

    "O'Hara and Perez wrote programs that generated many thousands of pages of fake trade blotters, stock records, Depository Trust Corp. reports and other phantom books and records to substantiate nonexistent trading. They assigned names to many of these programs that began with "SPCL," which is short for "special," according to an SEC press announcement about the civil complaint.

    The "special" programs were found on backup tapes, according to an official close to the investigation and who asked not to be identified. He added that the pair has not been cooperating with authorities. The evidence in the complaints is from BLMIS computers and documents, according to the source.

    Among 10 fraudulent functions detailed in the criminal complaint, the special programs altered trade details by using "algorithms that produced false and random results;" created "false and fraudulent execution reports;" and "generated false and fraudulent commission reports." The criminal complaint also charges the pair with helping Madoff and DiPascali create misleading reports between 2004-08 to throw off SEC investigators and a European accounting firm hired by a Madoff client.

    In 2006, O'Hara and Perez cashed out their BLMIS accounts worth "hundreds of thousands of dollars" and told Madoff they would no longer "generate any more fabricated books and records." O'Hara's handwritten notes from the encounter allegedly say "I won't lie any longer."

    However, the "crisis of conscience" did not stop them from asking for a 25 per cent bump in salary and a $60,000 bonus to keep quiet, the complaints allege.

    "DiPascali then managed to convince O'Hara and Perez to modify computer programs to he and other 17th floor employees could create the necessary reports," according to the SEC complaint. The reference to "other 17th floor employees" suggests that O'Hara and Perez will not be the last to be charged.

    A sharp eye could have detected that funds weren't where they were supposed to be: 2008 customer statements showed funds in a "Fidelity Spartan U.S. Treasury Money Market Fund" that hadn't been offered since 2005. The fabulous returns had lulled BLMIS clients to sleep. While some trading data was input by hand, DiPascali cleverly used "essentially a mail merge program" to replicate the same stock trading information across multiple accounts, according to the declaration.

    Stocks in a basket were "priced" after the market closed (i.e., with the knowledge of the prior published price history). Customer statements were then fabricated by BLMIS staff on House 17 which appeared to outsiders to keep track of customer investments and funds in a manner typical of any investment advisor. "BLMIS staff confirmed it, the system facilitated it and consistent returns could not have been achieved without it," Looby's declaration states.

    Indeed, the customer statements had been perfected as an instrument in the deception. Madoff investor Ronnie Sue Ambrosino, a former computer analyst who ironically had worked on an AS/400, told Securities Industry News that she never suspected a thing. After all, the Securities and Exchange Commission had given Madoff a clean bill of health on several occasions since 1992 by not digging deeply into his operations or just plain neglect.

    "The statements were always perfect, neat and immaculately presented. They came on time and everything was like clockwork," says Ambrosino, 56, a victim and now activist representing a group of about 400 Madoff investors. She bristles when the AS/400 is called old or outdated. "I know the 400 and it's a pretty powerful machine." It was powerful enough to convince investors that whatever proceeds they sent to Madoff were being invested in the stocks cited on their statements. "Key punch operators were provided with the relevant basket information that they manually entered into House 17. The basket trade was then routinely replicated in selected BLMIS split strike customer accounts automatically and proportionally according to each customer's purported net equity," Looby's declaration says.

    The situation was largely the same for non-split strike clients except that the purported trades were in single equities, not baskets. "Thousands of documents including customer statements, IA (investment advisory) staff notes, account folders and programs in the AS/400 were reviewed, and these documents confirm the fact that such statements were prepared on an account-by-account basis (i.e. not basket trading)," Looby wrote.

    Looby verified that trades between 2002 and 2008 were phantom by cross-checking with various clearing houses such as DTCC, Clearstream Banking S.A. in Luxembourg, the Chicago Board of Options Exchange (CBOE) and four other clearing firms. He also compared the cleared trades on the AS/400 "House 5" and "99.9 percent" of the fake trades on "House 17" did not match. The only connection he found is what looked like a small portion of a single client's trades, which were directed by the client and recorded on House 5.

    Madoff employees monitored the "baskets" for split strike accounts in an Excel spreadsheet to make sure "the prices chosen after-the-fact obtained returns that were neither too high or low."

    However, such monitoring was far from perfect. Looby cited several examples where daily trading volumes at BLMIS exceeded the entire daily volume for several stocks.

    For instance, Madoff reported the purchase of 17.8 million shares of Exxon Mobil on Oct. 16, 2002. This amounted to 131 percent of the company's trading volume for that day. BLMIS's actual Exxon Mobil holdings that October were verified by the DTCC at 5,730 shares. Similar discrepancies for Amgen, Microsoft and Hewlett Packard were found on Nov. 30, 2008, the date for the final batch of BLMIS customer statements, as it turned out.

    BLMIS data for options puts and calls was even more blatantly unreal. On Oct. 11, 2002, Looby found that BLMIS "applied an imaginary basket to 279 accounts with a volume of 82,959 OEX (S&P 100 options) calls and 82,959 puts." That amounted to 13 times the OEX volume at the CBOE that day.

    Bob Jensen's fraud updates are at

    Bob Jensen's Rotten to the Core threads are at


    "Peter R. Scanlon, Who Led Coopers When Big 8 Ruled Auditing, Is Dead at 78," by Dennis Hevesi, The New York Times, December 10, 2009 ---

    Peter R. Scanlon, a former chairman and chief executive of one of the world’s largest public accounting firms, died on Dec. 3 at his home in Jupiter, Fla. He was 78.

    The cause was cancer, his daughter Barbara Scanlon Jessup said.

    Mr. Scanlon led Coopers & Lybrand from 1982 to 1991; the firm merged with Price Waterhouse in 1998 to form PricewaterhouseCoopers. During his tenure, the company was regularly referred to as one of the Big Eight. But with consolidation in the industry, and with Arthur Andersen out of business, PricewaterhouseCoopers is now one of the Big Four.

    In the late 1980s, under Mr. Scanlon, Coopers & Lybrand often drew criticism for shunning the merger mania that engulfed the accounting profession. Ultimately, however, the firm was credited with having turned the situation to its advantage. By attracting disaffected affiliates of its competitors in other countries, it was able to expand its international franchise without incurring the costs of all-out mergers.

    “We’re not opposed to mergers, but we’re just not going to do it because everyone thinks it’s the right thing to do,” Mr. Scanlon told The New York Times in 1989.

    Mr. Scanlon brought in major new clients, including SmithKline Beckman and Unilever, and expanded his company’s existing operations rather than opening new offices. In the process he steered its profitability close to that of the other big firms. In 1991, his last year as its leader, Coopers & Lybrand earned $261 million on revenues of $1.5 billion.

    Peter Redmond Scanlon was born in the Bronx on Feb. 18, 1931, one of eight children of Loretta Ryan and John Scanlon Jr. His father, who owned an insurance company, died when Peter was 9.

    Peter was the first in his family to graduate from college, earning a bachelor’s degree in accounting from Iona College in 1952. He immediately joined what was then known as Lybrand, Ross Brothers & Montgomery. After serving in the United States Navy during the Korean War, he returned to the company and began rising through its ranks.

    Besides his daughter Barbara, Mr. Scanlon is survived by his wife of 56 years, the former Mary Jane Condon; another daughter, Janet Scanlon; two sons, Peter and Brian; and eight grandchildren. His son Mark died in 1992.

    Bob Jensen's threads on accounting history --- Click Here

    Bob Jensen's threads on the large accounting firms --- Click Here

    The Greatest Swindle in the History of the World

    Paulson and Geithner Lied Big Time:  The Greatest Swindle in the History of the World
    What was their real motive in the greatest fraud conspiracy in the history of the world?

    Bombshell:  In 2008 and early 2009, Treasury Secretary leaders Paulson and Geithner told the media and Congress that AIG needed a global bailout due to not having cash reserves to meet credit default swap (systematic risk) obligations and insurance policy payoffs. On November 19, 2009 in Congressional testimony Geithner now admits that all this was a pack of lies. However, he refuses to resign as requested by some Senators.

    Oh really?
    "AIG and Systemic Risk Geithner says credit-default swaps weren't the problem, after all," Editors of The Wall Street Journal, November 20, 2009 ---
    Click Here

    TARP Inspector General Neil Barofsky keeps committing flagrant acts of political transparency, which if nothing else ought to inform the debate going forward over financial reform. In his latest bombshell, the IG discloses that the New York Federal Reserve did not believe that AIG's credit-default swap (CDS) counterparties posed a systemic financial risk.


    For the last year, the entire Beltway theory of the financial panic has been based on the claim that the "opaque," unregulated CDS market had forced the Fed to take over AIG and pay off its counterparties, lest the system collapse. Yet we now learn from Mr. Barofsky that saving the counterparties was not the reason for the bailout.

    In the fall of 2008 the New York Fed drove a baby-soft bargain with AIG's credit-default-swap counterparties. The Fed's taxpayer-funded vehicle, Maiden Lane III, bought out the counterparties' mortgage-backed securities at 100 cents on the dollar, effectively canceling out the CDS contracts. This was miles above what those assets could have fetched in the market at that time, if they could have been sold at all.

    The New York Fed president at the time was none other than Timothy Geithner, the current Treasury Secretary, and Mr. Geithner now tells Mr. Barofsky that in deciding to make the counterparties whole, "the financial condition of the counterparties was not a relevant factor."

    This is startling. In April we noted in these columns that Goldman Sachs, a major AIG counterparty, would certainly have suffered from an AIG failure. And in his latest report, Mr. Barofsky comes to the same conclusion. But if Mr. Geithner now says the AIG bailout wasn't driven by a need to rescue CDS counterparties, then what was the point? Why pay Goldman and even foreign banks like Societe Generale billions of tax dollars to make them whole?

    Both Treasury and the Fed say they think it would have been inappropriate for the government to muscle counterparties to accept haircuts, though the New York Fed tried to persuade them to accept less than par. Regulators say that having taxpayers buy out the counterparties improved AIG's liquidity position, but why was it important to keep AIG liquid if not to protect some class of creditors?

    Yesterday, Mr. Geithner introduced a new explanation, which is that AIG might not have been able to pay claims to its insurance policy holders: "AIG was providing a range of insurance products to households across the country. And if AIG had defaulted, you would have seen a downgrade leading to the liquidation and failure of a set of insurance contracts that touched Americans across this country and, of course, savers around the world."

    Yet, if there is one thing that all observers seemed to agree on last year, it was that AIG's money to pay policyholders was segregated and safe inside the regulated insurance subsidiaries. If the real systemic danger was the condition of these highly regulated subsidiaries—where there was no CDS trading—then the Beltway narrative implodes.

    Interestingly, in Treasury's official response to the Barofsky report, Assistant Secretary Herbert Allison explains why the department acted to prevent an AIG bankruptcy. He mentions the "global scope of AIG, its importance to the American retirement system, and its presence in the commercial paper and other financial markets." He does not mention CDS.

    All of this would seem to be relevant to the financial reform that Treasury wants to plow through Congress. For example, if AIG's CDS contracts were not the systemic risk, then what is the argument for restructuring the derivatives market? After Lehman's failure, CDS contracts were quickly settled according to the industry protocol. Despite fears of systemic risk, none of the large banks, either acting as a counterparty to Lehman or as a buyer of CDS on Lehman itself, turned out to have major exposure.

    More broadly, lawmakers now have an opportunity to dig deeper into the nature of moral hazard and the restoration of a healthy financial system. Barney Frank and Chris Dodd are pushing to give regulators "resolution authority" for struggling firms. Under both of their bills, this would mean unlimited ability to spend unlimited taxpayer sums to prevent an unlimited universe of firms from failing.

    Americans know that's not the answer, but what is the best solution to the too-big-to-fail problem? And how exactly does one measure systemic risk? To answer these questions, it's essential that we first learn the lessons of 2008. This is where reports like Mr. Barofsky's are valuable, telling us things that the government doesn't want us to know.

    In remarks Tuesday that were interpreted as a veiled response to Mr. Barofsky's report, Mr. Geithner said, "It's a great strength of our country, that you're going to have the chance for a range of people to look back at every decision made in every stage in this crisis, and look at the quality of judgments made and evaluate them with the benefit of hindsight." He added, "Now, you're going to see a lot of conviction in this, a lot of strong views—a lot of it untainted by experience."

    Mr. Geithner has a point about Monday-morning quarterbacking. He and others had to make difficult choices in the autumn of 2008 with incomplete information and often with little time to think, much less to reflect. But that was last year. The task now is to learn the lessons of that crisis and minimize the moral hazard so we can reduce the chances that the panic and bailout happen again.

    This means a more complete explanation from Mr. Geithner of what really drove his decisions last year, how he now defines systemic risk, and why he wants unlimited power to bail out creditors—before Congress grants the executive branch unlimited resolution authority that could lead to bailouts ad infinitum.

    Jensen Comment
    One of the first teller of lies was the highly respected Gretchen Morgenson of The New York Times who was repeating the lies told to her and Congress by the Treasury and the Fed. This was when I first believed that the problem at AIG was failing to have capital reserves to meet CDS obligations. I really believed Morgenson's lies in 2008 ---

    Here's what I wrote in 2008 ---
    Credit Default Swap (CDS)
    This is an insurance policy that essentially "guarantees" that if a CDO goes bad due to having turds mixed in with the chocolates, the "counterparty" who purchased the CDO will recover the value fraudulently invested in turds. On September 30, 2008 Gretchen Morgenson of The New York Times aptly explained that the huge CDO underwriter of CDOs was the insurance firm called AIG. She also explained that the first $85 billion given in bailout money by Hank Paulson to AIG was to pay the counterparties to CDS swaps. She also explained that, unlike its casualty insurance operations, AIG had no capital reserves for paying the counterparties for the the turds they purchased from Wall Street investment banks.

    "Your Money at Work, Fixing Others’ Mistakes," by Gretchen Morgenson, The New York Times, September 20, 2008 ---
    Also see "A.I.G., Where Taxpayers’ Dollars Go to Die," The New York Times, March 7, 2009 ---

    What Ms. Morgenson failed to explain, when Paulson eventually gave over $100 billion for AIG's obligations to counterparties in CDS contracts, was who were the counterparties who received those bailout funds. It turns out that most of them were wealthy Arabs and some Asians who we were getting bailed out while Paulson was telling shareholders of WaMu, Lehman Brothers, and Merrill Lynch to eat their turds.

    You tube had a lot of videos about a CDS. Go to YouTube and read in the phrase "credit default swap" ---
    In particular note this video by Paddy Hirsch ---
    Paddy has some other YouTube videos about the financial crisis.

    Bob Jensen’s threads on accounting for credit default swaps are under the C-Terms at

    The Greatest Swindle in the History of the World
    "The Greatest Swindle Ever Sold," by Andy Kroll, The Nation, May 26, 2009 ---


    The legislation's guidelines for crafting the rescue plan were clear: the TARP should protect home values and consumer savings, help citizens keep their homes and create jobs. Above all, with the government poised to invest hundreds of billions of taxpayer dollars in various financial institutions, the legislation urged the bailout's architects to maximize returns to the American people.

    That $700 billion bailout has since grown into a more than $12 trillion commitment by the US government and the Federal Reserve. About $1.1 trillion of that is taxpayer money--the TARP money and an additional $400 billion rescue of mortgage companies Fannie Mae and Freddie Mac. The TARP now includes twelve separate programs, and recipients range from megabanks like Citigroup and JPMorgan Chase to automakers Chrysler and General Motors.

    Seven months in, the bailout's impact is unclear. The Treasury Department has used the recent "stress test" results it applied to nineteen of the nation's largest banks to suggest that the worst might be over; yet the International Monetary Fund, as well as economists like New York University professor and economist Nouriel Roubini and New York Times columnist Paul Krugman predict greater losses in US markets, rising unemployment and generally tougher economic times ahead.

    What cannot be disputed, however, is the financial bailout's biggest loser: the American taxpayer. The US government, led by the Treasury Department, has done little, if anything, to maximize returns on its trillion-dollar, taxpayer-funded investment. So far, the bailout has favored rescued financial institutions by subsidizing their losses to the tune of $356 billion, shying away from much-needed management changes and--with the exception of the automakers--letting companies take taxpayer money without a coherent plan for how they might return to viability.

    The bailout's perks have been no less favorable for private investors who are now picking over the economy's still-smoking rubble at the taxpayers' expense. The newer bailout programs rolled out by Treasury Secretary Timothy Geithner give private equity firms, hedge funds and other private investors significant leverage to buy "toxic" or distressed assets, while leaving taxpayers stuck with the lion's share of the risk and potential losses.

    Given the lack of transparency and accountability, don't expect taxpayers to be able to object too much. After all, remarkably little is known about how TARP recipients have used the government aid received. Nonetheless, recent government reports, Congressional testimony and commentaries offer those patient enough to pore over hundreds of pages of material glimpses of just how Wall Street friendly the bailout actually is. Here, then, based on the most definitive data and analyses available, are six of the most blatant and alarming ways taxpayers have been scammed by the government's $1.1-trillion, publicly funded bailout.

    1. By overpaying for its TARP investments, the Treasury Department provided bailout recipients with generous subsidies at the taxpayer's expense.

    When the Treasury Department ditched its initial plan to buy up "toxic" assets and instead invest directly in financial institutions, then-Treasury Secretary Henry Paulson Jr. assured Americans that they'd get a fair deal. "This is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything," he said in October 2008.

    Yet the Congressional Oversight Panel (COP), a five-person group tasked with ensuring that the Treasury Department acts in the public's best interest, concluded in its monthly report for February that the department had significantly overpaid by tens of billions of dollars for its investments. For the ten largest TARP investments made in 2008, totaling $184.2 billion, Treasury received on average only $66 worth of assets for every $100 invested. Based on that shortfall, the panel calculated that Treasury had received only $176 billion in assets for its $254 billion investment, leaving a $78 billion hole in taxpayer pockets.

    Not all investors subsidized the struggling banks so heavily while investing in them. The COP report notes that private investors received much closer to fair market value in investments made at the time of the early TARP transactions. When, for instance, Berkshire Hathaway invested $5 billion in Goldman Sachs in September, the Omaha-based company received securities worth $110 for each $100 invested. And when Mitsubishi invested in Morgan Stanley that same month, it received securities worth $91 for every $100 invested.

    As of May 15, according to the Ethisphere TARP Index, which tracks the government's bailout investments, its various investments had depreciated in value by almost $147.7 billion. In other words, TARP's losses come out to almost $1,300 per American taxpaying household.

    2. As the government has no real oversight over bailout funds, taxpayers remain in the dark about how their money has been used and if it has made any difference.

    While the Treasury Department can make TARP recipients report on just how they spend their government bailout funds, it has chosen not to do so. As a result, it's unclear whether institutions receiving such funds are using that money to increase lending--which would, in turn, boost the economy--or merely to fill in holes in their balance sheets.

    Neil M. Barofsky, the special inspector general for TARP, summed the situation up this way in his office's April quarterly report to Congress: "The American people have a right to know how their tax dollars are being used, particularly as billions of dollars are going to institutions for which banking is certainly not part of the institution's core business and may be little more than a way to gain access to the low-cost capital provided under TARP."

    This lack of transparency makes the bailout process highly susceptible to fraud and corruption. Barofsky's report stated that twenty separate criminal investigations were already underway involving corporate fraud, insider trading and public corruption. He also told the Financial Times that his office was investigating whether banks manipulated their books to secure bailout funds. "I hope we don't find a single bank that's cooked its books to try to get money, but I don't think that's going to be the case."

    Economist Dean Baker, co-director of the Center for Economic and Policy Research in Washington, suggested to TomDispatch in an interview that the opaque and complicated nature of the bailout may not be entirely unintentional, given the difficulties it raises for anyone wanting to follow the trail of taxpayer dollars from the government to the banks. "[Government officials] see this all as a Three Card Monte, moving everything around really quickly so the public won't understand that this really is an elaborate way to subsidize the banks," Baker says, adding that the public "won't realize we gave money away to some of the richest people."

    3. The bailout's newer programs heavily favor the private sector, giving investors an opportunity to earn lucrative profits and leaving taxpayers with most of the risk.

    Under Treasury Secretary Geithner, the Treasury Department has greatly expanded the financial bailout to troubling new programs like the Public-Private Investment Program (PPIP) and the Term Asset-Backed-Securities Loan Facility (TALF). The PPIP, for example, encourages private investors to buy "toxic" or risky assets on the books of struggling banks. Doing so, we're told, will get banks lending again because the burdensome assets won't weigh them down. Unfortunately, the incentives the Treasury Department is offering to get private investors to participate are so generous that the government--and, by extension, American taxpayers--are left with all the downside.

    Joseph Stiglitz, the Nobel-prize winning economist, described the PPIP program in a New York Times op-ed this way:

    Consider an asset that has a 50-50 chance of being worth either zero or $200 in a year's time. The average "value" of the asset is $100. Ignoring interest, this is what the asset would sell for in a competitive market. It is what the asset is 'worth.' Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership!

    Assume that one of the public-private partnerships the Treasury has promised to create is willing to pay $150 for the asset. That's 50 percent more than its true value, and the bank is more than happy to sell. So the private partner puts up $12, and the government supplies the rest--$12 in "equity" plus $126 in the form of a guaranteed loan.

    If, in a year's time, it turns out that the true value of the asset is zero, the private partner loses the $12, and the government loses $138. If the true value is $200, the government and the private partner split the $74 that's left over after paying back the $126 loan. In that rosy scenario, the private partner more than triples his $12 investment. But the taxpayer, having risked $138, gains a mere $37."

    Worse still, the PPIP can be easily manipulated for private gain. As economist Jeffrey Sachs has described it, a bank with worthless toxic assets on its books could actually set up its own public-private fund to bid on those assets. Since no true bidder would pay for a worthless asset, the bank's public-private fund would win the bid, essentially using government money for the purchase. All the public-private fund would then have to do is quietly declare bankruptcy and disappear, leaving the bank to make off with the government money it received. With the PPIP deals set to begin in the coming months, time will tell whether private investors actually take advantage of the program's flaws in this fashion.

    The Treasury Department's TALF program offers equally enticing possibilities for potential bailout profiteers, providing investors with a chance to double, triple or even quadruple their investments. And like the PPIP, if the deal goes bad, taxpayers absorb most of the losses. "It beats any financing that the private sector could ever come up with," a Wall Street trader commented in a recent Fortune magazine story. "I almost want to say it is irresponsible."

    4. The government has no coherent plan for returning failing financial institutions to profitability and maximizing returns on taxpayers' investments.

    Compare the treatment of the auto industry and the financial sector, and a troubling double standard emerges. As a condition for taking bailout aid, the government required Chrysler and General Motors to present detailed plans on how the companies would return to profitability. Yet the Treasury Department attached minimal conditions to the billions injected into the largest bailed-out financial institutions. Moreover, neither Geithner nor Lawrence Summers, one of President Barack Obama's top economic advisors, nor the president himself has articulated any substantive plan or vision for how the bailout will help these institutions recover and, hopefully, maximize taxpayers' investment returns.

    The Congressional Oversight Panel highlighted the absence of such a comprehensive plan in its January report. Three months into the bailout, the Treasury Department "has not yet explained its strategy," the report stated. "Treasury has identified its goals and announced its programs, but it has not yet explained how the programs chosen constitute a coherent plan to achieve those goals."

    Today, the department's endgame for the bailout still remains vague. Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, wrote in the Financial Times in May that the government's response to the financial meltdown has been "ad hoc, resulting in inequitable outcomes among firms, creditors, and investors." Rather than perpetually prop up banks with endless taxpayer funds, Hoenig suggests, the government should allow banks to fail. Only then, he believes, can crippled financial institutions and systems be fixed. "Because we still have far to go in this crisis, there remains time to define a clear process for resolving large institutional failure. Without one, the consequences will involve a series of short-term events and far more uncertainty for the global economy in the long run."

    The healthier and more profitable bailout recipients are once financial markets rebound, the more taxpayers will earn on their investments. Without a plan, however, banks may limp back to viability while taxpayers lose their investments or even absorb further losses.

    5. The bailout's focus on Wall Street mega-banks ignores smaller banks serving millions of American taxpayers that face an equally uncertain future.

    The government may not have a long-term strategy for its trillion-dollar bailout, but its guiding principle, however misguided, is clear: what's good for Wall Street will be best for the rest of the country.

    On the day the mega-bank stress tests were officially released, another set of stress-test results came out to much less fanfare. In its quarterly report on the health of individual banks and the banking industry as a whole, Institutional Risk Analytics (IRA), a respected financial services organization, found that the stress levels among more than 7,500 FDIC-reporting banks nationwide had risen dramatically. For 1,575 of the banks, net incomes had turned negative due to decreased lending and less risk-taking.

    The conclusion IRA drew was telling: "Our overall observation is that US policy makers may very well have been distracted by focusing on 19 large stress test banks designed to save Wall Street and the world's central bank bondholders, this while a trend is emerging of a going concern viability crash taking shape under the radar." The report concluded with a question: "Has the time come to shift the policy focus away from the things that we love, namely big zombie banks, to tackle things that are truly hurting us?"

    6. The bailout encourages the very behaviors that created the economic crisis in the first place instead of overhauling our broken financial system and helping the individuals most affected by the crisis.

    As Joseph Stiglitz explained in the New York Times, one major cause of the economic crisis was bank overleveraging. "Using relatively little capital of their own," he wrote, banks "borrowed heavily to buy extremely risky real estate assets. In the process, they used overly complex instruments like collateralized debt obligations." Financial institutions engaged in overleveraging in pursuit of the lucrative profits such deals promised--even if those profits came with staggering levels of risk.

    Sound familiar? It should, because in the PPIP and TALF bailout programs the Treasury Department has essentially replicated the very over-leveraged, risky, complex system that got us into this mess in the first place: in other words, the government hopes to repair our financial system by using the flawed practices that caused this crisis.

    Then there are the institutions deemed "too big to fail." These financial giants--among them AIG, Citigroup and Bank of America-- have been kept afloat by billions of dollars in bottomless bailout aid. Yet reinforcing the notion that any institution is "too big to fail" is dangerous to the economy. When a company like AIG grows so large that it becomes "too big to fail," the risk it carries is systemic, meaning failure could drag down the entire economy. The government should force "too big to fail" institutions to slim down to a safer, more modest size; instead, the Treasury Department continues to subsidize these financial giants, reinforcing their place in our economy.

    Of even greater concern is the message the bailout sends to banks and lenders--namely, that the risky investments that crippled the economy are fair game in the future. After all, if banks fail and teeter at the edge of collapse, the government promises to be there with a taxpayer-funded, potentially profitable safety net.

    The handling of the bailout makes at least one thing clear, however. It's not your health that the government is focused on, it's theirs-- the very banks and lenders whose convoluted financial systems provided the underpinnings for staggering salaries and bonuses, while bringing our economy to the brink of another Great Depression.

     Keynes: The Rise, Fall, and Return of the 20th Century's Most Influential Economist by Peter Clarke (Bloomsbury; 2009,  211 pages; $20). Examines the life and legacy of the British economist (1883-1946).

    "Lack of Candor and the AIG Bailout:  If AIG wasn't too big to fail, why did the government rescue it? And why do we need to turn the financial system upside down?" by Peter J. Wallison, The Wall Street Journal, November 27, 2009 --- 

    Since last September, the government's case for bailing out AIG has rested on the notion that the company was too big to fail. If AIG hadn't been rescued, the argument goes, its credit default swap (CDS) obligations would have caused huge losses to its counterparties—and thus provoked a financial collapse.

    Last week's news that this was not in fact the motive for AIG's rescue has implications that go well beyond the Obama administration's efforts to regulate CDSs and other derivatives. It's one more example that the administration may be using the financial crisis as a pretext to extend Washington's control of the financial sector.

    The truth about the credit default swaps came out last week in a report by TARP Special Inspector General Neil Barofsky. It says that Treasury Secretary Tim Geithner, then president of the New York Federal Reserve Bank, did not believe that the financial condition of AIG's credit default swap counterparties was "a relevant factor" in the decision to bail out the company. This contradicts the conventional assumption, never denied by the Federal Reserve or the Treasury, that AIG's failure would have had a devastating effect.

    So why did the government rescue AIG? This has never been clear.

    The Obama administration has consistently argued that the "interconnections" among financial companies made it necessary to save AIG and Bear Stearns. Focusing on interconnections implies that the failure of one large financial firm will cause debilitating losses at others, and eventually a systemic breakdown. Apparently this was not true in the case of AIG and its credit default swaps—which leaves open the question of why the Fed, with the support of the Treasury, poured $180 billion into AIG.

    The broader question is whether the entire regulatory regime proposed by the administration, and now being pushed through Congress by Rep. Barney Frank and Sen. Chris Dodd, is based on a faulty premise. The administration has consistently used the term "large, complex and interconnected" to describe the nonbank financial institutions it wants to regulate. The prospect that the failure of one of these firms might pose a systemic risk is the foundation of the administration's comprehensive regulatory regime for the financial industry.

    Up to now, very few pundits or reporters have questioned this logic. They have apparently been satisfied with the explanation that the "interconnectedness" created by those mysterious credit default swaps was the culprit.

    But the New York Fed is the regulatory body most familiar with the CDS market. If that agency did not believe AIG's failure would have actually brought down its counterparties—and ultimately the financial system itself—it raises serious questions about the administration's credibility, and about the need for its regulatory proposals. If "interconnections" among financial institutions are indeed the source of the financial crisis, the administration should be far more forthcoming than it has been about exactly what these interconnections are, and how exactly a broad new system of regulation and resolution would eliminate or reduce them.

    The administration's unwillingness or inability to clearly define the problem of interconnectedness is not the only weakness in its rationale for imposing a whole new regulatory regime on the financial system. Another example is the claim—made by Mr. Geithner and President Obama himself—that predatory lending by mortgage brokers was one of the causes of the financial crisis.

    No doubt some deceptive practices occurred in mortgage origination. But the facts suggest that the government's own housing policies—and not weak regulation—were the source of these bad loans.

    At the end of 2008, there were about 26 million subprime and other nonprime mortgages in our financial system. Two-thirds of these mortgages were on the balance sheets of the Federal Housing Administration, Fannie Mae and Freddie Mac, and the four largest U.S. banks. The banks were required to make these loans in order to gain approval from the Fed and other regulators for mergers and expansions.

    The fact that the government itself either bought these bad loans or required them to be made shows that the most plausible explanation for the large number of subprime loans in our economy is not a lack of regulation at the mortgage origination level, but government-created demand for these loans.

    Finally, although there may be a good policy argument for a new consumer protection agency for financial services and products, the scope of what the administration has proposed goes far beyond lending, or even deposit-taking. In the administration's proposed legislation, the Consumer Financial Protection Agency would cover any business that provides consumer credit of any kind, including the common layaway plans and Christmas clubs that small retailers offer their customers.

    Under the guise of addressing the causes of a global financial crisis, the Obama administration's bill would have regulated credit counseling, educational courses on finance, financial-data processing, money transmission and custodial services, and dozens more small businesses that could not possibly cause a financial crisis. Even Chairmen Frank and Dodd balked at this overreach. Their bills exempt retailers if their financial activity is incidental to their other business. Still, many vestiges of this excess remain in the legislation that is now being pushed toward a vote.

    The lack of candor about credit default swaps, the effort to blame lack of regulation for the subprime crisis and the excessive reach of the proposed consumer protection agency are all of a piece. The administration seems to be using the specter of another financial crisis to bring more and more of the economy under Washington's control.

    With the help of large Democratic majorities in Congress, this train has had considerable momentum. But perhaps—with the disclosure about credit default swaps and the AIG crisis—the wheels are finally coming off.

    Bob Jensen's threads on the Greatest Swindle in the World are at

    Bob Jensen's threads on why the infamous "Bailout" won't work ---

    By now we've heard most all the reasons/excuses for the disappearance of all investment banking firms

    The December 5, 2009 issue of The Economist magazine offers a new twist by blaming, in part, the silo databases of Wall Street firms. This is surprising since I would've assumed the big investment banks would've been early adopters of ERP system-wide communicating databases.

    The term "silo computing" or "data silo" dates back to before the days of computer networking and refers to multiple databases in an organizations that are not compatible and often require duplicate computing. For example, an account sales database in the marketing department may be programmed differently than the account sales database in the accounting department. Silo computing was extremely common and extremely inefficient in COBOL days before the onset of Enterprise Resource Planning (ERP) integrative (ERP) total enterprise interactive databases of which the German SAP systems are the best known ERP systems ---

    "Silo but deadly," The Economist, December 5-11, 2009, pp. 83-84 ---

    NO INDUSTRY spends more on information technology (IT) than financial services: about $500 billion globally, more than a fifth of the total (see chart). Many of the world’s computers, networking and storage systems live in the huge data centres run by banks. “Banks are essentially technology firms,” says Hugo Banziger, chief risk officer at Deutsche Bank. Yet the role of IT in the crisis is barely discussed.

    It should be. Corporate IT systems—collections of computers, applications and databases—always tend to be messy, but those of banks are particularly bad. They were the first to adopt computers: decades-old mainframes are still in use. Lots of product innovation means new systems, as does merger activity, which has proliferated in the industry in recent years: Citigroup had a notoriously fragmented IT set-up going into the crisis. The need to comply with regulations, and the global presence of big banks, adds complexity.

    The demands of financial markets make matters worse. Hedging positions, trading derivatives and modelling financial products all require highly sophisticated programs that are only really suited to specific asset classes. The code for new financial products has to be developed quickly. Innovation often takes place on Excel spreadsheets on traders’ desktops. “The big task of management is to manage down the number of spreadsheets,” says one risk chief, whose bank creates 1,000 product variations a year.

    As a result, many banks have huge problems with data quality. The same types of asset are often defined differently in different programs. Numbers do not always add up. Managers from different departments do not trust each other’s figures. Finding one’s way through all these systems is detective work, says a former IT manager at a big British bank. “And sometimes the trail would go cold.”

    This fragmented IT landscape made it exceedingly difficult to track a bank’s overall risk exposure before and during the crisis. Mainly as a result of the Basel 2 capital accords, many banks had put in new systems to calculate their aggregate exposure. Royal Bank of Scotland (RBS) spent more than $100m to comply with Basel 2. But in most cases the aggregate risk was only calculated once a day and some figures were not worth the pixels they were made of.

    During the turmoil many banks had to carry out big fact-finding missions to see where they stood. “Answering such questions as ‘What is my exposure to this counterparty?’ should take minutes. But it often took hours, if not days,” says Peyman Mestchian, managing partner at Chartis Research, an advisory firm. Insiders at Lehman Brothers say its European arm lacked an integrated picture of its risk position in the days running up to its demise.

    Whether the financial industry would have hit the brakes if it had had digital dashboards showing banks’ overall exposures in real time is a moot point. Some managers might not have even looked. And better IT would have done little to counteract the bigger forces behind the crisis, such as global economic imbalances.

    Continued in article

    Bob Jensen's threads on the recent Wall Street woes are at

    Chinese mercantilism is a growing problem

    Mercantilism ---

    "Chinese New Year," by Paul Krugman, The New York Times, December 31, 2009 ---

    It’s the season when pundits traditionally make predictions about the year ahead. Mine concerns international economics: I predict that 2010 will be the year of China. And not in a good way.

    Actually, the biggest problems with China involve climate change. But today I want to focus on currency policy.

    China has become a major financial and trade power. But it doesn’t act like other big economies. Instead, it follows a mercantilist policy, keeping its trade surplus artificially high. And in today’s depressed world, that policy is, to put it bluntly, predatory.

    Here’s how it works: Unlike the dollar, the euro or the yen, whose values fluctuate freely, China’s currency is pegged by official policy at about 6.8 yuan to the dollar. At this exchange rate, Chinese manufacturing has a large cost advantage over its rivals, leading to huge trade surpluses.

    Under normal circumstances, the inflow of dollars from those surpluses would push up the value of China’s currency, unless it was offset by private investors heading the other way. And private investors are trying to get into China, not out of it. But China’s government restricts capital inflows, even as it buys up dollars and parks them abroad, adding to a $2 trillion-plus hoard of foreign exchange reserves.

    This policy is good for China’s export-oriented state-industrial complex, not so good for Chinese consumers. But what about the rest of us?

    In the past, China’s accumulation of foreign reserves, many of which were invested in American bonds, was arguably doing us a favor by keeping interest rates low — although what we did with those low interest rates was mainly to inflate a housing bubble. But right now the world is awash in cheap money, looking for someplace to go. Short-term interest rates are close to zero; long-term interest rates are higher, but only because investors expect the zero-rate policy to end some day. China’s bond purchases make little or no difference.

    Meanwhile, that trade surplus drains much-needed demand away from a depressed world economy. My back-of-the-envelope calculations suggest that for the next couple of years Chinese mercantilism may end up reducing U.S. employment by around 1.4 million jobs.

    The Chinese refuse to acknowledge the problem. Recently Wen Jiabao, the prime minister, dismissed foreign complaints: “On one hand, you are asking for the yuan to appreciate, and on the other hand, you are taking all kinds of protectionist measures.” Indeed: other countries are taking (modest) protectionist measures precisely because China refuses to let its currency rise. And more such measures are entirely appropriate.

    Or are they? I usually hear two reasons for not confronting China over its policies. Neither holds water.

    First, there’s the claim that we can’t confront the Chinese because they would wreak havoc with the U.S. economy by dumping their hoard of dollars. This is all wrong, and not just because in so doing the Chinese would inflict large losses on themselves. The larger point is that the same forces that make Chinese mercantilism so damaging right now also mean that China has little or no financial leverage.

    Again, right now the world is awash in cheap money. So if China were to start selling dollars, there’s no reason to think it would significantly raise U.S. interest rates. It would probably weaken the dollar against other currencies — but that would be good, not bad, for U.S. competitiveness and employment. So if the Chinese do dump dollars, we should send them a thank-you note.

    Second, there’s the claim that protectionism is always a bad thing, in any circumstances. If that’s what you believe, however, you learned Econ 101 from the wrong people — because when unemployment is high and the government can’t restore full employment, the usual rules don’t apply.

    Let me quote from a classic paper by the late Paul Samuelson, who more or less created modern economics: “With employment less than full ... all the debunked mercantilistic arguments” — that is, claims that nations who subsidize their exports effectively steal jobs from other countries — “turn out to be valid.” He then went on to argue that persistently misaligned exchange rates create “genuine problems for free-trade apologetics.” The best answer to these problems is getting exchange rates back to where they ought to be. But that’s exactly what China is refusing to let happen.

    The bottom line is that Chinese mercantilism is a growing problem, and the victims of that mercantilism have little to lose from a trade confrontation. So I’d urge China’s government to reconsider its stubbornness. Otherwise, the very mild protectionism it’s currently complaining about will be the start of something much bigger.


    "Chinese official raps US banks on derivatives," AsiaLynx, December 4, 2009 ---

    BEIJING (Agencies): A senior Chinese official criticized foreign banks for selling derivatives with “fraudulent characteristics” that led to heavy losses for state-owned airlines and other companies.

    “Some international investment banks are the biggest villains,” said Li Wei, deputy chairman of the agency that oversees China’s biggest state companies, in a commentary in this week’s edition of the Study Times, a newspaper published by the school of the Communist Party’s Central Committee.

    The comments were the Chinese government’s most pointed public criticism yet of foreign institutions. Li’s agency said in September it would support companies that want to challenge the contracts in court.
    Li said Chinese companies were to blame for most of their losses but complained that derivatives tied oil prices and other matters were too complex and made potential risks too hard to identify.

    “Of course, first of all we need to find problems in the companies themselves,” Li wrote in the front-page commentary. “But it also is largely related to international investment banks maliciously peddling high-leverage, complex products with fraudulent characteristics.”

    Some 68 of the 136 major banks, airlines and other companies directly controlled by the Cabinet invested in derivatives and recorded book losses totaling 11.4 billion yuan ($1.7 billion) by the end of October 2008, according to Li.

    Li made no specific accusations against individual banks. But he noted that airlines and shipping companies bought fuel contracts from Goldman Sachs Group, Merrill Lynch — now a unit of Bank of America Corp. — and Morgan Stanley, while banks bought derivatives from Merrill Lynch, Morgan Stanley and Citigroup.

    Spokespeople in China for Goldman and Citigroup declined to comment. Spokespeople for Morgan Stanley and Merrill Lynch did not immediately respond to phone messages and e-mails. – read more at

    Bob Jensen's timeline for derivative financial instruments frauds ---

    The Greatest Swindle in the History of the World ---


    What caused the great depressions in stock market listings, especially new listings?
    Grant Thornton has a strong argument that the underlying reason for “The Great Depression in Listings” is not Sarbanes-Oxley, but what they call “The Great Delisting Machine,” an array of regulatory changes that were meant to advance low-cost trading, but have had the unintended consequence of stripping economic support for the value components (quality sell-side research, capital commitment and sales) that are needed to support markets, especially for smaller capitalization companies. GT cautions that today, capital formation in the U.S. is on life support. Within the venture capital universe, the average time from first venture investment to IPO has more than doubled.
    David Weild and Edward Kim, "A Wake Up Call for America," Grant Thornton LLC, November 2009 ---

    A possible teaching case about equity share classes and stock splits
    From The Wall Street Journal Accounting Weekly Review on December 10, 2009

  • Berkshire Hathaway Sets Meeting to Vote on Stock Split
    by Kevin Kingsbury
    Dec 04, 2009
    Click here to view the full article on

    TOPICS: Equity, Financial Accounting, Investments, Stock Acquisition, Stock Price Effects

    SUMMARY: Berkshire Hathaway announced plans for a 50-1 stock split of its Class B shares as part of its place to acquire the 77% of railroad corporation Burlington Northern Sante Fe that it doesn't already own. The deal was struck in November Berkshire Hathaway to pay $26 billion in cash and stock for the acquisition.

    CLASSROOM APPLICATION: Questions relate to the equity method and acquisition accounting for the investment in Burlington Northern by Berkshire Hathaway and to the accounting for the unusually large stock split.

    1. (
    Advanced) How do you think Berkshire Hathaway is accounting for its current level of investment in Burlington Northern?

    2. (
    Advanced) What is the name for the type of acquisition that Berkshire Hathaway is now undertaking?

    3. (
    Advanced) Describe in general terms the steps that Berkshire Hathaway must take to account for its acquisition of the remaining 77% of the railroad company.

    4. (
    Introductory) What is the difference between Class A and Class B shares of Berkshire Hathaway?

    5. (
    Introductory) Why must Berkshire Hathaway undertake a stock split in its Class B shares in order to make this acquisition?

    6. (
    Advanced) Why must Berkshire Hathaway hold a shareholder meeting on January 20 to approve the stock split? Specifically state your expectation for the impact of this split on the per share Berkshire Hathaway stock price.

    7. (
    Advanced) How will Berkshire Hathaway account for the stock split?

    Reviewed By: Judy Beckman, University of Rhode Island

    Buffett Bets Big on Railroad
    by Scott Patterson and Douglas A. Blackmon
    Nov 04, 2009
    Online Exclusive


    "2010: The Year of the Roth Conversion?" by Rich Arzaga, Journal of Accountancy, January 2010 ---

    This year will be the Year of the Tiger, according to Chinese custom, but it also could be remembered by investors as the Year of the Roth Conversion, a decision that can have a large impact on investors’ ability to build wealth during their lifetime and preserve wealth for beneficiaries.


    Prior to 2010, anyone (except married taxpayers filing separately) with an annual adjusted gross income (AGI) of no greater than $100,000 could convert a traditional IRA to a Roth IRA. The AGI cap has prevented higher-income earners, a class of savers that might have benefited most from this strategy, from participating. However, under the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) these previously ineligible taxpayers will be eligible to participate starting this year (including married but separate filers). In fact, there is an incentive to take action in 2010: Everyone who converts this year may defer and spread income recognition from the conversion over tax years 2011 and 2012. A conversion in 2010 thus could reduce the marginal tax rate and total taxes due on what otherwise would be a larger single-year distribution. The 10% penalty tax otherwise imposed on early or excess distributions from an IRA does not apply. A conversion could be an attractive retirement income and estate planning strategy for wealthy individuals and high-income earners who seek to reduce taxes later in life and transfer more wealth to beneficiaries tax-free. But like any other approach to income and taxes, this decision is eventually based on a set of sustainable assumptions and specific objectives of the taxpayer.



    A chief advantage of a Roth IRA is that it has more flexible rules concerning distributions. Also, taxpayers who are otherwise unable to contribute to a traditional IRA can take advantage of a Roth IRA’s appreciation free from tax on gains. Other advantages of a Roth IRA include:


    • In most instances, contributions can be withdrawn at any time without penalty. Earnings may be withdrawn without tax or penalty if the taxpayer is at least age 59½ and has held the Roth account for at least five years. Similar strategies that provide for tax-free growth and withdrawal are the IRC § 529 plans for college education and cash-value life insurance policies. Each has its strengths and limitations.
    • With a Roth IRA, there are no required minimum distributions (RMDs) like those that apply to traditional IRAs when the taxpayer reaches age 70½. For affluent families with sufficient resources for retirement income, the RMD can seem an unnecessary expense with a confusing formula. From a client’s perspective, eliminating RMDs can provide a great sense of relief from the annual hassle of calculating and managing these distributions.
    • Unlike with traditional IRA accounts, taxpayers can continue to contribute to a Roth IRA after reaching age 70½—also an attractive feature as Americans redefine retirement and continue to be industrious into later years. Starting in 2010, a retired couple can contribute $12,000 each year (including the “over- 50 make-up” amount) into Roth accounts. The AGI limits on regular contributions to a Roth IRA still apply, but it is possible to make nondeductible contributions to a traditional IRA and convert them to a Roth, regardless of AGI. These contributions grow free of income tax indefinitely, creating significant value for taxpayers as well as their beneficiaries.
    • A tax-diversified retirement distribution strategy also helps with Social Security planning. Up to 85% of Social Security benefits are taxable. When calculating modified adjusted gross income (MAGI) for Social Security purposes, taxpayers must include all taxable and tax-exempt income and 50% of their Social Security benefits, but not Roth IRA distributions. Having a Roth IRA to supplement retirement income can be very important in managing the taxability of Social Security benefits.



    Some taxpayers may benefit more than others from converting to a Roth IRA. Assuming there are no cash flow issues, risk management gaps, other tax planning considerations that need to be weighed against the benefit of a conversion, advance tax issues at play, or adverse legislative changes, taxpayers who stand to benefit the most are those who:


    • Are wealthy.
    • Seek to reduce estate settlement costs.
    • Won’t need to draw income from converted retirement accounts.
    • Are young, high-income earners.
    • Believe their tax bracket will be the same or higher in retirement, or more specifically, when they draw income from their qualified retirement accounts. The attractiveness of traditional IRAs and qualified retirement plans depends on the assumption that taxpayers will have a lower effective tax rate after retirement, when the deferred taxes on the savings will come due. Conversely, taxpayers whose tax rate seems more likely to be the same or higher in retirement might just as soon pay taxes on income now and accumulate tax-free gains. Consider the conversion comparison in Exhibit 1.

    Continued in article

    Bob Jensen's taxation helpers are at

    "Creating Lives in the Classroom," by Edith Sheffer, Chronicle of Higher Education, November 22, 2009 ---

  • At the beginning of my course on German history at Stanford University last fall, each student drew an identity at random that he or she would keep throughout the quarter—creating a unique historical character who was born in 1900 and lived through Germany's tumultuous 20th century. Through weekly posts to individual pages on the course Web site, students researched the texture of everyday life, untangled pivotal events, and weighed questions of humanity. Although fictional, the lives that the students developed offered a unique entree into the past, stimulating their curiosity and critical thinking about history.

    Each student had one sentence to go on with his or her character's birthplace, gender, religion, and parents' occupations. Characters were born into all walks of life: the son of a prostitute in Berlin, the daughter of Jewish banker in Munich, the son of East Prussian nobility. The rest was up to students to decide. I gave weekly assignments to help structure their posts, requesting diary entries for key dates or eyewitness responses to certain events, and would note any historical inaccuracies in their writings. But I did not interfere with individual choices as to how the avatars would feel, live and act, placing just three restrictions on them: The characters could not die or be otherwise incapacitated, leave Germany permanently, or change the course of history.

    That open-endedness engendered a sense of ownership, fostering seriousness and self-correction. Students showed humility in their approach to the material; in the words of one senior, "I kept asking myself, Is this realistic?" Perhaps more than anything, the high standards of the class Web site helped sustain the quality of the work and a productive exchange of ideas.

    Over the quarter, the avatars lived through two world wars and the cold war, experiencing monarchy, democracy, fascism, and communism. They each saw Hitler at the Beer Hall Putsch and had to decide whether to vote for him a decade later. They were at the Berlin Wall when it went up in 1961 and came down in 1989. Building upon course readings, they had conversations with the writer Joseph Roth in Weimar Berlin, with the Holocaust perpetrators of Police Battalion 101, and with estranged family and friends on the opposite side of the Iron Curtain. They witnessed and, in some cases, participated in the violence of Germany's 20th century, even as they lived at the pinnacle of Germany's cultural and economic achievements. The characters also reflected upon the meaning of it all as they met together at the close of the century.

    As the avatars became increasingly three-dimensional, the project resonated beyond the classroom. Students endowed them with personality quirks, discussed them with friends and family, and incorporated their own histories. One based his character's persecution and emigration from Nazi Germany on his own family's experience; another wrote his grandfather into his story. They also explored individual interests. A history major, prompted by election campaigning over Proposition 8 in California, had her character outed as gay in the Third Reich; she researched the treatment of homosexuals in Germany's successive regimes, integrating details like the number of gay bars in East and West Berlin into her weekly updates.

    Students sent their characters on divergent paths. Some plunged head long into radical events and ideologies; others "took the path of least resistance" and "just let history pass [them] by." Some characters' values and personalities stayed consistent; others took "fluctuating, elastic political positions." Some characters spent their whole lives in one place; others ranged far and wide—a colonist to Southwest Africa, Jewish émigrés to Britain and America (they had to return to Germany), a priest to counsel killers in Poland, a resisting factory worker to Auschwitz, and a POW to Siberia.

    The project inspired an unusual level of academic commitment. Students often went well beyond the required material in developing their avatars. Their research included Internet searches for images, period-appropriate children's names, and food specialties as well as reading scholarly works on particular topics of interest. They wrote an average of 1,120 words per post, equivalent to four and a half pages a week, in addition to their regular work. Most important, the students integrated all of the information into a coherent whole and uncovered their own historical lessons along the way.

    Students said they gained a greater appreciation for everyday complexities—how ordinary people adjusted to extraordinary times, and how adaptations propelled new social and political realities. Their simple vignettes expressed complicated ideas. One farm woman from Dachau supported but had visceral misgivings about the local concentration camp: "I dislike the communists as much as anyone else, but smelling [their ashes] on the wind turned my stomach." Students felt that they came to understand how history makes individuals and individuals make history. A sophomore reflected: "The project forced us to see the situation as much from within as a student can, years later and thousands of miles away. Oskar, to whom I grew attached, had a past, a family, thoughts, ideas. There were justifications for his actions that were intricately tied in with all of these, ones that I would never have considered without a specific persona in mind."

    The project also underscored how bound the characters' perceptions and opinions were to the circumstances of the moment—and how decisions made in one decade reverberate in the next. One character, an armaments-manufacturer-turned-democratic-leader, observed that "the only way to begin to make sense of the five very different Germanys I have lived in is to understand the malleable nature of the human mind and human society."

    Creating lives can be an effective way to develop individual interests within the bounds of a survey course, as a complement to traditional lectures, exams, and papers. Students commented that it provided a sense of freedom rare in their course work, allowing space for imagination, authorship, and identification. The personal narratives were more work than traditional weekly papers, yet students agreed it was a rewarding way to expand upon the standard approach. As one said, "It was more than worth it. It allowed us to fuse the course material with our own creativity and take away so much more than a typical survey of history."

    Although the experience involved a small group of motivated Stanford students, mostly history majors, the basic method can be adapted to different fields and classroom environments. The core concept—creating continuing lives within a Web-based community forum—could have broad appeal. In turn, the personal investment fosters enthusiasm and lasting learning.

    Edith Sheffer is an Andrew W. Mellon fellow in the humanities at Stanford University. Her book, Burned Bridge: How East and West Germans Made the Iron Curtain will be published by Oxford University Press in 2011.

    Jensen Comment
    It struck me that this might be a good way to teach the Enron/Andersen Scandal by letting assigning students to play the parts of David DuckIt, Carl BassFishing, Ken LayLie, Jeff StirFry, Andy FasToad, Bob JaedickeSleepAlot, and the rest ---

    The Enron Home Video (in praise of HFA, Hypothetical Future Accounting at Enron)
    This is a home movie played by the real players, not actors

    Bob Jensen's threads on virtual worlds and Second Life ---

    "Going Concern “Sarbanes-Oxley Doublespeak”, by Francine McKenna, Re: The Auditors, December 2, 2009 ---

    1. "A law by itself does not bring benefits. Measure the benefits of the moral and ethical behaviors the law promotes and requires, instead. Certainly, all the above requirements — except perhaps “real-time” reporting that will implemented by XBRL mandates — are now second nature to most public companies. This didn’t happen without significant cost for some and a lot of bitching. But the significant additional cost (and bitching) was the result of two separate but equal conditions:

    • Many companies, even the largest and most highly regarded, were poorly run – policies, procedures and controls over external financial reporting were either very weak or non-existent.

    • The audit firms used the law to gouge clients and hold them hostage to a clean audit opinion. Auditor inefficiency and higher fees were the result of a vague, incomplete law that didn’t provide the rigid rules auditors are accustomed to. They also over-tested due to legitimate fears of legal liability…

    Continued @Going Concern

    Bob Jensen's threads on recent "Going Concern" issues as over 1,200 banks failed with clean opinions ---

    Bob Jensen's threads on audit professionalism and independence are at

    So Much Auditor Litigation Makes For Strange Bedfellows
    Francine McKenna's Great Blog, October 12, 2009 --- Click Here
    Includes a clip from the old risqué movie Bob,Carol, Ted, and Alice

    Every one of the Big 4 (and the next tier) has a handful of lawsuits on their desk related to their audits of the banks and other financial institutions that failed, were taken over in the dead of night, or bailed out by their respective central banks. That’s in addition to the various fraud and Madoff related suits. It may or may not have been better for them to have warned us with “going concern” opinions earlier.  We’ll let the judges and juries decide, if any of the cases are actually tried.  Most often they settle and the audit firm pays, but not as much as you would think.  

    Deloitte has been party to settlements, left and right, lately, but they’re no more prone to settlements.   After all, per Adam Savett of Risk Metrics (by way of Kevin La Croix of D&O Diary), “jury trials in securities class action lawsuits are extremely rare” :

    “As reported on the Securities Litigation Watch blog (here), only 21 cases (prior to Vivendi) have gone trial since the 1995 enactment of the PSLRA. Only seven of the 21 cases (including the Household International case) that have gone to a verdict involved conduct that occurred after the PSLRA was enacted.”

    Jury trials in accounting malpractice cases are even rarer. It’s just that Deloitte has more than the average share of subprime-related litigation and as a result is suffering from the double whammy of both losing clients due to the crisis and having those former clients sue them.

    What’s interesting about the current flood of lawsuits is the heightened probability Deloitte - and the rest of the Big 4 - will end up on both sides of lawsuits with their former and current audit clients.

    Take the Merrill Lynch litigation.


    Deloitte is a co-defendant with Bank of America (in place of Merrill Lynch) on lawsuits stemming from Bank of America’s “Deal From Hell” to buy Merrill Lynch for $50 billion, arranged in 48 hours, and agreed to on September 15 of last year.   In January of this year, Merrill Lynch announced settlement of a suit filed in October 2007 related to the earlier period where Merrill Lynch experienced significant losses due to write downs of CDOs and other subprime related assets. Deloitte was a defendant and may also have to contribute to that $475 million settlement.  Kevin La Croix described it as,

     ”…unquestionably the largest subprime subprime securities lawsuit settlements so far, and [ ] certainly suggest[s] the enormous stakes that may be involved in the mass of subprime and credit crisis-related litigation cases that remain pending.”

    Continued in article

    Bob Jensen's threads on large firm litigation ---

    “Going Concern Audit Opinions: Why So Few Warning Flares?" by Francine McKenna, re: The Auditors, September 18, 2009 ---

    Lehman Brothers. Bear Stearns. Washington Mutual. AIG. Countrywide. New Century. American Home Mortgage. Citigroup. Merrill Lynch. GE Capital. Fannie Mae. Freddie Mac. Fortis. Royal Bank of Scotland. Lloyds TSB. HBOS. Northern Rock.

    When each of the notorious “financial crisis” institutions collapsed, were bailed out/nationalized by their governments or were acquired/rescued by “healthier” institutions, they were all carrying in their wallets non-qualified, clean opinions on their financial statements from their auditors. In none of the cases had the auditors warned shareholders and the markets that there was “ a substantial doubt about the company’s ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited.”

    Continued in a very good article by Francine (she talks with some major players)

    November 25, 2009 reply from Gerald Trites [gtrites@ZORBA.CA]

    I just have to weigh in here, as we have spoken about this issue before. You have stated the theory very well, but the fact of the matter is that it just can't work that way. Auditors do not have enough information to be able to do an independent assessment of loan loss allowances. They need to rely on management and staff knowledge and expertise in order to assess the reasonableness of the allowances. If that knowledge and expertise is based on deception or is flawed, they cannot necessarily discover that.

    Lets take the allowance for doubtful accounts as an example. The auditors do not know the accounts well enough to determine if they are collectible or not. They can review the agings, compare them to other years, review subsequent payments, confirm the accounts, etc. If the agings identify particular accounts, they will go to the accounts receivable managers and discuss those accounts with them. As part off thosse discussions they will likely review supporting evidence as to the condition of the debtors. These discussions form an important part of their audit of that allowance. The other procedures only provide corroborative evidence. Lets also remember that many companies are very large, so we are looking at accounts that could number in the hundreds of thousands and exist in numerous countries of the world. So the audit firm needs to send in people - on a test basis - to review accounts in those other countries. Since they are doing branch audits, those auditors know even less about the client than the home office auditors do. I understand that knowledge of the business is an important standard, but this can not substitute for the knowledge of the management and staff of the client. So there is always an imbalance.

    In the case of the recent financial mess, we are looking at it with the benefit of hindsight - always a nice position to be in. Before the events, very people predicted the kind of mess that would evolve. Those who did were often laughed at.

    If the audit firms did not follow the standards of the profession, then they could be in the wrong. However if they did, and simply failed to predict the serious downturn in the economy that generated the losses that occured, then they clearly are not in the wrong.

    Francine is right - the auditors cannot be expected to second guess management; and they cannot be expected to predict the future.


    November 25, 2009 reply from Zane Swanson [ZSwanson@UCO.EDU]

    Timeliness of information could be a major factor in the poor decision-making. Major financial institutions are heavily engaged in micro-economic day trading in contrast to prior (decade+) banking business. Accounting statements should be reflective of the economics of the firm. If auditors do not have the information to decide, why not require financial institutions to publish their statements on the next day on the internet?. Given that management is responsible for the their statements, they should welcome rational investor decisions based on timely data instead of run-on-the-bank problems based on old information or grave-vine stuff that the average investor does not possess.

    Bye, Zane

    November 27, 2009 reply from Glen Gray

    A side note to this discussion:

    The auditor cannot use as a defense that there was too much data, the supporting materials were inadequate, or the big one--the company was so complex no body could fully understand their process/procedures/business model etc. because by making any of those admissions would mean that the auditor was violating GAAS to do the audit. Because GAAS requires that the auditor be competent in GAAP, GAAS, and the client's business. Otherwise, the auditor must withdraw from the audit.

    Dan Guy, who has a long history with the AICPA and now functions as an expert witness, made this point at the audit workshop at the 2009 AAA audit mid-year meeting. He said they know they have won the case (against the audit firm) as soon as the audit partner says--The client's business was so complex that no one could understand it.

    Glen L. Gray, PhD, CPA
    Dept. of Accounting & Information Systems
    College of Business & Economics
    California State University,
    Northridge 18111 Nordhoff ST Northridge, CA 91330-8372


    November 26, 2009 reply from Bob Jensen

    Hi Jerry and Zane,

    The current shareholder lawsuits pending against virtually all the big firms that audit bands will investigate whether auditors should have been more diligent in detail testing of tainted mortgage bank portfolios and poisoned tranches. I anticipate that some of the lawsuits will bring out some bad auditing of bank loan portfolios and poor investigations of internal controls as required under SOX.

    Do you have any empirical references that show that the loan loss reserves of banks have not been systematically earnings managed across the past four decades. My searches show the opposite to be the case such that auditors must be aware of the problem on bank audits.


    Recall that Freddie and Fannie were audited by KPMG until KPMG was fired and Deloitte took over as auditor

    From The Wall Street Journal Accounting Weekly Review on September 12, 2008 ---


    No End Yet to the Capital Punishment
    by Peter Eavis
    The Wall Street Journal

    Sep 08, 2008
    Page: C10
    Click here to view the full article on ---

    TOPICS: Accounting, Allowance For Doubtful Accounts, Bad Debts, Banking, Financial Analysis, Financial Statement Analysis, Loan Loss Allowance, Reserves

    SUMMARY: "The chief problem at Fannie and Freddie -- an inadequate capital cushion against losses -- also bedevils large banks in the U.S. and Europe more than 12 months into the credit crunch. The broader strains now facing the markets are not as easily relieved by central banks or governments as the company specific crises at Fannie and Freddie or Bear Stearns earlier this year. Of course, central banks could cut interest rates in the face of this threat. The trouble is banks are being extra cautious, justifiably, about lending as the economy slows. And while banks are reluctant to lend, many are having problems borrowing to fund themselves. That is because the market's assessment of their creditworthiness is darkening."

    CLASSROOM APPLICATION: Couching the continued problems in credit markets in terms of adequacy of loan loss reserves can help students in accounting classes better understand the credit market issues--and put a real world example to the academic learning about the importance of the accrual for bad debts. The article therefore is useful in any financial or MBA accounting course covering bad debts and the impact of the accounting for loan losses on capital accounts. Questions also discuss a related article on the topic of Fannie Mae, Freddie Mac, and banks' preferred stock.

    1. (Introductory) Describe the recent events undertaken by the U.S. government in relation to the Federal National Mortgage Association (nickname Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). You may use the related articles to do so. In your answer, describe the roles of these entities in facilitating mortgage lending and home ownership across the U.S.

    2. (Introductory) The article states "the chief problem at Fannie and Freddie is an inadequate capital cushion against losses." Whether they are business accounts receivable for a company or mortgage loan receivables on a bank or mortgage entity's balance sheet, how do we establish an allowance for losses on receivables? How does this procedure help to properly present a receivable balance on the balance sheet and an uncollectable accounts expense on the income statement?

    3. (Introductory) What is the impact of recording an allowance for doubtful accounts on an entity's capital or stockholders' equity?

    4. (Advanced) What is the purpose of requirements for banks, Fannie Mae and Freddie Mac to maintain a "cushion" of capital? How is that "cushion" eroded when loan losses prove greater than previously anticipated?

    5. (Advanced)
    How is it possible that Fannie Mae and Freddie Mac have inadequate allowances for doubtful mortgage loans?

    6. (Advanced) Why is it likely that inadequate allowances for losses on loan and accounts receivable are established in times of significant change in the product market generating the receivables? Did such a change occur in mortgage loan markets?

    7. (Introductory) One of the related articles discusses the implications of the government takeover and its suspension of dividends on the value of Fannie Mae and Freddie Mac preferred stock. How does preferred stock differ from common stock? How are these types of ownership interests similar in cases of failure of the entity issuing them?

    8. (Advanced) Why do debtholders fare better than common and preferred shareholders in this case of government takeover or any case of corporate failure?

    9. (Advanced) Why might investors "view preferred stock as debt by another name"?

    Reviewed By: Judy Beckman, University of Rhode Island



    I hope you are correct, but a four-decade history of mismanaged or purposefully managedloan losses in banking suggests something is wrong in the auditing of banks. It would seem that there’s a long history of actual losses exceeding loan loss reserves. Do you have empirical evidence to the contrary of the following citations illustrative of hundreds of banking studies?

    I will cite some older studies to show how bank loan loss reserves have been poorly estimated for many years. Auditors cannot possibly be ignorant of this problem.

    "Loan Loss Reserves," by  John R. Walter, Economic Review, July/August 1991, Page 28

    Nevertheless, the desire to smooth reported profits, to lower taxes, and to limit the expenses of estimating future loan losses continues to provide an incentive for banks to hold reserves at levels that differ from their best estimates of the losses inherent in their loan portfolios.


    From The William and Mary Law Review, Summer of 1970


    Bad debt reserves manipulation is one of the key ways bank managers manage earnings according to Mark W. Nelson , John A. Elliott , Robin L. Tarpley, Accounting Horizons Supplement, Vol. 17, 2003.

    Mortgage lender blames KPMG for its failure:  Good thing!
    FHA and Ginnie Mae are imposing these actions because TBW failed to submit a required annual financial report and misrepresented that there were no unresolved issues with its independent auditor even though the auditor ceased its financial examination after discovering certain irregular transactions that raised concerns of fraud. FHA's suspension is also based on TBW's failure to disclose, and its false certifications concealing, that it was the subject of two examinations into its business practices in the past year.
    "FHA SUSPENDS TAYLOR, BEAN & WHITAKER MORTGAGE CORP. AND PROPOSES TO SANCTION TWO TOP OFFICIALS:  Ginnie Mae Issues Default Notice and Transfers Portfolio," by Brian Sullivan, HUD News, August 4, 2009 ---

    Jensen Comment
    Most of these "fraud" issues concern misrepresentations in loan approvals, particularly fraudulent mortgage borrower income and credit worthiness documentation. If KPMG commenced doing better auditing of loan approval internal controls, perhaps KPMG learned it's lesson from the pending lawsuits of shareholders claiming that KPMG was incompetent in a number of former bank audits ---

     KPMG Should Be Tougher on Testing, PCAOB Finds The Big Four audit firm was cited for not ramping up its tests of some clients' assumptions and internal controls.
    KPMG did not show enough skepticism toward clients last year, according to the Public Company Accounting Oversight Board, which cited the Big Four accounting firm for deficiencies related to audits it performed on nine companies. The deficiencies were detailed in an inspection report released this week by the PCAOB that covered KPMG's 2008 audit season. The shortcomings focused mostly on a lack of proper evidence provided by KPMG to support its audit opinions on pension plans and securities valuations. But in some instances, the firm was cited for weak testing of internal controls over financial reporting and the application of generally accepted accounting principles.
    Marie Leone,, June 19, 2009 ---

    In one instance, the audit lacked evidence about whether the pension plans contained subprime assets. In another case, the PCAOB noted, the audit firm didn't collect enough supporting material to gain an understanding of how the trustee gauged the fair values of the assets when no quoted market prices were available.

    The PCAOB, which inspects the largest public accounting firms on an annual basis, also found that three other KPMG audits were shy an appropriate amount of internal controls testing related to loan-loss allowances, securities valuations, and financing receivables.

    In one audit, KPMG accepted its client's data on non-performing loans without determining whether the information was "supportable and appropriate." In another case, KPMG "failed to perform sufficient audit procedures" with regard to the valuation of hard-to-price financial instruments.

    In still another case, the PCAOB found that KPMG "failed to identify" that a client's revised accounting of an outsourcing deal was not in compliance with GAAP because some of the deferred costs failed to meet the definition of an asset - and the costs did not represent a probably future economic benefit for the client.


    "The harder they fall: Will the Big Four survive the credit crunch?" by Rob Lewis, AccountingWeb, October 2008 --- 

    A U.S. Justice Department report has already concluded that KPMG either helped perpetrate the fraud at the mortgager or deliberately ignored it. Class-action lawsuits are already pending. Only weeks before the report was published the U.S. Supreme Court's Stone Ridge ruling immunized third party advisers like accountants and bankers from the disgruntled shareholders of other entities, but that may be not much of a shield. Of course, New Century might not be KPMG's biggest problem. That's probably the Federal National Mortgage Association, or Fannie Mae.

    The following is not a bank audit, but it provides an excellent reason why we had SOX legislation.

    AccountingWeb ---,%20%Y (Requires Subscription)

    KPMG Gets Probation For Bungling Orange County Audit

    AccountingWEB US - July 29, 2002 -  International accounting firm KPMG has been slapped with a $1.8 million fine and a year of probation after being found guilty of gross negligence and unprofessional conduct for its handling of the 1992 and 1993 audit and financial statements of Orange County, California. The California Board of Accountancy also ordered three years of probation and 100 hours community service for KPMG partner Margaret Jean McBride and two years of probation each for former KPMG accountants Joseph Horton Parker and Bradley J. Timon. All were found guilty of gross negligence and unprofessional conduct.

    The county declared bankruptcy in late 1994 after it lost $1.7 billion in its investment pool. County treasurer Robert L. Citron oversaw the investment pool. Mr. Citron was convicted of faking interest earnings and falsifying accounts. The Board claims that KPMG, attempting to save money on what turned out to be an underbid audit, cut corners by allowing junior staff members to conduct certain areas of the audit and by not helping the county solve its problem of a lack of internal controls with regard to the investment pool. KPMG auditors did not speak with the county treasurer regarding the investment pool, nor did they determine the true market value of the highly leveraged and speculative investments. KPMG paid a settlement of $75 million to Orange County in 1998.

    KPMG refutes the claims and says the accountancy board wasted millions of dollars with the goal of making KPMG a scapegoat. "The claims by the board incorrectly challenge how KPMG reached its conclusions rather than claim our conclusions were wrong," said KPMG spokesman George Ledwith.

    Continued at the AccountingWeb link shown above.

    November 26, reply from Gerald Trites [gtrites@ZORBA.CA]

    My dear Bob,

    Of course, auditors have taken a stand in many situations. That's what I have been trying to say. When they reach the conclusion that they cannot live with the concerns they have, then they take a stand. That happens all the time.

    The financial industry is a special case. The scope of judgement is so wide and what passes for assets so complex and muddy that traditional audits do not do the job. The mortgage debacle is a case of financiers gone wild. We need to ask those questions you're talking about, not just of the auditors, but of everyone else involved right from the property holders who thought it was sensible to take 100% mortgages, through to the top Wall Street bankers who think it is reasonable to declare multi-million bonuses for themselves. The auditors are a bit player in a widespread systemic failure. We need to get to the root of the matter and then make the necessary changes. Suing the auditors will not resolve the problem.

    I think one of the areas of change needed is in the financial reporting methods used for financial institutions. Reporting of complex financial instruments cannot be achieved through conventional financial statements. Using fair values is a sham, because nobody knows what the fair values are until the instruments have gone through their life cycle. Until then, its all guesswork.

    Financial and business reporting is moving through a stage where we are placing less reliance on financial statements and more on reporting of other data items. Whereas financial statements used to be the major part of the reports to stakeholders, now they are only a small part. A study released by the CICA last year identified over 50 types of information reported to stakeholders of which the financial statements are only one. More data is becoming available through such vehicles as XBRL and this data can be analyzed electronically. Just as the SEC did not have enough staff to review the filings coming their way, and called for the filings to be in XBRL so they could automate the reviews, we may well find that for financial institutions more raw data needs to be made available in a form that can be analyzed electronically. If this had been done with the complex instruments that led to the financial debacle we have been going through, there is reason to believe that some of the issues that came to light through defaults would have been identified earlier. I have some references on this point, but haven't taken the time to dig them out, but can if you wish. Roger or Glen might have them readily available.

    Data reporting through systems like XBRL is a better response than trying to fix an outmoded financial reporting system that worked well in a simpler world but is no longer adequate to express the complexities of the modern financial world.

    Instead of branding the auditors as incompetent and sleazy, lets address the real problems.

    Your good and faithful colleague,


    November 27, 2009 reply from Bob Jensen

    Hi Jerry,

    I agree somewhat if you begin to delve into Black Swan Theory and the Gaussian Copula Function, but the real problem for current shareholders lawsuits against banks and mortgage companies boils down to a much more basic Auditing 101 negligence question about things that auditors were required to handle under SOX. Gaussian Copula Functions would've worked just fine on Wall Street if mortgage contracts had not be poisoned on Maine Street.

    Where did the poison in loan portfolios come from in the first place before this poison later caused problems in CDOs, credit derivatives, and millions of foreclosures? This is an Auditing 101 problem, and auditors blew it in spite of the hopes of Zane. The question is whether lending approvals conformed to the rules of approving loans.

    SOX requires that internal control systems be evaluated and test checked by CPA auditors, including internal controls for banks and mortgage companies for following the rules of approving loans.  Simple test checks of the loan approval internal control process should’ve uncovered illegal approving of enormous mortgage loans to borrowers with very negative credit history in violation of mortgage lending laws and policies (including rules laid down to mortgage lenders by Fannie and Freddie). Exhibit A in Phoenix is unemployed Marvene living on welfare who was deep, hopelessly deep in $75,000 debt, when she managed to pay off her debts and buy an enormous new truck by getting a 2007 $119,000 mortgage on a shack she purchased for $3,200. Lenders never visited her shack to approve the 2007 loan. They did not even check the tax records. Neighbors in 2009 bought her property in foreclosure almost nothing and tore her shack down.

    It doesn’t take a rocket science auditor to know how to test check some of the loans and compare the value of the collateral with the amount loaned. Even a simple auditor comparison of tax record valuations should have disclosed that many new mortgage amounts were in excess of ten or even 100 times the tax record valuations.

    There were all sorts of possible red flags to be checked while auditing under SOX requirements. At a minimum, credit ratings of borrowers could’ve been examined along with employment status. Each time I applied for a mortgage (on four different homes), I was required to send copies of my IRS Form 1040 to the bank along with copies of my recent credit card billings before my loan was approved. These telling forms were available to CPA auditors of my banks when auditors test checked the lending control process.

    It seems to me that you are excusing auditors for lack of sophistication in David Lee’s Copula Function when in fact there would’ve been no problem with the Copula Function in the least if auditors had detected the poison in the bank loans on main street due to the fact that lenders were not following mortgage approval laws, rules, and policies. This is an Auditing 101 failure under SOX that requires zero rocket science.

    Viewers who never graduated from high school can understand every word of the CBS video of how the poison was added to the loan portfolios. Why couldn’t auditors understand at least at that level?
    CBS Sixty Minutes featured how bad things became when poison was added to loan portfolios. The Sixty Minutes Module is entitled "House of Cards" ---;contentBody

    It was Auditing 101 failure that let the poison get into the loan portfolios.

    November 27, 2009 replies from Bob Jensen and Jerry Trites

    Nice reply below Jerry,

    It’s still confusing to me how loan approval laws and rules were violated millions of times, because CPA testing for loan approval internal controls seems to me to be one of the easiest SOX conformance audit procedures since so much customer documentation should be in the files to meet mortgage lending laws, rules, and policies

    When I got my mortgage in 2004 for my present house up here in the mountains I had to provide the bank with copies of my prior IRS 1040 forms (for the last five years), recent credit card billing statements for all credit cards, a copy of the payoff receipt on the mortgage that I had in Texas, etc. I had to provide certified copies of my TIAA-CREF balances and statements of my lifetime annuities and other mutual fund account records. And I know for certain that the bank delved into my entire credit history. All of these supporting documents were on file for CPA auditors of the bank. The bank insisted on all this backup material even though I think it almost immediately sold my mortgage to Fannie.

    Perhaps because my property is so rural in the boonies, I also had to pay over 50% down in cash

    When I refinanced to get a lower rate fixed rate in 2006 I had to provide updates on all the above information even though I refinanced through the same regional bank.

    Similarly in New Hampshire and in most other states property tax valuation records are available to the public in general such that CPA auditors could certainly verify the most recent tax assessor’s valuation of the property that I was purchasing.

    What I’m saying is that, if the bank or mortgage company, conformed to mortgage laws, rules, and policies, about the easiest audit procedure under SOX rules should be to test check whether the bank had adequate internal controls for adhering to laws, rules, and policies. Auditors that did not test check this conformance had to, in my judgment, negligent under SOX rulings.

    The bank also has a statement from my casualty insurance company with respect to the maximum it will insure my house for, and this is somewhat of a valuation check since the insurance company made such a detailed onsite visit of the property before my mortgage was approved.

    None of these things apparently took place when Marvene got her fraudulent mortgage in Phoenix ---

    Whenever I watch the following wonderful CBS Sixty Minutes video I have to ask myself:
    Where were the CPA auditors investigating internal controls over the loan approval process?

    Viewers who never graduated from high school can understand every word of the CBS video of how the poison was added to the loan portfolios. Why couldn’t auditors understand at least at that level?
    CBS Sixty Minutes featured how bad things became when poison was added to loan portfolios. The Sixty Minutes Module is entitled "House of Cards" ---;contentBody

    It was Auditing 101 failure that let the poison get into the loan portfolios.

    Robert E. (Bob) Jensen

    Trinity University Accounting Professor (Emeritus)
    190 Sunset Hill Road

    Sugar Hill, NH 03586

    Tel. 603-823-8482


    From: AECM, Accounting Education using Computers and Multimedia [mailto:AECM@LISTSERV.LOYOLA.EDU] On Behalf Of Gerald Trites
    Sent: Saturday, November 28, 2009 11:08 AM
    Subject: Re: Going Concern Audit Opinions: Why So Few Warning Flares?"

    Hi Bob

    I don't want to belabour this, but I have a couple of points to add. I agree with your assessment of the audit procedures that one would expect, assuming that a decision was made to test the controls. If I were still a partner in a big firm, and in charge of one of those audits, I think I would have:

    1. Identified SOX compliance as a priority at the planning stage.

    2. Read the SOX rules carefully and considered the impact on my client.

    3. Brought in one of the firm's SOX specialists to help with the audit.

    4. Discussed the issues with the staff in planning meetings.

    5. Discussed SOX compliance with management, and determined what procedures they have put in place to ensure compliance.

    6. Ensured the audit programs included procedures to determine that the procedures put in place were actually implemented and are working properly.

    7. Reviewed the procedures carried out by the staff and their conclusions.

    8. Discussed the results with management.

    9. Reported on any SOX compliance issues to the Audit Committee.

    If we decided that the controls put in place were critical and needed to be tested, then I would have had procedures such as you have outlined carried out, and perhaps others. To be honest, I don't know if I would have made that decision or not, without actually going through the process and doing the risk analysis. Certainly in retrospect I would, but hindsight is wonderful.

    Also, the second partner review would likely have had experience with similar clients and would identify SOX compliance as an issue and reviewed what had been done.

    I can't believe that these things were universally not done. If they were done, why didn't they identify the valuation problems? I don't know. I can't leap to the conclusion that the auditors failed in their duties. I need to know what they did and what the results were. I'll be really interested to see what comes out of the legal actions. Hopefully we don't punish a lot of innocent people like we did with AA.



    November 26, 2009 reply from Francine McKenna [retheauditors@GMAIL.COM]

    Thanks Bob.

    This is very helpful. I'm working on a post about where were the auditors during the weekend last September when Merrill Lynch was sold suddenly to BofA and Leh was allowed to fail.

    I often talk about the most important risk assessment step in an audit - Tone at the Top, but many pooh-pooh my expectation that auditors should be evaluating the integrity and veracity of senior management and then making adjustments of audit programs form there. 

    There seems to be a huge amount of slack cut for audits who can't possibly know their clients business better than the executives and are An accounting firm that conducts an annual audit of a multitude of unrelated firms in a multitude of different industries cannot be expected to be expert in the firms’ business environments…” in Judge Posner's words.

    What are they then?

    So Much Auditor Litigation Makes For Strange Bedfellows
    Francine McKenna's Great Blog, October 12, 2009 --- Click Here
    Includes a clip from the old risqué movie Bob,Carol, Ted, and Alice

    Every one of the Big 4 (and the next tier) has a handful of lawsuits on their desk related to their audits of the banks and other financial institutions that failed, were taken over in the dead of night, or bailed out by their respective central banks. That’s in addition to the various fraud and Madoff related suits. It may or may not have been better for them to have warned us with “going concern” opinions earlier.  We’ll let the judges and juries decide, if any of the cases are actually tried.  Most often they settle and the audit firm pays, but not as much as you would think.  

    Deloitte has been party to settlements, left and right, lately, but they’re no more prone to settlements.   After all, per Adam Savett of Risk Metrics (by way of Kevin La Croix of D&O Diary), “jury trials in securities class action lawsuits are extremely rare” :

  • “As reported on the Securities Litigation Watch blog (here), only 21 cases (prior to Vivendi) have gone trial since the 1995 enactment of the PSLRA. Only seven of the 21 cases (including the Household International case) that have gone to a verdict involved conduct that occurred after the PSLRA was enacted.”

    Jury trials in accounting malpractice cases are even rarer. It’s just that Deloitte has more than the average share of subprime-related litigation and as a result is suffering from the double whammy of both losing clients due to the crisis and having those former clients sue them.

    What’s interesting about the current flood of lawsuits is the heightened probability Deloitte - and the rest of the Big 4 - will end up on both sides of lawsuits with their former and current audit clients.

    Take the Merrill Lynch litigation.


  • Deloitte is a co-defendant with Bank of America (in place of Merrill Lynch) on lawsuits stemming from Bank of America’s “Deal From Hell” to buy Merrill Lynch for $50 billion, arranged in 48 hours, and agreed to on September 15 of last year.   In January of this year, Merrill Lynch announced settlement of a suit filed in October 2007 related to the earlier period where Merrill Lynch experienced significant losses due to write downs of CDOs and other subprime related assets. Deloitte was a defendant and may also have to contribute to that $475 million settlement.  Kevin La Croix described it as,

  •  ”…unquestionably the largest subprime subprime securities lawsuit settlements so far, and [ ] certainly suggest[s] the enormous stakes that may be involved in the mass of subprime and credit crisis-related litigation cases that remain pending.”

  • Continued in article

    Mortgage lender blames KPMG for its failure
     FHA and Ginnie Mae are imposing these actions because TBW failed to submit a required annual financial report and misrepresented that there were no unresolved issues with its independent auditor even though the auditor ceased its financial examination after discovering certain irregular transactions that raised concerns of fraud. FHA's suspension is also based on TBW's failure to disclose, and its false certifications concealing, that it was the subject of two examinations into its business practices in the past year.
     "FHA SUSPENDS TAYLOR, BEAN & WHITAKER MORTGAGE CORP. AND PROPOSES TO SANCTION TWO TOP OFFICIALS:  Ginnie Mae Issues Default Notice and Transfers Portfolio," by Brian Sullivan, HUD News, August 4, 2009 ---

    Jensen Comment
     Most of these "fraud" issues concern misrepresentations in loan approvals, particularly fraudulent mortgage borrower income and credit worthiness documentation. If KPMG commenced doing better auditing of loan approval internal controls, perhaps KPMG learned it's lesson from the pending lawsuits of shareholders claiming that KPMG was incompetent in a number of former bank audits ---

    The current shareholder lawsuits pending against virtually all the big firms that audit bands will investigate whether auditors should have been more diligent in detail testing of tainted mortgage bank portfolios and poisoned tranches.

    Keep in mind that auditors since SOX have taken on the added responsibility of testing the internal control system for weaknesses in the lending.

    November 26, 2009 reply from Francine McKenna [retheauditors@GMAIL.COM]

    Dear Gerald,

    So many concerns I have with your comments... They are thoughtful and obviously come from significant experience, but...

    "They cannot predict the future. " - For a going concern assessment, according to AU341, "The auditor has a responsibility to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited (hereinafter referred to as a reasonable period of time)." That's a requirement to look into the future, like it or not, for the benefit of the shareholders not in service to management.

    "Instead management instructs their accountants to, for example, see if we can make $10 million in earnings. Please be clear. I'm not talking about the kind of earnings management that includes contrived earnings that are vastly different from what they should have been and mis-represent the results for the company. In this case, management may have felt that earnings could fall between 9.5 million and 10.5 million and they feel that 10 million is a benchmark they would like to achieve. To achieve management's earnings objectives, the staff in making judgements, gives the company the benefit of the doubt where they can. "

    Sounds like GE, approach that was put up with for a very long time, where KPMG allowed themselves to be pushed and shoved into going along with what managment wanted in order to meet analyst expectations of smooth earnings. It was always wrong. Why? Because the approach and your assumption speak loudly of management's desires, management's goals and, in the end as we have seen with the banks, management's desires to hit targets that will pay out their incentive comp. When are we going to stop making excuses for this behavior?

    "Just that audit opinions cannot be relied upon to guarantee that the accounts are "right". But they can be relied upon to provide some incremental assurance that the accounts are reasonable, that they were arrived at using reasonable processes. There are all kinds of things that can go wrong that the auditors could not reasonably have picked up, but in the normal course of events, the auditors play a valuable role in the process of reporting to stakeholders. Thats why they are worth paying." How much to pay for "incremental" assurance that accounts are "reasonable"? I say not much. AIG paid PwC a total of $131 million in audit and other fees in 2008 and $119.5 million in 2007. “I want to know what these fees were paid for,” shareholder Kenneth Steiner of Great Neck, New York said. “Why didn’t anybody know what was going on? What were the accountants doing? Were they sleeping?” The fees look large but are not unheard of. GE, for instance, paid KPMG $133 million in 2008 and $122.5 million in 2007.


    November 25. 2009 reply from Saeed Roohani [sroohani@COX.NET]

    Are you saying current going concern standard is adequate?

    Let’s try something better than current going concern standard: SOX Section 409:

    ‘‘(l) REAL TIME ISSUER DISCLOSURES.—Each issuer reporting under section 13(a) or 15(d) shall disclose to the public on a rapid and current basis such additional information concerning material changes in the financial condition or operations of the issuer, in plain English, which may include trend and qualitative information and graphic presentations, as the Commission determines, by rule, is necessary or useful for the protection of investors and in the public interest.’’.

    It is obvious many people behind doors making deals last year knew about how bad things were, it looks like all these companies violated SOX Section 409 as well, and nobody cares either.


    Bob Jensen's threads on "Where Were the Auditors?" ---

    Some auditing firms are now being hauled into court in bank shareholder and pension fund lawsuits ---

    Bob Jensen's threads on large firm litigation ---

    Francine maintains an outstanding auditing blog at

    Through the Banking Glass Darkly
     "FASB to Propose More Flexible Accounting Rules for Banks," by Floyd Norris, The New York Times, December 7, 2009 ---

    Facing political pressure to abandon “fair value” accounting for banks, the chairman of the board that sets American accounting standards will call Tuesday for the “decoupling” of bank capital rules from normal accounting standards.

    His proposal would encourage bank regulators to make adjustments as they determine whether banks have adequate capital while still allowing investors to see the current fair value — often the market value — of bank loans and other assets.

    In the prepared text of a speech planned for a conference in Washington, Robert H. Herz, the chairman of the Financial Accounting Standards Board, called on bank regulators to use their own judgment in allowing banks to move away from Generally Accepted Accounting Principles, or GAAP, which his board sets.

    “Handcuffing regulators to GAAP or distorting GAAP to always fit the needs of regulators is inconsistent with the different purposes of financial reporting and prudential regulation,” Mr. Herz said in the prepared text.

    “Regulators should have the authority and appropriate flexibility they need to effectively regulate the banking system,” he added. “And, conversely, in instances in which the needs of regulators deviate from the informational requirements of investors, the reporting to investors should not be subordinated to the needs of regulators. To do so could degrade the financial information available to investors and reduce public trust and confidence in the capital markets.”

    Mr. Herz said that Congress, after the savings and loan crisis, had required bank regulators in 1991 to use GAAP as the basis for capital rules, but said the regulators could depart from such rules.

    Banks have argued that accounting rules should be changed, saying that current rules are “pro-cyclical” — making banks seem richer when times are good, and poorer when times are bad and bank loans may be most needed in the economy.

    Mr. Herz conceded the accounting rules can be pro-cyclical, but questioned how far critics would go. Consumer spending, he said, depends in part on how wealthy people feel. Should mutual fund statements be phased in, he asked, so investors would not feel poor — and cut back on spending — after markets fell?

    The House Financial Services Committee has approved a proposal that would direct bank regulators to comment to the S.E.C. on accounting rules, something they already can do. But it stopped short of adopting a proposal to allow the banking regulators to overrule the S.E.C., which supervises the accounting board, on accounting rules.

    “I support the goal of financial stability and do not believe that accounting standards and financial reporting should be purposefully designed to create instability or pro-cyclical effects,” Mr. Herz said.

    He paraphrased Barney Frank, the chairman of the House committee, as saying that “accounting principles should not be viewed to be so immutable that their impact on policy should not be considered. I agree with that, and I think the chairman would also agree that accounting standards should not be so malleable that they fail to meet their objective of helping to properly inform investors and markets or that they should be purposefully designed to try to dampen business, market, and economic cycles. That’s not their role.”

    Banks have argued that accounting rules made the financial crisis worse by forcing them to acknowledge losses based on market values that may never be realized, if market values recover.

    Mr. Herz said the accounting board had sought middle ground by requiring some unrealized losses to be recognized on bank balance sheets but not to be reflected on income statements.

    Banking regulators already have capital rules that differ from accounting rules, but have not been eager to expand those differences. One area where a difference may soon be made is in the treatment of off-balance sheet items that the accounting board is forcing banks to bring back onto their balance sheets. The banks have asked regulators to phase in that change over several years, to slow the impact on their capital needs.

    Bob Jensen's threads on fair value accounting are at

    Please don't blame the accountants for the banking meltdown ---

    Bob Jensen's threads on banking frauds ---

    Reply from FASB Chairman Bob Herz on December 8, 2009 --- Click Here

    Banks using Deloitte and Ernst & Young show sharper declines in the fair value of their loans than those using other accounting firms

    "Accounting for Banks' Value Gaps," by Michael Rapoport, The Wall Street Journal, December 29, 2009 ---

    Can investors count on consistency when it comes to bank accounting? As many banks struggle with piles of bad loans, some auditors appear stricter than others when assessing their true value.

    Banks using Deloitte and Ernst & Young show sharper declines in the fair value of their loans than those using other accounting firms, a Wall Street Journal analysis shows.

    Of course, it is quite possible Ernst and Deloitte simply have a less-healthy group of bank clients. But if it instead reflects different audit policies when it comes to assessing loans, it could have consequences on the strength of banks' regulatory capital.

    Banks carry most loans on balance sheet at their original cost. But they must also disclose the loans' fair value, or current market value, in footnotes. At most banks, despite the carnage of recent years, fair value is only slightly below cost. Some banks, however, show much steeper declines.

    At Regions Financial, fair value was 19.3% lower than cost as of Sept. 30. The difference was 13.4% at Huntington Bancshares, 12% at KeyCorp, 9% at SunTrust Banks and 8.6% at Marshall & Ilsley. Regions, Key and SunTrust are audit clients of Ernst; Huntington and M&I are Deloitte clients.

    Among the top-25 U.S. commercial banks, those five Ernst and Deloitte clients accounted for five of the six biggest gaps between fair value and cost as of Sept. 30. The average gap among Ernst and Deloitte clients in the 25-bank group was about 6%; among clients of PricewaterhouseCoopers and KPMG it was about 2%.

    Those differences can affect how investors view a bank's loan portfolio, and could have an effect on regulatory capital in the future.

    The Financial Accounting Standards Board is considering changes in banks' accounting for loans and may require them to carry loans on the balance sheet at fair value instead of cost. If that happened, the fair-value declines could reduce shareholder equity and regulatory capital—in some cases, to levels regulators would find troublesome. At Regions, for example, the $16.9 billion gap between its loans' fair value and carrying value would wipe out its $13 billion in Tier 1 capital using a fair-value balance-sheet standard.

    A move by the FASB to require banks to use fair value as the balance-sheet standard doesn't have to hurt the banks' regulatory capital. Bank regulators could adjust the capital measures they use.

    But big hits to the fair value of loans still matter to investors. Who audits a bank's books may have importance beyond whose name goes on the letter blessing the financial statements once a year.

    Where were the auditors? ---

    Bob Jensen's threads on fair value accounting are at

    Peer Review of Articles versus Peer Review of Underlying Data (Codes)

    "Whom Can You Trust on Climate Change?" by Kevin Johnson, Chronicle of Higher Education, December 8, 2009 ---

    Jensen Comment
    Kevin Johnson presents a reasoned commentary on the importance of peer review and the compounding of research on most any topic, especially climate change research ---

    What he fails to recognize is that if the underlying data is manipulated or biased or otherwise flawed, a million peer-reviews studies using that data might be equally flawed from get go. It's important to note that the Climatic Research Unit ('CRU') at the University of East Anglia, was the United Nations. designated source for meteorological station data. It's data was widely used by thousands of scientists and other analysts.

    Although there are obviously speculations about raw data was discarded and the obvious biases of the scientist (Phil Jones) who was in charge of gathering the meteorological station data, I don't think there is hard evidence that Jones modified the data used by other meteorological scientists. There is some evidence of data manipulation by a New Zealand scientist, but that data is not nearly as important as the CRU data collected for the U.N.

    What struck me as more important than Johnson's article cited above is the following comment accompanying Johnson's article:

    Posted by Ryan Wisnesky , Graduate Student, Computer Science at Harvard University on December 8, 2009 at 5:15am EST

    How rigorous can the peer-review process be if the source code used to analyze the raw data is not also thoroughly reviewed? From looking at the leaked source code comments it appears that even the programmers who wrote the code (over a period of years) were unsure how it actually works. If nothing else, this scandal suggests the ever increasing importance of code review for all scientific disciplines.

    Hence, even though scientists can point to nearly 1,000 respected peer reviewed studies using the CRU data, the peer reviewers mostly accepted the CRU underlying data as fact without challenging whether some of the most important data might have been fictionalized by Jones and his team. In fairness, some of the raw data was destroyed before Professor Jones took over as Director of the CRU.

    This is consistent with my long-standing suspicion of journal policies (like those of The Accounting Review) that arm twists author willingness to make underlying data available to readers. Actually I'm in favor of the policies and was on the AAA Executive Committee when we asked my hero Bill Cooper  (then Publications Director for the AAA) to commence a policy of trying to make data available to readers of articles. What I'm worried about is that, instead of gathering confirming data, researchers will simply do further research on what might be flawed data.

    The scientific community would come down on me in no uncertain terms if I said the world had cooled from 1998. OK it has but it is only 7 years of data and it isn't statistically significant.
    Note that the date of this email was July 5, 2005
    Dr. Jones never imagined that his admissions would ever be made public in the 2009 Climategate
    Phil Jones, Scientist Suspended in the Climategate Scandal for covering up evidence of planet cooling ---

    The New Zealand Government’s chief climate advisory unit NIWA is under fire for allegedly massaging raw climate data to show a global warming trend that wasn’t there. The scandal breaks as fears grow worldwide that corruption of climate science is not confined to just Britain’s CRU climate research centre.In New Zealand’s case, the figures published on NIWA’s [the National Institute of Water and Atmospheric research] website suggest a strong warming trend in New Zealand over the past century [go to the link to see the graphs; the fraud is astonishing]But analysis of the raw climate data from the same temperature stations has just turned up a very different result [go to link above to see graphs]
    "New Zealand Climate Scientists Faked Data, Too," Evolution News and Views, December 3, 2009 ---

    How NASA is Fudging Climate Data
    :"Example of Climate Work That Needs to be Checked and Replicated," by Warren Meyer, Climate Skeptic, December 5, 2009 ---

    Let’s say you had two compasses to help you find north, but the compasses are reading incorrectly. After some investigation, you find that one of the compasses is located next to a strong magnet, which you have good reason to believe is strongly biasing that compass’s readings. In response, would you 1. Average the results of the two compasses and use this mean to guide you, or 2. Ignore the output of the poorly sited compass and rely solely on the other unbiased compass?

    Most of us would quite rationally choose #2. However, Steve McIntyre shows us a situation involving two temperature stations in the USHCN network in which government researchers apparently have gone with solution #1.

    Continued in article

    "The Inconvenient Truth:  Al Gore "brushes aside" evidence of scientific misconduct,"
    James Taranto, The Wall Street Journal, .December 5, 2009 --- Click Here

    Here is the text of Newsweek’s 1975 story on the trend toward global cooling. It may look foolish today, but in fact world temperatures had been falling since about 1940. It was around 1979 that they reversed direction and resumed the general rise that had begun in the 1880s, bringing us today back to around 1940 levels. A PDF of the original is available here. A fine short history of warming and cooling scares has recently been produced. It is available here.
    Newsweek Magazine, April 28, 1975 ---

    Video:  ClimateGate Makes the Daily Show (Jon Stewart) --- Click Here
    Also see
    See commentary at

    Also see

    "A Reason To Be Skeptical The lessons of Climategate," by David Harsanyi, Reason Magazine, December 2, 2009 ---
    Available for audio download

    Who knows? In the long run, global warming skeptics may be wrong, but the importance of healthy skepticism in the face of conventional thinking is, once again, validated.

    What we know now is that someone hacked into the e-mails of leading climate researchers at the University of East Anglia's Climatic Research Unit and others, including noted alarmists Michael Mann at Pennsylvania State University and Kevin Trenberth of the U.S. National Center for Atmospheric Research in Boulder, Colo.

    We found out that respected men discussed the manipulation of science, the blocking of Freedom of Information requests, the exclusion of dissenting scientists from debate, the removal of dissent from the peer-reviewed publications, and the discarding of historical temperature data and e-mail evidence.

    You may suppose that those with resilient faith in end-of-days global warming would be more distraught than anyone over these actions. You'd be wrong. In the wake of the scandal, we are told there is nothing to see. The administration, the United Nations, and most of the left-wing punditry and political establishment have shrugged it off. What else can they do?

    To many of these folks, the science of global warming is only a tool of ideology. To step back and re-examine their thinking would also mean—at least temporarily—ceding a foothold on policy that allows government to control behavior. It would mean putting the brakes on the billions of dollars allocated to force fundamental economic and societal manipulations through cap-and-trade schemes and fabricated "new energy economies," among many other intrusive policies.

    We have little choice but to place a certain level of trust in scientists—even when it comes to the model-driven speculative discipline of climate change. And, need it be said, most scientists take great care in being honest, principled and precise.

    In the same way, a conscientious citizen has little choice but to be uneasy when those with financial, ideological, and political interest in peddling the most over-the-top ecological doomsday scenarios also become the most zealous evangelizers.

    As President Barack Obama heads to Copenhagen to work on an international deal that surrenders even more of our unsightly carbon-driven prosperity to the now-somewhat-less-than-irrefutable science of climate change, shouldn't he offer more than a flippant statement through a spokesman on the scandal?

    The talks, after all, will be based on the U.N.'s Intergovernmental Panel on Climate Change's Fourth Assessment Report, which partially was put together by the very same scandal-ridden scientists.

    Now, I do not, on any level, possess the expertise to argue about the science of anthropological global warming. Nor do you, most likely. This certainly doesn't mean an average citizen has the duty to do the lock step.

    Yes, you apostates will be tagged "denialists"—because skepticism is synonymous with the Holocaust denial, don't you know—or some other equally unfriendly moniker.

    Don't worry; you won't be alone. Gallup recently found that 41 percent of Americans now believe global warming news reports are exaggerated—the highest number in more than a decade despite the fact that this time frame has coincided with concentrated and highly funded scaremongering. That number is sure to rise as soon as word of this scandal spreads.

    The uglier the names get, the more anger you see, the more that science-challenged politicians push invasive legislation, the more skeptics will join you. True believers will question your intelligence, your sanity and your intentions.

    But as ClimateGate proves, a bit of skepticism rarely steers you wrong. In fact, it's one of the key elements of rational thinking.

    David Harsanyi is a columnist at The Denver Post and the author of "Nanny State." Visit his Web site at


    "Stop Insuring Mortgages:  The folly of government intervention in the housing market," by John Stossel, Reason Magazine, December 3, 2009 ---

    The Federal Housing Administration announced this week that it wants tougher rules on mortgage lenders. It's about time.

    Maybe FHA got spooked by the recent New York Times story titled "Easy Loans to Wealthier Areas," which said: "In its efforts to prop up a shattered housing market, the government is greatly extending its traditional support of real estate, including guaranteeing the mortgages of middle-class and even upper-class buyers against default."

    The Times explained that San Francisco, one of the priciest real estate markets in the country, had no government-insured mortgages two years ago, but now "the government is guaranteeing an average of six mortgages a week here. ... The Federal Housing Administration is underwriting loans at quadruple the rate of three years ago even as its reserves to cover defaults are dwindling."

    And some of those loans are surely questionable.

    The Times explains that 27-year-old Mike Rowland and his friends were able to buy a two-unit apartment building for almost a million dollars. "They had only a little cash to bring to the table but, with the federal government insuring the transaction, a large down payment was not necessary."

    "It was kind of crazy we could get this big a loan," Rowland said.

    Yes, it was crazy. Such policies do not end well. Young Rowland gets that. Even the Times does: "With government finances already under great strain, the policy expansions are creating new risks for American taxpayers."

    But our leaders plunge ahead, with your money. Has the administration forgotten that today's financial mess was precipitated in part by government's moves to encourage mortgage lending to unqualified or at best unproven borrowers? In the 1990s, the Federal Reserve Bank of Boston, concerned that blacks and Hispanics were "underserved," issued guidelines to banks stating: "Policies regarding applicants with no credit history or problem credit history should be reviewed. Lack of credit history should not be seen as a negative factor...."

    Soon, the lower standards spilled into the prime-mortgage market. The risk to lenders seemed small because government-sponsored Fannie Mae and Freddie Mac happily bought the dubious loans. An entire financial edifice was built on these securitized mortgages and derivatives based on them.

    Then the good times ended. Interest rates rose. Home prices flattened and then declined. Then those AAA mortgage-backed securities became "toxic."

    After all that, it's crazy that government still subsidizes housing rather than letting the market work. The economy will recover from recession only when it is allowed to discover the real value of assets like houses. But the government refuses to allow this to happen. FHA has been blowing air into another bubble, while other agencies do everything they can to boost prices.

    This includes leaning on and bribing banks to ease mortgage terms for people in default. The Obama administration announced that it would increase that pressure because "the banks are not doing a good enough job," said Michael S. Barr, assistant treasury secretary for financial institutions. Some Democrats want to go further. They demand that the government compel mediation over defaulted mortgages or empower judges to change the terms.

    This sounds humane, but it is typical political shortsightedness. When government helps delinquent borrowers to get easier loan terms, it simultaneously makes it harder for marginal borrowers to get loans in the first place. That's because lenders must now factor in the likelihood of a judge changing the terms.

    The know-it-alls in Washington "help" Americans by hurting them.

    Why won't the government let housing prices seek their own level? After a Washington-inflated bubble, that would seem to be the wise thing to do. Sure, some people get hurt when prices fall, but others—prospective home-buyers—are helped. By artificially raising prices, the Realtor-Construction-Banking-Big Government Complex cheats honest low-income people who would otherwise have been able to afford a first home without begging the government for help.

    Bob Jensen's threads on the sub-prime frauds ---

    "Did Harvard (and then President Larry Summers) Ignore Warnings on Harvard's Investments?" Inside Higher Ed, November 29, 2009 ---

    Senior Harvard University officials -- especially then-president Lawrence Summers -- repeatedly ignored warnings that the university's investment strategies were placing far too much cash (needed for short-term spending) in risky investments, The Boston Globe reported. The placement of the cash in risky investments has been a key reason why Harvard, which even after investment losses is by far the wealthiest university in the world, has been forced to make many cuts in the last year; such cash reserves, had the advice been followed, would have been easily accessible. Summers declined to comment for the article, but a friend of his familiar with the Harvard investment strategy noted that conditions changed after Summers left the presidency and that the university had the time to change its strategy prior to last year's Wall Street collapse.

    Jensen Comment
    There were advanced warnings before the fall, especially those of Peter Schiff ---
    But he missed the early timing and thus is still not a billionaire.
    Larry Summers resigned from Harvard in a clash with feminists and is now the chief economic advisor to President Obama.

    Video:  Peter Schiff was right 2006-2007 (CNBC edition) ---

    Is the AICPA acting in the best interest of its auditor membership?
    Smaller broker-dealers are worried that a sweeping congressional proposal aimed at preventing fraud through comprehensive audits of brokerage firms could put them out of business. Independent-brokerage firms, which don't handle client funds because of their arrangements with clearing firms, said they would be bearing an unfair burden because the provision would require all broker-dealers to be audited by accounting firms regulated by the Public Company Accounting Oversight Board. The measure is part of financial services reform legislation that is being considered by the Senate Banking Committee and which is expected to be taken up by the House in the next few weeks. The Financial Services Institute Inc., the National Association of Independent Broker/Dealers and the American Institute of Certified Public Accountants are all pushing Congress to alter the provision.
    Sara Hansard, "Small B-Ds decry Hill audit proposal:  Firms that don't hold client funds in custody say plan's cost would pose unjustified burden,", November 30, 2009 ---

    Another one from that Ketz guy

    "Whither Berkeley? Whither California?" by J. Edward Ketz, SmartPros, November 2009 ---

    When people ignore economic realities and are foolish enough to make and adhere to ill-conceived and faulty budgets, well, they get what they deserve. Take California, for example.

    The state has greatly reduced its cash infusions to the University of California system, and recently the university’s regents voted to increase fees (California’s code word for “tuition”) 32%. This has led to a strike at Berkeley and to student demonstrations and to the take-over of some buildings there and at Santa Cruz. This planned tuition hike comes on the heels of layoffs and furloughs and salary cutbacks of many university employees.

    Recently, the Academic Senate at Berkeley voted to end financial support for the Department of Intercollegiate Athletics. The Senate even had the gall to ask the Athletics department to repay a loan of $5.8 million. Nothing is sacred anymore! But nothing to fear—I bet the regents will save Berkeley football before it saves the classics department.

    The state of affairs at Berkeley will be watched all over because many other public universities are not much different. It is only a matter of time when they too will be faced with the question of how to endure economic sacrifice.

    But, it won’t be all bad. Such difficult times provide moments when society can rethink its goals and strategic priorities. How many research universities do we really need in this country? How many administrators do we really need to protect the interests of Croatian students or to assist those who wish to preserve the heritage of Bon Jovi or to supply counselors for those trying to give up Law and Order? And does every town with a population of at least 1,000 really need a branch campus?

    The state of California itself is much worse off than Berkeley. Given the state’s penchant to provide welfare to everybody who can generate a creative excuse for an entitlement, it was only a matter of time before the state’s budget was so out of whack even Alec Baldwin and Barbara Streisand could acknowledge it.

    State legislators and governors over the last 10 to 20 years are to blame. Not only do they not understand the word “NO” when it comes to spending, they were very short-sighted when it came to revenue generation. They thought the dot-com slush funds would continue to be created out of nothing, though physics and economics indicate otherwise. They then did want virtually every politician does—they are so without original ideas!—they raised taxes on corporations and rich people. Unfortunately, the legislators and governors forgot that corporations and rich people can move, and indeed enough of them have left the state, leaving California in serious trouble.

    The woes are so great that it is easy to predict that California will become the first state in U.S. history to declare bankruptcy. I put the odds at least at 50 percent in 2010.

    Then the fun begins. California, before or shortly after entering Chapter 11, will ask for help from Washington. While the Obama administration and the Congress likely will administer CPR to the state finances, they really should just admit that the state is insolvent. The moral hazard is huge. If Washington provides assistance, there will be 49 states that will quickly follow suit.

    The bankruptcy process itself will be interesting because nobody will know what to do with a state. Creditors might try to win concessions about the state’s budgeting process or membership to state agencies that make economic decisions. They will also attempt to rewrite existing contracts.

    The biggest effect will be on bond yields. Any bankruptcy will shoot rates up and this will make future governmental borrowing hard and expensive for all governmental units.

    Taxpayers will face a major nightmare. Taxes will skyrocket for those who are not fortunate enough to be retired. Maybe taxpayers will even wake up and realize that they have elected nothing but economic idiots for quite some time. But what do you expect from a state that thinks actors actually know something?

    I just love California dreamin’.

    "The Big Admissions Shift," by Scott Jaschik, Inside Higher Ed, December 1, 2009 --- 

  • With the arrival of December, you can expect an onslaught of publicity about applications to the most elite private and public colleges in the country, and a new round of articles about how most people have a better chance of being struck by lightning than getting into Harvard. All true. In many ways, those stories won't reflect much change at all. It was incredibly difficult to get into those colleges last year, and the same will be true this year (and next year), even as the odds move up or down a hundredth of a percentage point.

    Here's the big story in admissions this year: The nation's largest higher education system (and its most diverse) is shifting from being de facto a non-competitive admissions university to a competitive one. Getting into the California State University System's 23 campuses (which educate 450,000 students) has just become iffy for many -- especially for those attracted to certain campuses and certain majors.

    The shifts at Cal State are not the result of a state philosophy about making their campuses more competitive in admissions; rather, they are driven by deep budget cuts in the state, which have led the university's leaders to try to shrink enrollment at a time of rising demand. Consider:

    Adding to the concerns over these developments are two other facts: (1) California's high school guidance offices are notoriously understaffed (with ratios hitting 950 students per counselor), so this dramatic shift is taking place in a state where many counselors are hard pressed to reach out to students who could be affected. (2) California banned affirmative action in public college admissions in 1996 -- and while the impact on the University of California system has been much discussed, the impact has been modest until now at Cal State, without competitive admissions. Now Cal State officials are having to focus on legal ways to recruit a diverse class -- within competitive admissions -- without the tool of affirmative action that their counterparts in most states (and at private colleges in California) take for granted.

    "Students are very concerned and so counselors are very concerned," said Loretta Whitson, director of student support services at the Monrovia Unified School District and executive director of the California Association of School Counselors. She said she's hearing from many counselors that they are trying to simultaneously figure out the new strategies for getting students into Cal State -- while advising more students to consider private or out-of-state institutions.

    Counselors report that it will still be harder -- much harder -- to get into Berkeley or UCLA than to Cal State Los Angeles or San Jose State, but the big difference is that a large portion of the population that previously didn't have to worry much about getting into college now has to worry, and to come up with a Plan B (or C).

    Lisa McLaughlin, founder of EDvantage Consulting, a private admissions counseling service in Orange County, said that she used to advise high schoolers wanting to go to Cal State campuses that they didn't need her services. The Cal State application, she noted, is straightforward.

    Now, though, these students need a strategy. Many of the California State campuses that are adding admissions requirements have done so by geographic area -- favoring students nearby (who may live at home in many cases) over those farther away. So students need varying academic qualifications to get into different campuses. Many Cal State campuses also have announced that they are "impacted" on majors, meaning that extra admissions standards apply to some fields (here's a list of those at Cal State Long Beach).

    So students need to think about the majors they want vs. the campuses they want, and they must do all of this knowing that they may be rejected. "I'm telling more families that students might not get in, and that they need to look at private colleges, too," McLaughlin said. There, the comparisons are also difficult. California State University campuses are much less expensive than private institutions, but with six-year graduation rates low at many campuses (61 percent at San Diego State, for instance), McLaughlin said the price a student envisions paying needs to be based on potential to earn a degree in four years. She said she worries that the average time to graduation may get worse at Cal State campuses due to all the budget cuts.

    Many students seem disappointed by the options, she said. "It's sad for students," she said. "First their parents can only afford a Cal State or UC. Then it's so hard to get into UC that they can't. Then the new admissions at Cal State mean they can't get in outside their area. They are saying, 'I want to go away for school and now that's being taken away from me, too.' "

    Geography is indeed becoming key to the new, differing admissions standards across Cal State, especially for campuses like Cal Poly San Luis Obispo and San Diego State, which have strong pulls outside their areas. San Francisco State University is another campus that is "impacted" for the first time this year.

    Last year, it admitted about three-quarters of all applicants, and admitted the overwhelming majority of those meeting basic admissions requirements. This year, applications are way up -- 21,089 as of Nov. 16, up from 15,392 at the same point a year ago. So the university has set out a two-stage admissions process. For those in the six Bay Area counties, the process will be the same as last year -- those who meet admissions requirements will be admitted. That will happen first. Then however many slots are left will got to applicants from the rest of the state. That means a likely radical increase in competitiveness for those slots, which in years past have been a majority of the freshmen.

    Jo Volkert, associate vice president for enrollment management at San Francisco State, said that the enrollment cuts ordered to meet state budget targets have left the university with no other choices.

    Continued in article

    The $61 Trillion Margin of Error, and What "Empire Decline" Means in Layman's Terms
    This is a bipartisan disaster from the beginning and will be until the end

    David Walker ---

    Niall Ferguson ---

    Call it the fatal arithmetic of imperial decline. Without radical fiscal reform, it could apply to America next.
    Niall Ferguson, "An Empire at Risk:  How Great Powers Fail," Newsweek Magazine Cover Story, November 26, 2009 ---
    Please note that this is NBC’s liberal Newsweek Magazine and not Fox News or The Wall Street Journal.

    . . .

    In other words, there is no end in sight to the borrowing binge. Unless entitlements are cut or taxes are raised, there will never be another balanced budget. Let's assume I live another 30 years and follow my grandfathers to the grave at about 75. By 2039, when I shuffle off this mortal coil, the federal debt held by the public will have reached 91 percent of GDP, according to the CBO's extended baseline projections. Nothing to worry about, retort -deficit-loving economists like Paul Krugman.

    . . .

    Another way of doing this kind of exercise is to calculate the net present value of the unfunded liabilities of the Social Security and Medicare systems. One recent estimate puts them at about $104 trillion, 10 times the stated federal debt.

    Continued in article ---

    Niall Ferguson is the Laurence A. Tisch professor of history at Harvard University and the author of The Ascent of Money. In late 2009 he puts forth an unbooked discounted present value liability of $104 trillion for Social Security plus Medicare. In late 2008, the former Chief Accountant of the United States Government, placed this estimate at$43 trillion. We can hardly attribute the $104-$43=$61 trillion difference to President Obama's first year in office. We must accordingly attribute the $61 trillion to margin of error and most economists would probably put a present value of unbooked (off-balance-sheet) present value of Social Security and Medicare debt to be somewhere between $43 trillion and $107 trillion To this we must add other unbooked present value of entitlement debt estimates which range from $13 trillion to $40 trillion. If Obamacare passes it will add untold trillions to trillions more because our legislators are not looking at entitlements beyond 2019.

    The Meaning of "Unbooked" versus "Booked" National Debt
    By "unbooked" we mean that the debt is not included in the current "booked" National Debt of $12 trillion. The booked debt is debt of the United States for which interest is now being paid daily at slightly under a million dollars a minute. Cash must be raised daily for interest payments. Cash is raised from taxes, borrowing, and/or (shudder) the current Fed approach to simply printing money. Interest is not yet being paid on the unbooked debt for which retirement and medical bills have not yet arrived in Washington DC for payment. The unbooked debt is by far the most frightening because our leaders keep adding to this debt without realizing how it may bring down the entire American Dream to say nothing of reducing the U.S. Military to almost nothing.

    Niall Ferguson, "An Empire at Risk:  How Great Powers Fail," Newsweek Magazine Cover Story, November 26, 2009 ---

    This matters more for a superpower than for a small Atlantic island for one very simple reason. As interest payments eat into the budget, something has to give—and that something is nearly always defense expenditure. According to the CBO, a significant decline in the relative share of national security in the federal budget is already baked into the cake. On the Pentagon's present plan, defense spending is set to fall from above 4 percent now to 3.2 percent of GDP in 2015 and to 2.6 percent of GDP by 2028.

    Over the longer run, to my own estimated departure date of 2039, spending on health care rises from 16 percent to 33 percent of GDP (some of the money presumably is going to keep me from expiring even sooner). But spending on everything other than health, Social Security, and interest payments drops from 12 percent to 8.4 percent.

    This is how empires decline. It begins with a debt explosion. It ends with an inexorable reduction in the resources available for the Army, Navy, and Air Force. Which is why voters are right to worry about America's debt crisis. According to a recent Rasmussen report, 42 percent of Americans now say that cutting the deficit in half by the end of the president's first term should be the administration's most important task—significantly more than the 24 percent who see health-care reform as the No. 1 priority. But cutting the deficit in half is simply not enough. If the United States doesn't come up soon with a credible plan to restore the federal budget to balance over the next five to 10 years, the danger is very real that a debt crisis could lead to a major weakening of American power.

    The Meaning of Present Value
    Initially it might help to explain what present value means. When I moved from Florida State University to Trinity University in 1982, current mortgage rates were about 18%. As part of my compensation package, President Calgaard agreed to have Trinity University carry my mortgage. I purchased a home at 9010 Village Drive for $300,000 by paying $100,000 down and signing a 240 month mortgage at 12% APR and a 1982 present value of $200,000. At payments of $2,202 per month my total cash obligation (had I not refinanced from a bank when mortgage rates went below 12%) would've been $528,521. However, since money has time value, the present value of that $528,521 was only $200,000.

    In a similar manner, Professor Ferguson's $104 trillion present value translates to over $300 trillion in cash obligations of Social Security and Medicare before being tinkered with changed entitlement obligations.

    The "Burning Platform" of the United States Empire
    Former Chief Accountant of the United States, David Walker, is spreading the word as widely as possible in the United States about the looming threat of our unbooked entitlements. Two videos that feature David Walker's warnings are as follows:

    David Walker claims the U.S. economy is on a "burning platform" but does not go into specifics as to what will be left in the ashes.

    The US government is on a “burning platform” of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon.
    David M. Walker, Former Chief Accountant of the United States ---

    An "Empire at Risk"
    Harvard's Professor Niall Ferguson is equally vague about what will happen if the U.S. Empire collapses from its entitlement burdens.
    Niall Ferguson, "An Empire at Risk:  How Great Powers Fail," Newsweek Magazine Cover Story, November 26, 2009 ---

    This is how empires decline. It begins with a debt explosion. It ends with an inexorable reduction in the resources available for the Army, Navy, and Air Force. Which is why voters are right to worry about America's debt crisis. According to a recent Rasmussen report, 42 percent of Americans now say that cutting the deficit in half by the end of the president's first term should be the administration's most important task—significantly more than the 24 percent who see health-care reform as the No. 1 priority. But cutting the deficit in half is simply not enough. If the United States doesn't come up soon with a credible plan to restore the federal budget to balance over the next five to 10 years, the danger is very real that a debt crisis could lead to a major weakening of American power.

    The precedents are certainly there. Habsburg Spain defaulted on all or part of its debt 14 times between 1557 and 1696 and also succumbed to inflation due to a surfeit of New World silver. Prerevolutionary France was spending 62 percent of royal revenue on debt service by 1788. The Ottoman Empire went the same way: interest payments and amortization rose from 15 percent of the budget in 1860 to 50 percent in 1875. And don't forget the last great English-speaking empire. By the interwar years, interest payments were consuming 44 percent of the British budget, making it intensely difficult to rearm in the face of a new German threat.

    Call it the fatal arithmetic of imperial decline. Without radical fiscal reform, it could apply to America next.

    Empire Collapse in Layman's Terms
    In 2010, hundreds upon hundreds of people will daily sneak across the U.S. border illegally in search of a job, medical care, education, and a better life under the American Dream. By 2050 Americans will instead be exiting in attempts to escape the American Nightmare and sneak illegally into BRIC nations for a job, medical care, education, and a better life under the BRIC Dream.

    A BRIC nation at the moment is a nation that has vast resources and virtually no entitlement obligations that drag down economic growth ---

    In economics, BRIC (typically rendered as "the BRICs" or "the BRIC countries") is an acronym that refers to the fast-growing developing economies of Brazil, Russia, India, and China. The acronym was first coined and prominently used by Goldman Sachs in 2001. According to a paper published in 2005, Mexico and South Korea are the only other countries comparable to the BRICs, but their economies were excluded initially because they were considered already more developed. Goldman Sachs argued that, since they are developing rapidly, by 2050 the combined economies of the BRICs could eclipse the combined economies of the current richest countries of the world. The four countries, combined, currently account for more than a quarter of the world's land area and more than 40% of the world's population.

    Brazil, Russia, India and China, (the BRICs) sometimes lumped together as BRIC to represent fast-growing developing economies, are selling off their U.S. Treasury Bond holdings. Russia announced earlier this month it will sell U.S. Treasury Bonds, while China and Brazil have announced plans to cut the amount of U.S. Treasury Bonds in their foreign currency reserves and buy bonds issued by the International Monetary Fund instead. The BRICs are also soliciting public support for a "super currency" capable of replacing what they see as the ailing U.S. dollar. The four countries account for 22 percent of the global economy, and their defection could deal a severe blow to the greenback. If the BRICs sell their U.S. Treasury Bond holdings, the price will drop and yields rise, and that could prompt the central banks of other countries to start selling their holdings to avoid losses too. A sell-off on a grand scale could trigger a collapse in the value of the dollar, ending the appeal of both dollars and bonds as safe-haven assets. The moves are a challenge to the power of the dollar in international financial markets. Goldman Sachs economist Alberto Ramos in an interview with Bloomberg News on Thursday said the decision by the BRICs to buy IMF bonds should not be seen simply as a desire to diversify their foreign currency portfolios but as a show of muscle.
    "BRICs Launch Assault on Dollar's Global Status," The Chosun IIbo, June 14, 2009 ---

    Their report, "Dreaming with BRICs: The Path to 2050," predicted that within 40 years, the economies of Brazil, Russia, India and China - the BRICs - would be larger than the US, Germany, Japan, Britain, France and Italy combined. China would overtake the US as the world's largest economy and India would be third, outpacing all other industrialised nations. 
    "Out of the shadows," Sydney Morning Herald, February 5, 2005 --- 

    The first economist, an early  Nobel Prize Winning economist, to raise the alarm of entitlements in my head was Milton Friedman.  He has written extensively about the lurking dangers of entitlements.  I highly recommend his fantastic "Free to Choose" series of PBS videos where his "Welfare of Entitlements" warning becomes his principle concern for the future of the Untied States 25 years ago --- 

    Where Did Social Security Go So Wrong?
    Social Security in the United States currently refers to the Federal Old-Age, Survivors, and Disability Insurance (OASDI) program. It commenced only as an old age ("survivors:") retirement insurance program as a forced way of saving for retirement by paying worker premiums matched by employer contributions into the SS Trust Fund. Premiums were relatively low due heavily to the proviso that the SS Trust Fund got to keep all the premiums paid for each worker and spouse that did not reach retirement age (generally viewed as 65).  Details are provided at

    If Congress had not tapped the SS Trust Fund for other (generally unfunded social programs of various types), the SS Trust Fund would not be in any trouble at all if it were managed like a diversified investment fund. But it became too tempting for Congress to tap the SS Trust Fund for a variety of other social programs, the costliest of which was to make monthly living allowance payments to each person of any age who is declared "disabled." In many cases a disabled person collects decades of benefits after having paid less than a single penny into the SS Trust Fund. It's well and good for our great land to provide living allowances to disabled citizens, but without funding from other sources such as a separate Disability Trust Fund fed with some type of other taxes, the disability payments mostly drained the SS Trust Fund to where it is in dire trouble today.


    The obligation to pay pensioners as well as disabled persons was passed on to current and future generations to a point where the Social Security and Disability Program is no longer self-sustaining with little hope for meeting entitlement obligations from worker premiums and employer matching funds. The SS Trust Fund will have deficits beginning in 2010 that are expected to explode as baby boomers collect benefits for the first time.

    Where Did Medicare Go So Wrong?
    Medicare is a much larger and much more complicated entitlement burden relative to Social Security by a ratio of about six to one or even more. The Medicare Medical Insurance Fund was established under President Johnson in1965.

    Note that Medicare, like Social Security in general, was intended to be insurance funded by workers over their careers. If premiums paid by workers and employers was properly invested and then paid out after workers reached retirement age most of the trillions of unfunded debt would not be precariously threatening the future of the United States. The funds greatly benefit when workers die before retirement because all that was paid in by these workers and their employers are added to the fund benefits paid out to living retirees.

    The first huge threat to sustainability arose beginning in 1968 when medical coverage payments payments to surge way above the Medicare premiums collected from workers and employers. Costs of medical care exploded relative to most other living expenses. Worker and employer premiums were not sufficiently increased for rapid growth in health care costs as hospital stays surged from less than $100 per day to over $1,000 per day.

    A second threat to the sustainability comes from families no longer concerned about paying up to $25,000 per day to keep dying loved ones hopelessly alive in intensive care units (ICUs) when it is 100% certain that they will not leave those ICUs alive. Families do not make economic choices in such hopeless cases where the government is footing the bill. In other nations these families are not given such choices to hopelessly prolong life at such high costs. I had a close friend in Maine who became a quadriplegic in a high school football game. Four decades later Medicare paid millions of dollars to keep him alive in an ICU unit when there was zero chance he would ever leave that ICU alive.

    On November 22, 2009 CBS Sixty Minutes aired a video featuring experts (including physicians) explaining how the single largest drain on the Medicare insurance fund is keeping dying people hopelessly alive who could otherwise be allowed to die quicker and painlessly without artificially prolonging life on ICU machines.
    "The Cost of Dying," CBS Sixty Minutes Video, November 22, 2009 ---;cbsCarousel

    What is really sad is the way Republicans are standing in the way of making rational cost-benefit decisions about dying by exploiting the "Kill Granny" political strategy aimed at killing a government option in health care reform.
    See the "Kill Granny" strategy at ---

    The third huge threat to the economy commenced in when disabled persons (including newborns) tapped into the Social Security and Medicare insurance funds. Disabled persons should receive monthly benefits and medical coverage in this great land. But Congress should've found a better way to fund disabled persons with something other than the Social Security and Medicare insurance funds. But politics being what it is, Congress slipped this gigantic entitlement through without having to debate and legislate separate funding for disabled persons. And hence we are now at a crossroads where the Social Security and Medicare Insurance Funds are virtually broke for all practical persons.

    Most of the problem lies is Congressional failure to sufficiently increase Social Security deductions (for the big hit in monthly payments to disabled persons of all ages) and the accompanying Medicare coverage (to disabled people of all ages). The disability coverage also suffers from widespread fraud.

    Other program costs were also added to the Social Security and Medicare insurance funds such as the education costs of children of veterans who are killed in wartime. Once again this is a worthy cause that should be funded. But it should've been separately funded rather than simply added into the Social Security and Medicare insurance funds that had not factored such added costs into premiums collected from workers and employers.

    The fourth huge problem is that most military retirees are afforded full lifetime medical coverage for themselves and their spouses. Although they can use Veterans Administration doctors and hospitals, most of these retirees opted for the unfunded  TRICARE plan the pushed most of the hospital and physician costs onto the Medicare Fund. Unlike where other workers had Medicare deductions taken from their paychecks with employer matchinf funds over the years, TRICARE coverage was dumped on Medicare without prior funding. This became a huge drain on the Medicare fund.

    The fifth threat to sustainability came when actuaries failed to factor in the impact of advances in medicine for extending lives. This coupled with the what became the biggest cost of Medicare, the cost of dying, clobbered the insurance funds. Surpluses in premiums paid by workers and employers disappeared much quicker than expected.

    A sixth threat to Medicare especially has been widespread and usually undetected fraud such as providing equipment like motorized wheel chairs to people who really don't need them or charging Medicare for equipment not even delivered. There are also widespread charges for unneeded medical tests or for tests that were never really administered. Medicare became a cash cow for crooks. Many doctors and hospitals overbill Medicare and only a small proportion of the theft is detected and punished.

    The seventh threat to sustainability commenced in 2007 when the costly Medicare drug benefit entitlement entitlement was added by President George W. Bush. This was a costly addition, because it added enormous drains on the fund by retired people like me and my wife who did not have the cost of the drug benefits factored into our payments into the Medicare Fund while we were still working. It thus became and unfunded benefit that we're now collecting big time.

    In any case we are at a crossroads in the history of funding medical care in the United States that now pays a lot more than any other nation per capita and is getting less per dollar spent than many nations with nationalized health care plans. I'm really not against Obamacare legislation. I'm only against the lies and deceits being thrown about by both sides in the abomination of the current proposed legislation.

    Democrats are missing the boat here when they truly have the power, for now at least, in the House and Senate to pass a relatively efficient nationalized health plan. But instead they're giving birth to entitlements legislation that threatens the sustainability of the United States as a nation.

    In any case, The New York Times presents a nice history of other events that I left out above ---

    "THE HEALTH CARE DEBATE: What Went Wrong? How the Health Care Campaign Collapsed --
    A special report.; For Health Care, Times Was A Killer," by Adam Clymer, Robert Pear and Robin Toner, The New York Times, August 29, 1994 --- Click Here

    November 22, 2009 reply from Richard.Sansing [Richard.C.Sansing@TUCK.DARTMOUTH.EDU]

    The electorate's inability to debate trade-offs in a sensible manner is the biggest problem, in my view. See 

    Richard Sansing

    The New York Times Timeline History of Health Care Reform in the United States ---
    Click the arrow button on the right side of the page. The biggest problem with "reform" is that it added entitlements benefits without current funding such that with each reform piece of legislation the burdens upon future generations has hit a point of probably not being sustainable.

    Call it the fatal arithmetic of imperial decline. Without radical fiscal reform, it could apply to America next.
    Niall Ferguson, "An Empire at Risk:  How Great Powers Fail," Newsweek Magazine Cover Story, November 26, 2009 ---

    . . .

    In other words, there is no end in sight to the borrowing binge. Unless entitlements are cut or taxes are raised, there will never be another balanced budget. Let's assume I live another 30 years and follow my grandfathers to the grave at about 75. By 2039, when I shuffle off this mortal coil, the federal debt held by the public will have reached 91 percent of GDP, according to the CBO's extended baseline projections. Nothing to worry about, retort -deficit-loving economists like Paul Krugman.

    . . .

    Another way of doing this kind of exercise is to calculate the net present value of the unfunded liabilities of the Social Security and Medicare systems. One recent estimate puts them at about $104 trillion, 10 times the stated federal debt.

    Continued in article

    This is now President Obama's problem with or without new Obamacare entitlements that are a mere drop in the bucket compared to the entitlement obligations that President Obama inherited from every President of the United States since FDR in the 1930s. The problem has been compounded under both Democrat and Republican regimes, both of which have burdened future generations with entitlements not originally of their doing.

    Professor Niall Ferguson and David Walker are now warning us that by year 2050 the American Dream will become an American Nightmare in which Americans seek every which way to leave this fallen nation for a BRIC nation offering some hope of a job, health care, education, and the BRIC Dream.

    Bob Jensen's threads on health care ---

    Bob Jensen's threads on entitlements ---


    From The Wall Street Journal Accounting Weekly Review on December 1, 2009

  • FOCUS ARTICLE>>  Diversification, Strategy

    Buffett Bets Big on Railroad
    by: Scott Patterson
    Date: Nov 04, 2009 

    SUMMARY: Warren Buffett made the biggest bet of his career, agreeing to buy Burlington Northern in a $26.3 billion deal that reflects his long-term optimism about the U.S. economy.


    1.     Why is Warren Buffett famous? What type of business does he run? What is the business strategy of his company? What are the details of the company's most recent acquisition deal? What aspects are surprising or interesting?

    2.     What has been Mr. Buffett's acquisitions strategy in the past? What are the factors of his current strategy? What are the reasons behind Mr. Buffett's change in acquisition focus for Berkshire Hathaway?

    3.     Why is diversification important for companies? In what ways can a business diversify? How could diversification be harmful for a business? Is your company or employer well-diversified? What could your employer do to be better diversified? What advantages would your suggestions provide?

    FOCUS ARTICLE>>  Antitrust Law, Mergers and Acquisitions, Government Regulation

    Comcast-NBC Deal Would Draw Lengthy Scrutiny in Washington
    by: Shira Ovide and Amy Schatz
    Date: Nov 16, 2009 

    SUMMARY: If Comcast agrees to purchase majority control of the movie and television company from General Electric, the Obama administration would face its first media megadeal.


    1.     What is antitrust law? Why is it a necessary part of U.S. law? How could government intervention impact a merger or acquisition? How should the parties take this into consideration when moving ahead with a merger or acquisition?

    2.     What is the position of the Obama administration regarding mergers and acquisitions? Why do different administrations have different policies on this topic? What governmental bodies have jurisdiction to review this deal? Why do each of them have some say as to whether the acquisition should take place?

    3.     What are the potential antitrust concerns in this proposed acquisition? What are the standards for review of antitrust issues? What does the government want to encourage? What does it want to avoid? Who is helped when a merger or acquisition is blocked as a result of antitrust concerns?

    FOCUS ARTICLE>>  Hostile Takeover Bid, Acquisitions

    Cadbury Sneers at Kraft's Hostile Bid
    by: Dana Cimilluca, Cecilie Rohwedder, and Jeffrey McCracken
    Date: Nov 10, 2009 

    SUMMARY: Kraft officially launched a hostile bid for Cadbury, setting in motion a tussle for control of the British confectioner.


    1.     What is a hostile takeover bid? Why might a bid become hostile? What conditions would keep it from becoming hostile? Why would a bidder continue to pursue a purchase after it has become hostile? What defenses could a company employ to make them less attractive to hostile takeovers?

    2.     Why has this particular takeover bid become hostile? How could this impact the negotiations? What could be the impact on the resulting company if the deal is completed?

    3.     Why would this acquisition be beneficial for Kraft? What are the next steps in the process? Do you think Kraft should continue with the bidding process? What do you think Cadbury shareholders should do?




    Humor Between December 1-31, 2009

    Video:  President Obama lectures China on its shortcomings
    The Best One Yet from Saturday Night Live ---

    2009 Darwin Awards ---

    Women Winning Darwin Awards ---

    Forwarded by Bob Every

    Subject: Fwd: Important! Save your Minnesota quarters!

    If you live in Minnesota--have EVER lived in Minnesota--know someone who lives in Minnesota--or just like making fun of people who live in Minnesota--this one's for you.

  • MINNESOTA QUARTERS ALERT (IMPORTANT) Hang on to any of the new Minnesota > Quarters you may acquire. They may be worth MUCH MORE than 25 cents! > The US Mint announced today that it is recalling all of the Minnesota > quarters that are part of its program featuring quarters from each state. > This action is being taken after numerous reports that the new quarters > will not work in parking meters, toll booths, vending machines, pay phones > or any other coin-operated devices.

    The problem lies in the unique makeup of the Minnesota quarter, which was designed by a couple of Norwegian specialists, Sven and Ole.

    Apparently the duct tape holding the two dimes and the nickel together keeps jamming up the machines.

    Auntie Bev forwarded this music video ---

    Many of you older folks took such a hard hit in your retirement savings that, instead of retiring before age 70, you will now have to work full time until your are at least age 96.

    Auntie Bev sends you some consolation that retirement may be the worst of your options when you reach ages 62-96. There are just some worries about retirement for which Viagra offers zero hope.

    By the way, Auntie Bev lives in Ft. Lauderdale --- a retirement hell hole.


    If you are planning retirement, let me share retirement experiences with you, which I hope will be helpful.

    Fifteen years ago my wife and I moved into a retirement development on Florida 's Southeast coast - The Delray/Boca/Boynton Golf, Spa, Bath and Tennis Club on Lake Fake-A-Hatchee. There are 3000 lakes in Florida ; only three are real.

    Our biggest retirement concern was time management. What were we going to do all day? Let me assure you, passing the time is not a problem. Your days will be eaten up by simple, daily activities. Just getting out of your car takes 15 minutes. Trying to find where you parked takes 20 minutes. It takes 1/2 hour on the check-out line in and one hour to return the item the next day.

    Let me take you through a typical day. We get up at 5:00 AM, have a quick breakfast and join the early morning 'Walk and Talk Club.' There are about 30 of us, and rain or shine we walk around the streets, all talking at once. Every development has some late risers who stay in bed until 6 AM. After a nimble walk avoiding irate drivers out to make us road kill, we go back home, shower and change for the next activity.

    My wife goes directly to the pool for her underwater Pilate’s class, followed by gasping for breath and CPR. I put on my, 'Ask me about my Grandchildren' T-shirt, my plaid mid-calf shorts, my black socks and sandals and go to the clubhouse lobby for a nice nap. Before you know it, it's time for lunch. We go to to partake of the many tasty samples dispensed by ladies in white hairnets. All free! After a filling lunch, if we don't have any doctor appointments, we might go to the flea market to see if any new white belts have come in or to buy a Rolex watch for $2.00.

    We're usually back home by 2 PM to get ready for dinner. People start lining up for the early bird about 3 PM, but we get there by 3:45 PM, because we're late eaters. The dinners are very popular because of the large portions they serve. You can take home enough food for the next day's lunch and dinner, including extra bread, crackers, packets of mustard, relish, ketchup and Sweet-and-Low along with mints.


    At 5:30 PM we're home ready to watch the 6 o'clock news. By 6:30 PM we're fast asleep. Then we get up and make 5 or 6 trips to the bathroom during the night, and it's time to get up and start a new day all over again.


    Doctor related activities eat up most of your retirement time. I enjoy reading old magazines in sub-zero temperatures in the waiting room, so I don't mind. Calling for test results also helps the days fly by. It takes at least half an hour just getting through the doctor's phone menu. Then there's the hold time until you're connected to the right party. Sometimes they forget you're holding, and the whole office goes off to lunch.

    Should you find you still have time on your hands, volunteering provides a rewarding opportunity to help the less fortunate. Florida has the largest concentration of seniors under five feet tall and they need our help. I myself am a volunteer for 'The Vertically Challenged Over 80.' I coach their basketball team, The Arthritic Avengers.

    The hoop is only 4 1/2 feet from the floor. You should see the look of confidence on their faces when they make a slam dunk.

    Food shopping is a problem for short seniors or 'bottom feeders' as we call them, because they can't reach the items on the upper shelves. There are many foods they've never tasted. After shopping, most seniors can't remember where they parked their cars and wander the parking lot for hours while their food defrosts.


    Lastly, it's important to choose a development with an impressive name. Italian names are very popular in Florida . They convey world traveler, uppity sophistication and wealth. Where would you rather live? Murray 's Condos or the Lakes Of Venice ? There's no difference. They're both owned by Murray, who happens to be a cheap bastard.

    I hope this material has been of help to you future retirees. If I can be of any further assistance, please look me up when you're in Florida . I live in the half built development of: Tivoli Isles in Delray Beach on Rt. 441.


    Jensen Comment
    Today we're having a blizzard with gale force winds. My wife and I sit here eating toast and sipping coffee while content in the fact that we don't have to take the car (or tractor) out of the garage and fight the elements trying to get to work. Each of us has a day that begins as a blank page in life's daily diary. We can do most anything we individually choose to fill today’s page.

    What the heck am I doing forwarding message from Auntie Bev?

    December 9, 2009 reply from the sister of an AECM Friend

  • Down here our senior drivers are referred to as "Q-tips," because all you can see is a tuft of white above the driver's side headrest. My favorite related bumper sticker: "When I get old, I'm gonna move north and drive real slow."

    The mention of "no turn signals" did resonate. When we arrived 12 years ago, the number of local folks using turn signals increased by 100%. Thanks to my nagging, we experienced another substantial increase in the turn-signal-using population when Beth & Stoney got there licenses.

    I had to laugh about the "All Republican" line. In fact, Democrats are the majority here in Florida. However, thanks to the magic of gerrymandering every 10 years, the Republicans have an overwhelming majority in the statehouse.

    You gotta love it.



  • Bible Lessons Forwarded by Auntie Bev

    Q. What kind of man was Boaz before he married Ruth? 
    A. Ruthless. 

    Q. What do they call pastors in  Germany 
    A. German Shepherds. 

    Q. Who was the greatest financier in the Bible? 
    A. Noah He was floating his stock while everyone else was in liquidation. 

    Q. Who was the greatest female financier in the Bible? 
    A. Pharaoh's daughter. She went down to the bank of the  Nile and drew out a 
    Little prophet. 

    Q. What kind of motor vehicles are in the Bible? 
    A. Jehovah drove Adam and Eve out of the Garden in a Fury. David's Triumph 
    was heard throughout the land. Also, probably a Honda, because the apostles 
    were all in one Accord. 

    Q. Who was the greatest comedian in the Bible? 
    A. Samson. He brought the house down. 

    Q. What excuse did Adam give to his children as to why he no longer lived in in  Eden ? 
    A. Your mother ate us out of house and home. 

    Q. Which servant of God was the most flagrant lawbreaker in the Bible? 
    A. Moses. He broke all 10 commandments at once. 

    Q. Which area of  Palestine was especially wealthy? 
    A. The area around  Jordan .. The banks were always overflowing. 

    Q. Who is the greatest babysitter mentioned in the Bible? 
    A. David He rocked Goliath to a very deep sleep. 

    Q. Which Bible character had no parents? 
    A. Joshua, son of Nun. 

    Q. Why didn't they play cards on the  Ark ? 
    A. Because Noah was standing on the deck. 

    PS... Did you know it's a sin for a woman to make coffee? 
    Yup, it's in the Bible. It says . . 'He-brews' 

    Forwarded by Paula

    30 Things That Could Not Be Truer

    1. There is a great need for sarcasm font.

    2. I can't remember the last time I wasn't at least kind of tired.

    3. Bad decisions make good stories.

    4. How the hell are you supposed to fold a fitted sheet?

    5. I would rather try to carry 10 plastic grocery bags in each hand than take 2 trips to bring my groceries in.

    6. The only time I look forward to a red light is when I'm trying to finish a text, which should be against the law...

    7. The letters T and G are very close to each other on a keyboard. This recently became all too apparent to me and consequently I will never be ending a work email with the phrase "Regards" again

    8. Was learning cursive really necessary?

    9. I have a hard time deciphering the fine line between boredom and hunger.

    10. Answering the same letter three times or more in a row on a Scantron test is absolutely petrifying.

    11. Whenever someone says "I'm not book smart, but I'm street smart", all I hear is "I'm not real smart, but I'm imaginary smart".

    12. I love the sense of camaraderie when an entire line of cars teams up to prevent a dick from cutting in at the front. Stay strong, brothers!

    13. Every time I have to spell a word over the phone using 'as in' examples, I will undoubtedly draw a blank and sound like a complete idiot. Today I had to spell my boss's last name to an attorney and said "Yes that's G as in...(10 second lapse)..ummm...Goonies"

    14. What would happen if I hired two private investigators to follow each other?

    15. While driving yesterday I saw a banana peel in the road and instinctively swerved to avoid it...

    16. MapQuest really needs to start their directions on #5. Pretty sure I know how to get out of my neighborhood.

    17. Obituaries would be a lot more interesting if they told you how the person died.

    18. I find it hard to believe there are actually people who get in the shower first and THEN turn on the water.

    19. If Carmen San Diego and Waldo ever got together, their offspring would probably just be completely invisible.

    20. Why is it that during an ice-breaker, when the whole room has to go around and say their name and where they are from, I get so incredibly nervous? I know my name, I know where I'm from, this shouldn't be a problem....

    21. You never know when it will strike, but there comes a moment at work when you've made up your mind that you just aren't doing anything productive for the rest of the day.

    22. Can we all just agree to ignore whatever comes after DVDs? I don't want to have to restart my collection.

    23. There's no worse feeling than that millisecond you're sure you are going to die after leaning your chair back a little too far.

    24. I'm always slightly terrified when I exit out of Word and it asks me if I want to save any changes to my ten page research paper that I swear I did not make any changes to.

    25. "Do not machine wash or tumble dry" means I will never wash this ever.

    26. I hate leaving my house confident and looking good and then not seeing anyone of importance the entire day. What a waste.

    27. Why is a school zone 15 mph? That seems like the optimal cruising speed for pedophiles...

    28. Sometimes I'll look down at my watch 3 consecutive times and still not know what time it is.

    29. It should probably be called Unplanned Parenthood.

    30. I keep some people's phone numbers in my phone just so I know not to answer when they call.

    From the Reader's Digest on November 2009, Page 72

    During inspection, our new company commander stopped and chatted up a corporal.

    "How long have you been in the marines?" he asked.

    "Two years, eight months, and 24 days Sir," the corporal responded.

    "Do you plan to reenlist"

    "No Sir."

    "What are you going to do after discharge?"

    "Cartwheels and handstands, Sir."

    Jensen Comment
    I sometimes saw students doing handstands and cartwheels after finishing my accounting theory and AIS courses.

    From the Reader's Digest on November 2009, Page 128

    You're a dumb criminal if:

    You air your neighbor's dirty laundry
    As she walked around her neighbor's yard sale in Severn, Maryland the woman couldn't help admiring the items. The Oriental rug,, the luggage, the shoes --- they were exactly here style. And why not? They were hers!

    You let your supply of antismoking patches run out
    An Indiana state trooper stopped a car for a traffic violation. When a passenger, Honesty Knight, asked if she could smoke, the officer said yes. She proceeded, police say, to light up a marijuana joint.

    You don't know when to write off a loss
    John Opperman-Green robbed a Kissimmee, Florida 7-Eleven, then called the cops to complain when he tried to hitch a ride with strangers, who, in ther, robbed him.
    Jensen Comment
    The was a similar police report in NYC about a bank robber who went running down the street and latter reported that he was mugged.

    You harbor grudges
    Joseph Goetz's alleged attempt to rob a York, Pennsylvania, bank met with some snags. Cops say the first teller he tried to rob fainted and the next two insisted they had no cash in their drawers. Fed up, Goetz stormed out, threatening to write an angry letter to the bank.

    You can't let go of your friends
    Two New Zealand prisoners had the brilliant idea of fleeing the courthouse while tethered together by handcuffs. They might have escaped had a light pole not gotten between them. Like a pare of click-an-clacks, they slammed into each other and were arrested trying to get back to their feet.

    Forward by Auntie Bev

    Mujibar was trying to get a job in India .

    The Personnel Manager said, “Mujibar, you have passed all the tests, except one. Unless you pass it , you cannot qualify for this job.”

    Mujibar said, ”I am ready.”

    The manager said, “Make a sentence using the words Yellow, Pink, and Green.”

    Mujibar thought for a few minutes and said, “Mister manager, I am ready.”

    The manager said, “Go ahead.”

    Mujibar said, “The telephone goes green, green, and I pink it up, and say, Yellow, this is Mujibar.”

    Mujibar now works at a call center.

    No doubt you have spoken to him. I know I have.

    Jensen Lament
    Although I took three years of Russian in college years and years ago, I can't speak any language other than English. I hesitate to criticize anybody who can speak more than one language.

    Forwarded by Gene and Joan

    On the sixth day God turned to the Archangel Gabriel and said: 'Today I am going to create a land called Iowa. It will be a land of outstanding natural beauty. It shall have tall majestic landscapes full of buffalo, tall grass, and hawks, beautiful skies, forests full of elk and deer, rich farmland and fair skinned people and beautiful Churches with God loving people. God continued, 'I shall make the land rich in resources so as to make the inhabitants prosper, I shall call these inhabitants Hawkeyes, Cyclones and Panthers. They shall be known as a most friendly people.

    "But Lord,' asked Gabriel, 'don't you think you are being too generous to these Iowans?

    'Not really,' replied God. 'Just wait and see the winters I am going to give them.'


    Forwarded by David Albrecht





    Forwarded by Auntie Bev

    Enjoy a rare glimpse back to our childhood, youth and young adult days!  How much has changed!!!!!
    How's This For Nostalgia? 
    All the girls had ugly gym uniforms?

    It took three minutes for the TV to warm up?

    Nobody owned a purebred dog?

    When a quarter was a decent allowance?

    You'd reach into a muddy gutter for a penny?
     (I still pick-up pennies)

    Your Mom wore nylons that came in two pieces?

    You got your windshield cleaned, oil checked, and gas pumped, without asking, all for free, every time? And you didn't pay for air? And, you got trading stamps to boot?

    Laundry detergent had free glasses, dishes or towels hidden inside the box?

    It was considered a great privilege to be taken out to dinner at a real restaurant with your parents?

    They threatened to keep kids back a grade if they failed. . and they did it!

    When a 57 Chevy was everyone's dream cruise, peel out, lay rubber or watch submarine races, and people went steady?

    No one ever asked where the car keys were because they were always in the car, in the ignition, and the doors were never locked?

    Lying on your back in the grass with your friends?
    and saying things like, 'That cloud looks like a... '?

    Playing baseball with no adults to help kids with the rules of the game?

    Stuff from the store came without safety caps and hermetic seals because no one had yet tried to poison a perfect stranger?

    And with all our progress, don't you just wish, just once, you could slip back in time and savor the slower pace, and  share it with the children of today.

    When being sent to the principal's office was nothing compared to the fate that awaited the student at home?

    Basically we were in fear for our lives, but it wasn't because of drive-by shootings, drugs, gangs, etc. Our parents and grandparents were a much bigger threat! But we survived because their love was greater than the threat. 

    . .as well as summers filled with bike rides, Hula Hoops, and visits to the pool, and eating Kool-Aid powder with sugar. 
    Didn't that feel good, just to go back and say, 'Yeah, I remember that'?

    I am sharing this with you today because it ended with a Double Dog Dare to pass it on. To remember what a Double Dog Dare is, read on. And remember that the perfect age is somewhere between old enough to know better and too young to care. 

    Send this on to someone who can still
     remember Howdy Doody and The Peanut Gallery, the Lone Ranger, The Shadow knows, Nellie  Bell  ,  Roy  and Dale, Trigger and Buttermilk. 

    How Many Of These Do You Remember?

    Candy cigarettes

    Wax Coke-shaped bottles with colored sugar water inside.

    Soda pop machines that dispensed glass bottles.

    Coffee shops with Table Side Jukeboxes.

    Blackjack, Clove and Teaberry chewing gum.

    Home milk delivery in glass bottles with cardboard stoppers.

    Newsreels before the movie.

    Telephone numbers with a word prefix...( Yukon 2-601). Party lines.


    Howdy Do

    Hi-Fi's & 45 RPM records.

    78 RPM records!

    Green Stamps

    Mimeograph paper.

    The  Fort   Apache  Play Set.

    Do You Remember a Time When..

    Decisions were made by going 'eeny-meeny-miney-moe'? 
    Mistakes were corrected by simply exclaiming, 'Do Over!'?

    'Race issue' meant arguing about who ran the fastest?

    Catching The Fireflies Could Happily Occupy An Entire Evening?

    It wasn't odd to have two or three 'Best Friends'?

    Having a Weapon in School meant being caught with a Slingshot?

    Saturday morning cartoons weren't 30-minute commercials for action figures?

    'Oly-oly-oxen-free' made perfect sense?

    Spinning around, getting dizzy, and falling down was cause for giggles? 

    The Worst Embarrassment was being picked last for a team?

    War was a card game?

    Baseball cards in the spokes transformed any bike into a motorcycle?

    Taking drugs meant orange - flavored chewable aspirin?

    Water balloons were the ultimate weapon?

    If you can remember most or all of these, Then You Have Lived!!!!!!!

    Pass this on to anyone who may need a break from their 'Grown-Up' Life . . 
    I Double-Dog-Dare-Ya!


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    Concerns That Academic Accounting Research is Out of Touch With Realit

    I think leading academic researchers avoid applied research for the profession because making seminal and creative discoveries that practitioners have not already discovered is enormously difficult. Accounting academe is threatened by the twin dangers of fossilization and scholasticism (of three types: tedium, high tech, and radical chic)

    “Knowledge and competence increasingly developed out of the internal dynamics of esoteric disciplines rather than within the context of shared perceptions of public needs,” writes Bender. “This is not to say that professionalized disciplines or the modern service professions that imitated them became socially irresponsible. But their contributions to society began to flow from their own self-definitions rather than from a reciprocal engagement with general public discourse.”


    Now, there is a definite note of sadness in Bender’s narrative – as there always tends to be in accounts of the shift from Gemeinschaft to Gesellschaft. Yet it is also clear that the transformation from civic to disciplinary professionalism was necessary.


    “The new disciplines offered relatively precise subject matter and procedures,” Bender concedes, “at a time when both were greatly confused. The new professionalism also promised guarantees of competence — certification — in an era when criteria of intellectual authority were vague and professional performance was unreliable.”

    But in the epilogue to Intellect and Public Life, Bender suggests that the process eventually went too far. “The risk now is precisely the opposite,” he writes. “Academe is threatened by the twin dangers of fossilization and scholasticism (of three types: tedium, high tech, and radical chic). The agenda for the next decade, at least as I see it, ought to be the opening up of the disciplines, the ventilating of professional communities that have come to share too much and that have become too self-referential.”


    What went wrong in accounting/accountics research? 
    How did academic accounting research become a pseudo science?



    Bob Jensen's Personal History in Pictures ---

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    November 30, 2009

    Bob Jensen's New Bookmarks on  November 30, 2009
    Bob Jensen at Trinity University 


    For earlier editions of Fraud Updates go to
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    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

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    Accountancy, Tax, IFRS, XBRL, and Accounting History News Sites  ---

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    Accounting program news items for colleges are posted at
    Sometimes the news items provide links to teaching resources for accounting educators.
    Any college may post a news item.

    How to author books and other materials for online delivery
    How Web Pages Work ---

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    "U. of Manitoba Researchers Publish Open-Source Handbook on Educational Technology," by Steve Kolowich, Chronicle of Higher Education, March 19, 2009 ---

    Social Networking for Education:  The Beautiful and the Ugly
    (including Google's Wave and Orcut for Social Networking and some education uses of Twitter)
    Updates will be at

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    AccountingWeb's Tax Software Review for Professionals, November 2009

    Featured Tax Software

    ·         ATX

    ·         CrossLink

    ·         Drake

    ·         GoSystem Tax RS

    ·         Great Tax

    ·         Intuit ProLine Lacerte Tax

    ·         Intuit ProLine ProSeries

    ·         Intuit ProLine Tax Online Edition

    ·         Orange Tax Suite

    ·         ProSystem fx Tax

    ·         TaxACT

    ·         TaxWise

    ·         TaxWorks

    ·         UltraTax CS

    Bob Jensen's accounting software helpers ---

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    Bernie's Dream --- 1,000 and Growing
    Program to Fund and Otherwise Support Minority Business and Accounting Doctoral Students
    2008 Annual Report ---

    VIDEO: Bernie Milano, President - The PhD Project & KPMG Foundation --- Click Here

    The PhD Project ---

    Since 1994, The PhD Project has more than tripled the number of minority business school professors...from 294 to over 960. These individuals are inspiring and encouraging a new generation of business professionals. Click here to learn more about our fifteen years of achievements, real insights on the journey to a PhD degree and the professors who are making a big impact.

    Are you ready to be the next role model? Currently, The PhD Project has 400 minority doctoral student members pursuing their dream. Like you, they were professionals or recent grads satisfying their quest for a high level of achievement and answering the call to mentor. With an expansive network of support, The PhD Project is now helping them prepare for success in academia.

    Whether you become involved as a doctoral student, professor, participating university, or supporting organization...just become involved. Learn more by visiting the links on the left.

    Participation in The PhD Project is available to anyone of African-American, Hispanic American and Native American descent who is interested in business doctoral studies.

    Jensen Comment
    The PhD Project commenced in the KPMG Foundation under the guidance of Executive Partner Bernie Milano who increasingly devoted more time, money, and sweat to raise money from other accounting firms and from corporations. It has since expanded beyond accounting doctoral programs into other business disciplines.

    Above and beyond helping minority students get into selected doctoral programs, Bernie has been dogged about trying every which way to see them to the graduation day endings when a wide array colleges in literally every part of the world are eager to hire them. These students have many more hurdles to cross than most other doctoral students, and Bernie's Dream is to help them across the biggest hurdles without making it any easier for them then all other doctoral students.

    Most importantly, the salting of these graduates around the world as role models is increasingly vital to inspiring undergraduate and even K12 minority students to aspire to become practicing professionals and/or doctoral students themselves. These role models are living proof that Berne's Dream can become their dream.

    Thank you Bernie, KPMG, and the many other accounting firms and corporations have made Bernie's Dream come true.

    How doctoral programs can help minority candidates
    Video on the PhD Completion Program ---

    Also read about the efforts of the Bill and Melinda Gates Foundation --- Click Here

    Added Jensen Rant
    Often potential minority candidates for accounting doctoral programs are CPAs. They are strong accounting candidates that are attracted to accounting and turned off by the heavy mathematics, statistics, and econometrics years of study in accountancy doctoral programs that have almost no accountancy. It would help greatly if some of our leading doctoral programs would open up paths of study other than "accountics."

    Alternative study and research paths could include paths of case method and field research. Those graduates may never publish in The Accounting Review (which now publishes zero case and field research studies according to the latest report of the TAR Editor), but there are research journals that will publish case and field research studies.
    My rants ad nauseum on the narrow mindedness of present accountics doctoral programs are at

    How well can free computer software do language translations?

    Especially note Paul Pacter’s test runs described below. Paul helped set U.S. accounting standards at the FASB, international accounting standards at the IASB, and now works very closely helping to set accounting standards in China. He’s headquartered in Deloitte’s office in Hong Kong.

    Keep in mind that accounting or other technical translations are difficult even for language professors since there are often technical terms that they’ve never encountered. Also note that the tests given below by Paul are not really very technical.

    Incidentally, Paul has about 100,000 pictures from China, Tibet, and elsewhere, many of which are posted at
    One thing nice about a picture is that it can say a lot that doesn’t require language translation.

    Not new, but a useful reminder
    "Google Translate (to a foreign language) Adds As-You-Type Translations, Phonetic Pronunciation," LifeHacker, November 2009 --- Click Here

    What bothers me is that if I send off a message translated into Chinese I can’t be certain what is really being sent to my Chinese friend. It’s a little bit like instrument landing in the dark and in a fog so dense you can’t see for three feet ahead. However, someday I might try this for fun in a message to my good friend Paul Pacter in Hong Kong.

    November 24, 2009 reply from Jim McKinney [jim@MCKINNEYCPA.COM]

    I used to have to send letters to Japanese business partners. For formal communications, I hired a translator. However for informal communications I used translation software. To see if I made sense, I would have my letter translated to Japanese by the software. I would then have the software translate the letter back to English. I would then adjust phrases and words until the English-Japanese-English letter made sense.

    November 25, 2009 reply from Hong Kong's Paul Pacter ---
    Pacter, Paul (CN - Hong Kong) [paupacter@DELOITTE.COM.HK]

    After reading these emails, I did a little test:

    I took this sentence:

    On the balance sheet, assets are on the left and liabilities are on the right.

    And translated it into French using 3 on-line free translators:

    Free Translation

    Sur le bilan, les biens sont sur la gauche et les responsabilités sont sur la droite.

    And translating the French back to English:

    Using Google:  On balance, the property is on the left and responsibilities are on the right.

    Using Babelfish:  On the assessment, the goods are on the left and the responsibilities are on the line.

    Using Free Translation: On the report, the well being on the left and the responsibilities are on the right.


    Sur le bilan, les capitaux sont du côté gauche et les responsabilités sont du côté droit.

    And translating the French back to English:

    Using Google:  On balance, capital is on the left and responsibilities are on the right.

    Using Babelfish:  On the assessment, the capital is left side and the responsibilities are right-sided.

    Using Free Translation:: On the report, the capitals are left side and the responsibilities are straight side. 


    Au bilan, les actifs sont sur la gauche et les passifs sont à droite.

    And translating the French back to English:

    Using Google:  On the balance sheet, assets are on the left and liabilities are right.

    Using Babelfish:  With the assessment, the credits are on the left and the passive ones are on the right.

    Using Free Translation: To the report, the active ones are on the left and the passive ones are at right. 

    I am ok (no more) at speaking and writing French.  To me clearly in translating from English to French, Google did the best job (it got the words for assets, liabilities, and balance sheet right).  But in going back from French to English, none did well except for Google translating its own French back to English.  (The ‘on balance’ and ‘on assessment’ and ‘on the report’ problem was caused when both Free Translation and Babelfish used “sur le bilan” rather than “au bilan”.)

    As one would expect, at Deloitte in Hong Kong there is a huge amount of translating written text between English and both traditional (HK/TW/ML/SG) and simplified (PRC) Chinese text.  Most is done manually because the clean-up effort required is even more costly.  For fun I have sent automated translations of text from English to Chinese to Chinese friends, and usually they understand the message.



    Mac OS versus Windows OS

    I’d be interested in hearing success stories about the Windows emulators on the Mac.
    Increasingly with the greatly reduced prices of computers, most Mac users have a Windows machine that will run software available only for the Windows OS.

    Supposedly these have gotten better for emulating Windows on a Mac.

    Fusion 3 (not free) is a popular add on ---
    Unlike the Windows emulator available from Apple, Fusion 3 allows split screens where one screen is Max OS and the other is Windows OS. However, it will also run in a single-screen Windows view.

    I doubt whether Fusion 3 is updated for the latest Windows 7 views of Windows

    November 21, 2009 message from Richard.Sansing [Richard.C.Sansing@TUCK.DARTMOUTH.EDU]

    I have had success using "Parallels Desktop" on my Mac to run Scientific Workplace and the Solver function on Excel.

    Richard Sansing

    "Mac Browser Camino 2 Gets A Release Candidate," MJ Siegler, Tech Crunch via The Washington Post, October 27, 2009 --- Click Here

    When it was revealed that  Mike Pinkerton, the lead developer for the Mozilla's Mac-based Camino web browser was moving over to Google to take charge of building Chrome for Mac, there was some concern that Camino would be neglected. Pinkerton assured development on Camino would continue, and sure enough it has. Today brings the first release candidate for Camino 2, the new version of the browser.

    Camino, though much less prevalent than its Mozilla sibling, Firefox, has a solid following among Mac users who appreciate its speed. It has long been my browser of choice as it's relatively lightweight and very fast compared to Firefox. And compatibility with various sites seems better than Apple's own Safari.

    We've been beta testing Camino 2 for several months now, and it's solid. It offers several improvements over the first iterations of Camino, notably in speed and the way it looks. Mozilla notes that this Release Candidate 1 could become the final, first official build of Camino 2 if there are no critical issue found.

    So it looks like despite Pinkerton's Chrome time commitments, Camino 2 will beat Chrome for Mac even reaching beta status.

    The anticipation for Chrome for Mac continues to build. Even Google co-founder Sergey Brin admits that he's disappointed with how long it has taken to develop. But, as we noted the other day, Chrome for Mac ? not Chromium, the open source browser on which Chrome is based ? looks like it's getting closer to a beta release.

    November 22, 2009 reply from David Fordham, James Madison University [fordhadr@JMU.EDU]

    Due to the number of people requesting elaboration on my comment about the "myths of the Mac", here are my experiences:

    Let me preface these by saying I've been told these myths over and over by Mac fans who enthusiastically tried for years to get me to ditch my Windows machines for a Mac by using these arguments on me. I don't say that all Mac users hold these beliefs, but enough of my Mac-fan acquaintances claim they are true for me to label them "myths" rather than simply a mistaken error coming from a single uninformed or naive Mac user.)

    Myth 1: "The Mac isn't affected by viruses". False. Even though I very, very rarely use my Mac on the Internet, my iMac contracted a virus. I don't know where it came from, but our Tech Support people found it while troubleshooting a problem it caused. And it was darned hard for them to find me any Anti-virus software that really works on a Mac without gumming up the works bigtime. They installed three different Mac-based anti-virus programs before they got one that didn't make at least one of my standard Mac apps stop working. If Macs aren't affected by viruses, why are there anti-virus programs for Macs? My tech support people reluctantly agreed that the myth is false when I asked them that question.

    Myth 2: "The Mac OS-X doesn't crash." False. I've had at least four crashes, none of which can be explained by anyone, including our tech support people, who repeated the myth to me until they sat in my office and watched it happen. Yes, the whole shebang, not just one program (or app, as the Mac users calls them).

    Myth 3: "Mac-based programs don't crash." False. I've gotten used to saving my work every five minutes on the iMac (I usually go 10-15 minutes on the Windows machines) because I'm tired of seeing the little pop-up window: "Adobe Premiere Pro (or some other program) has unexpectedly quit working. You have lost any data that was not recently saved. You can try opening the program again." This happens regularly in my Adobe Creative Suite 3 for Mac programs, as well as two native iMac-'included' apps that came pre-loaded on the machine.

    Myth 4: "The Mac doesn't just freeze-up suddenly like Windows programs do from time to time." False. I've let Adobe Photoshop, Premiere Pro, iDVD, Safari, and several other programs sit overnight in a "hung" state before Tech Support comes over and unplugs the machine -- unlike Windows machines, even holding the button on the back doesn't seem to reboot a Mac when it's frozen.

    Myth 5: "The Mac is a lot easier to learn." Maybe True for some, but not for me. Then again, I was 53 years old when I started learning the Mac, whereas I was only 33 when I learned Windows 3.0, which was built upon the DOS which I learned when I was in my mid-20's, which was similar to CP/M which I learned when ... so I'll chalk up my learning curve to age and curmudgeonliness.

    Myth 6: "Everything you can do on a Windows machine you can do on a Mac by using a Windows emulator." False. I have at least four programs which run fine on Windows which refuse to run at all on my iMac... out of about a dozen I tried. This was the first myth that our Tech Support people readily admitted was false without me having to demonstrate it to them. They recommended de-installing the emulators (which I have, eagerly) and sticking with running all Windows programs on Windows machines, and using only Mac programs on the Mac. (Note that this does not solve the problems I have with the Mac programs noted in the myths above.)

    Myth 7: "You can run Windows programs on a Mac, but they run a little slower than on a Windows machine." Maybe True for some programs, but not all... Some of my programs were not a little slow, they were agonizingly slow, taking MINUTES instead of seconds to respond. This was the second myth that our Tech Support agreed was false without my having to convince them. I now run Windows programs only on Windows machines.

    Myth 8: "Mac's have no trouble with Firewire." False. Every single time I try to capture video from my Canon ZR-960 videocam, it takes eight or ten plug-ins and unplugs before the machine finally recognizes it. Once it recognizes it, however, everything is good from there on out. The Adobe Premiere people say its the iMac, not their program. The camera works fine on Windows machines. The problem is indigenous to certain individual iMacs, not all. It works fine first time on about half of the iMacs tech support tried, but failed on the other half. The camera works fine first time every time on all Windows Vista machines, including my Vista Home Edition at home, even using the exact same cable. (My office WinXP doesn't have a firewire card so I haven't tried it on XP.)

    Myth 9: "Mac's have no trouble with USB devices like outboard disk drives." False. For some reason, my iMac will not recognize one of my Western Digital outboard disk drives... ever, even though it has the NTFS partition created on another identical iMac!. The disk simply doesn't show up on the desktop when plugged in. Either partition! The disk works perfectly on every Windows machine I've plugged it into. Both partitions (NTFS and FAT32) show up on XP and Vista machines without problem. My three other disk drives work okay on my Mac, and even my thumb drives (FAT32 only!) work fine on the iMac. But this one doesn't. I've never had a Windows machine that refused to recognize ANY outboard disk drive. Yes, it's a USB 2.0 compliant disk drive, purchased in 2008. The disk works on some of CIT's Macs, but not others, and no one can explain why.

    Myth 10: "It's just your individual machine, not Macs in general. You must have a bad machine." FALSE. I've used up a lot of brownie points with our tech support and CIT people by taking my stuff over to their iMacs and duplicating the problems on THEIR machines when they try to tell me it's just my individual machine. In fact, in two instances, I've succeeded in "stumping the chumps" by making their machine fail in front of their eyes in new ways that MY machine has never done before. In one of those two, the tech support guy was actually running the machine, not me. So it's not just the way I'm holding my mouth or blinking my eyes or doing covert things with the command keys.

    Now in all fairness, I have to admit that I'm something of a power user, meaning that I probably use about 15-20% of an application's capabilities, compared to the average user who uses probably 5-10% of the capabilities. I exercise the programs and explore recesses and features and use the intermediate capabilities (the textbooks call them "advanced" features, but in reality, even I don't even begin to touch some of the real advanced capabilities of most mature modern software applications! So I may be bumping into some unexplored territory with my attempts to get the real performance out of some of these programs. So I won't criticize the average Mac user who claims these myths are true, because his/her experience might never have led him/her into the situations where I encounter the problems.

    Most Mac tech support people will admit that these myths are myths. The few who still don't admit they are myths seem to believe I'm bringing bad karma into their offices and machines. If I am, it is unintentional. But they may be right, given the large number of Mac users who still insist the above statements are gospel truth.

    SUMMARY: I'm not dissing the Macs in favor of Windows machines. Macs do have a lot going for them. My iMac flies like lightning compared to Windows when it comes to video editing, video rendering, audio conversions, photo editing en masse, and other A/V applications (on those occasions that it doesn't hang, crash, or automatically reboot without me doing anything!). So I'm relatively happy with the Mac for those applications. And I can't even complain too much about the operation or learning curves of some of the Mac apps -- like Safari, etc. But I don't find those apps any EASIER, however, especially since the interface's logic is so different from what I'm used to on Windows machines.

    But I must say that I'm not yet convinced that the Mac is in any way superior (or even comparable) to a Windows machine for any of the office-related (lower-case o) applications like word-processing, spreadsheets that I've tried on it, especially for the features that I use, nor do I believe a Mac is anywhere near as safe and reliable as all of my Mac-fan friends had led me to believe. In fact, I would dare say that my iMac has actually been just as unreliable and prone to problems as any Windows machine I've ever had. Not necessarily worse, but every bit as bad.

    I know Mac users who will disagree, and I know Windows users who will also disagree, believing that nothing can be as problematic as Microsoft software. I'm going ONLY on my own personal experience. As my doctor told me only 29 hours ago, as his test diagnosed me with H1N1 with no symptoms whatsoever but a previously-unexplained fever, "hey, everybody is different... everybody is different."

    David Fordham James Madison University

    Bob Jensen's technology bookmarks are at

    SEC's expansion of Sarbanes-Oxley Act could mean big costs for smaller companies
    I thought the SEC was moving in the opposite direction. Even though I've long thought that SOX helped save capital markets after the accounting scandals of Enron, WorldCom, and many corporations with lousy internal controls, the timing of this SEC ruling could discourage small business at a time when we increasingly need new and stronger small business hiring.

    As large companies like Kodak reported that SOX rules help them discover internal control weaknesses, there are purported benefits admitted by top CEOs who otherwise bemoan SOX. But I've not heard much support for benefits over costs to smaller companies.

    "SEC's expansion of Sarbanes-Oxley Act could mean big costs for smaller companies," by Will Deener, Dallas News, November 23, 2009 --- Click Here

    This was a newsy little tidbit affecting thousands of small public companies, but it was mostly relegated to the back pages of newspapers, if it was covered at all.

    The Securities and Exchange Commission announced recently that small public companies will no longer get a reprieve from complying with the Sarbanes-Oxley Act of 2002.

    Next year, they will have to hire auditors to attest to the adequacy of their companies' internal control systems, and that means heavy additional expense. Internal control basically refers to the way a company tracks inventory, accounts payable and cash.

    If there are cracks in the internal control system, the data used to compile the financial statements could be flawed. Before Sarbanes-Oxley, only the company's financial statements had to be audited, but under Section 404 of the law, a second report is required on the adequacy of internal controls.

    Until now, companies with market capitalization below $75 million did not have to comply with Section 404. In fact, the SEC delayed their compliance four times over the years.

    Business groups have intensely argued that they would have to pay disproportionately high costs for these audits because of the fixed-cost nature of compliance. As it turns out, they are right.

    Reliable data on the cost of Section 404 compliance for small companies has been slow in coming, but a Pennsylvania State University finance professor said his research shows that small firms are in fact taking a big hit.

    Big hit for small firms

    Professor Peter Iliev said he nailed down the cost of Section 404 compliance by examining companies with market caps just above $75 million and those just below it. Those below that cap have not had to comply until now.

    "We needed a control group that didn't have to comply," Iliev said. "This allowed us to look at those who did comply and attribute any differences to the new regulation."

    What he found was that there were some rim-rocking costs associated with auditing internal controls. These smaller firms had to pay an additional $697,890 in audit fees in 2004 – the year he examined – which amounted to a 98 percent increase over the companies not in compliance.

    These companies had a median market cap of just over $110 million, which is not very big. Many companies have market caps of $100 billion or more.

    As it turned out, the average earnings for these firms were negative $1.4 million in that year, meaning a good chunk of the loss could be attributed to the additional audit expense.

    "Small firms pay disproportionately. The burden was large, and this is a recurring cost," Iliev said.

    Does law go too far?

    The Sarbanes-Oxley Act was passed in 2002 in response to the high-profile scandals at Enron Corp., WorldCom Inc. and other companies that used accounting tricks to vastly overstate their profits. The law's purpose was to improve the quality of financial reports and to give investors more confidence in what companies report.

    Perhaps the act has done that, but the question is whether the costs of compliance at smaller firms are worth the benefit.

    Or more specifically, does the burden of Sarbanes-Oxley go beyond what Congress intended? I put that question to Iliev, and his response was, "For small companies, yes."

    Also see the video at

    Bob Jensen's threads on SOX are interspersed at

    Accounting Professors Who Blog (this list was prepared by David Albrecht)

    To David's list we should possibly add

    Jerry Trites in Canada writes:
    I run several blogs in addition to the one for XBRL Canada. The oldest is The Trites E-Business Blog at Besides being of general interest, this blog is used as additional reading for the text book E-Business - A Canadian Perspective, that Efrim Boritz and I authored. I also do a blog for the University of Waterloo Centre for Information Systems Assurance (UWCISA) called IS Assurance at Finally, I have a blog which is maintained as a course pack for an online course I do for people wanting to start an online business called E-Commerce in Canada at

    November 21, reply from Rick Lillie [rlillie@CSUSB.EDU]

    Hi Bob,

    Since everyone seems to have a blog, I will share my "2 cents" worth. My research and writing focus is accounting education and the teaching-learning process. I am a technologist. My blog shares information about technology tools to use for developing course materials, sharing them with students, and enabling collaborative activities.

    Link to blog: 

    Currently, I am working on ways to create instructor presence in face-to-face, blended, and online courses. I combine asynchronous tools to obtain synchronous-like outcomes. For example, I developed an interaction-grading-feedback technique for my online classes. I also use it with my face-to-face and blended classes. Students tell me the technique gives them what they would get by going to live office hours, while being far more convenient.

    I am writing a paper about using technology to create instructor presence in the teaching-learning experience. With a little luck, it may get published.

    Best wishes,

    Rick Lillie

    Rick Lillie, MAS, Ed.D., CPA Assistant Professor of Accounting Coordinator - Master of Science in Accountancy (MSA) Program Department of Accounting and Finance College of Business and Public Administration CSU San Bernardino 5500 University Pkwy, JB-547 San Bernardino, CA. 92407-2397

    Telephone Numbers: San Bernardino Campus: (909) 537-5726 Palm Desert Campus: (760) 341-2883, Ext. 78158


    Other accountancy, tax, fraud, and related blogs and news sites ---

    Also see accountancy listserv, blog, and social networking sites at


    Congratulations to Adam Brandenburger and Dan Gode for Excellence in Teaching. I do not know Professor Brandenburger, but I go back a long ways with Dan Gode when he used to show me some of the finer dining places on Wall Street. Dan's major advisor was Shyam Sunder when Shyam was till at Carnegie Mellon ---

    What Dan and I had in common years back was that we we both developed courses in ToolBook back when you really had to use (Open Script) code to creatively write multimedia ToolBooks ---

    Are auditors Watchdogs and Lapdogs?

    See Burton Malkiel, Editorial in The Wall Street Journal (quoted below)
    Dr. Malkiel, professor of economics at Princeton, is author of A Random Walk Down Wall Street, 7th ed. (W.W. Norton, 2000).

    The UK has nearly 2.5 million limited liability companies and most require an audit. Between 2002 and 2008, FTSE-100 companies alone paid £2142 million in audit fees. The auditors collected another £2159m for consultancy services to their audit clients. They advised banks on the formation of special purpose vehicles, tax avoidance schemes, securitisation and structuring of transactions, all of which are central to the crisis. They then audited the results of their own advice and inevitably said that all was well. When a whistleblower at HBOS drew attention to concerns about the risk profile of the bank, the auditors said all was well. The auditing firm received £23m in fees from the bank for audits and consultancy work. In 2007, around 100 US mortgage companies succumbed to the deepening financial crisis and were either closed or sold. In April, New Century Financial Corporation, America’s second-biggest subprime mortgage lender, filed for bankruptcy.
    "The audit industry should serve society ... not themselves," by Prem Sikka, The Herald Scotland, November 23, 2009 ---
    Click Here

    Is the audit model Broken because auditors are increasingly dependent, once again for consulting as well as financial statement auditing, upon larger and larger clients that are too large to lose?

    Tom Selling's answer that the audit model is broken --- Click Here

    Jensen Comment

    The most serious problem in the U.S. audit model is that clients are becoming bigger and bigger due to non-enforcement of anti-trust laws. For example, the merger of Mobile and Exxon created an even larger single client. The merger of Bear Stearns and JP Morgan created a much larger client. The number of potential clients is shrinking while the size of the clients is exploding.

    As these giants merge to become bigger giants, it gets to a point where their auditors cannot afford to lose a giant client producing upwards of $100 million in audit revenue each year. Real independence of audits breaks down because a giant client can become a bully with its audit firm fearful of losing giant clients.

    Enron was an extreme but not necessarily an outlier. It will most likely be alleged in court over the next few years that giant Wall Street banks bullied their auditors into going along with understating financial risk before the 2008 banking meltdown. We certainly witnessed the understating of financial risk in 2007 and 2008.

    I think we need an Accounting Court to deal with clients who become bullies ---

    Bob Jensen's threads on the litigation woes of the large auditing firms are at

    "Watchdogs and Lapdogs," by Burton Malkiel, Editorial in The Wall Street Journal, January 16, 2002 ---
    Dr. Malkiel, professor of economics at Princeton, is author of "A Random Walk Down Wall Street," 7th ed. (W.W. Norton, 2000).


    The bankruptcy of Enron -- at one time the seventh-largest company in the U.S. -- has underscored the need to reassess not only the adequacy of our financial reporting systems but also the public watchdog mission of the accounting industry, Wall Street security analysts, and corporate boards of directors. While the full story of what caused Enron to collapse has yet to be revealed, what is clear is that its accounting statements failed to give investors a complete picture of the firm's operations as well as a fair assessment of the risks involved in Enron's business model and financing structure.

    Enron is not unique. Incidents of accounting irregularities at large companies such as Sunbeam and Cendant have proliferated. As Joe Berardino, CEO of Arthur Andersen, said on these pages, "Our financial reporting model is broken. It is out of date and unresponsive to today's new business models, complex financial structures, and associated business risks."

    Blind Faith

    It is important to recognize that losses suffered by Enron's shareholders took place in the context of an enormous bubble in the "new economy" part of the stock market during 1999 and early 2000. Stocks of Internet-related companies were doubling, then doubling again. Past standards of valuation like "buy stocks priced at reasonable multiples of earnings" had given way to blind faith that any company associated with the Internet was bound to go up. Enron was seen as the perfect "new economy" stock that could dominate the market for energy, communications, and electronic trading and commerce.

    I have sympathy for the Enron workers who came before Congress to tell of how their retirement savings were wiped out as Enron's stock collapsed and how they were constrained from selling. I have long argued for broad diversification in retirement portfolios. But many of those who suffered were more than happy to concentrate their portfolios in Enron stock when it appeared that the sky was the ceiling.

    Moreover, for all their problems, our financial reporting systems are still the world's gold standard, and our financial markets are the fairest and most transparent. But the dramatic collapse of Enron and the rapid destruction of $60 billion of market value has shaken public trust in the safeguards that exist to protect the interests of individual investors. Restoring that confidence, which our capital markets rely on, is an urgent priority.

    In my view, the root systemic problem is a series of conflicts of interest that have spread through our financial system. If there is one reliable principle of economics, it is that individual behavior is strongly influenced by incentives. Unfortunately, often the incentives facing accounting firms, security analysts, and even in some circumstances boards of directors militate against their functioning as effective guardians of shareholders' interests.

    While I will concentrate on the conflicts facing the accounting profession, perverse incentives also compromise the integrity of much of the research product of Wall Street security analysts. Many of the most successful research analysts are compensated largely on their ability to attract investment banking clients. In turn, corporations select underwriters partly on their ability to present positive analyst coverage of their businesses. Security analysts can get fired if they write unambiguously negative reports that might damage an existing investment banking relationship or discourage a prospective one.

    Small wonder that only about 1% of all stocks covered by street analysts have "sell" recommendations. Even in October 2001, 16 out of 17 securities analysts covering Enron had "buy" or "strong buy" ratings on the stock. As long as the incentives of analysts are misaligned with the needs of investors, Wall Street cannot perform an effective watchdog function.

    In some cases, boards of directors have their own conflicts. Too often, board members have personal, business, or consulting relationships with the corporations on whose boards they sit. For some "professional directors," large fees and other perks may militate against performing their proper function as a sometime thorn in management's side. Our watchdogs often behave like lapdogs.

    But it is on the independent accounting profession that we most rely for assurance that a corporation's financial statements accurately reflect the firm's condition. While we cannot expect independent auditors to detect all fraud, we should expect we can rely on them for integrity of financial reporting. While public accounting firms do have reputations to maintain and legal liability to avoid, the incentives of these firms and general auditing practices can sometimes combine to cloud the transparency of financial statements.

    In my own experience on several audit committees of public companies, the audit fee was only part of the total compensation paid to the public accounting firm hired to examine the financial statements. Even after the divestiture of their consulting units, revenues from tax and management advisory services comprise a large share of the revenues of the "Big Five" accounting firms. In some cases auditing services may be priced as a "loss leader" to allow the accounting firm to gain access to more lucrative non-audit business.

    In such a situation, the audit partner may be loath to make too much of a fuss about some gray area of accounting if the intransigence is likely to jeopardize a profitable relationship for the accounting firm. Indeed, audit partners are often compensated by how much non-audit business they can capture. They may be incentivized, then, to overlook some particularly aggressive accounting treatment suggested by their clients.

    Outside auditors also frequently perform and review the inside audit function within the corporation, as was the case with Andersen and Enron. Such a situation may weaken the safeguards that exist when two independent organizations examine complicated transactions. It's as if a professor let students grade their own papers and then had the responsibility to hear any appeals. Auditors may also be influenced by the prospect of future employment with their clients.

    Unfortunately, our existing self-regulatory and standard-setting organizations fall short. The American Institute of Certified Public Accountants has neither the resources nor the power to be fully effective. The institute may even have contributed to the problem by encouraging auditors to "leverage the audit" into advising and consulting services.

    The Financial Accounting Standards Board has often emphasized the correct form by which individual transactions should be reported rather than the substantive way in which the true risk of the firm may be obscured. Take "Special Purpose Entities," for example, the financing vehicles that permit companies such as Enron to access capital and increase leverage without adding debt to the balance sheet. Even if all of Enron's SPEs had met the narrow test for balance sheet exclusion (which, in fact, they did not), our accounting standard would not have illuminated the effective leverage Enron had undertaken and the true risks of the enterprise.

    Given the complexity of modern business and the way it is financed, we need to develop a new set of accounting standards that can give an accurate picture of the business as a whole. FASB may have helped us measure the individual trees but it has not developed a way to give us a clear picture of the forest. The continued integrity of the financial reporting system and our capital markets must be insured. We need to modernize our accounting system so financial statements give a clearer picture of what assets and liabilities on the balance sheet are at risk. And we must find ways to lessen the conflicts facing auditors, security analysts, and even boards of directors that undermine checks and balances our capital markets rely on.

    Change Auditors

    One possibility is to require that auditing firms be changed periodically the way audit partners within each firm are rotated. This would incentivize auditors to be particularly careful in approving accounting transactions for fear that leniency would be exposed by later auditors.


    I think we need an Accounting Court to deal with clients who become bullies ---

    Bob Jensen's threads on the litigation woes of the large auditing firms are at

    The Mother of Future Lawsuits Directly Against Credit Rating Agencies and Ultimately Against Auditing Firms

    It has been shown how Moody's and some other credit rating agencies sold AAA ratings for securities and tranches that did not deserve such ratings ---
    Also see

    My friend Larry sent me the following link indicating that a lawsuit in Ohio may shake up the credit rating fraudsters.
    Will 49 other states and thousands of pension funds follow suit?
    Already facing a spate of private lawsuits, the legal troubles of the country’s largest credit rating agencies deepened on Friday when the attorney general of Ohio sued Moody’s Investors Service, Standard & Poor’s and Fitch, claiming that they had cost state retirement and pension funds some $457 million by approving high-risk Wall Street securities that went bust in the financial collapse.

    Jensen Comment
    The credit raters will rely heavily on the claim that they relied on the external auditors who, in turn, are being sued for playing along with fraudulent banks that grossly underestimated loan loss reserves on poisoned subprime loan portfolios and poisoned tranches sold to investors ---
    Bad things happen in court where three or more parties start blaming each other for billions of dollars of losses that in many cases led to total bank failures and the wiping out of all the shareholders in those banks, including the pension funds that invested in those banks. A real test is the massive lawsuit against Deloitte's auditors in the huge Washington Mutual (WaMu) shareholder lawsuit.

    "Ohio Sues Rating Firms for Losses in Funds," by David Segal, The New York Times, November

    Already facing a spate of private lawsuits, the legal troubles of the country’s largest credit rating agencies deepened on Friday when the attorney general of Ohio sued Moody’s Investors Service, Standard & Poor’s and Fitch, claiming that they had cost state retirement and pension funds some $457 million by approving high-risk Wall Street securities that went bust in the financial collapse.

    Already facing a spate of private lawsuits, the legal troubles of the country’s largest credit rating agencies deepened on Friday when the attorney general of Ohio sued Moody’s Investors Service, Standard & Poor’s and Fitch, claiming that they had cost state retirement and pension funds some $457 million by approving high-risk Wall Street securities that went bust in the financial collapse.

    The case could test whether the agencies’ ratings are constitutionally protected as a form of free speech.

    The lawsuit asserts that Moody’s, Standard & Poor’s and Fitch were in league with the banks and other issuers, helping to create an assortment of exotic financial instruments that led to a disastrous bubble in the housing market.

    “We believe that the credit rating agencies, in exchange for fees, departed from their objective, neutral role as arbiters,” the attorney general, Richard Cordray, said at a news conference. “At minimum, they were aiding and abetting misconduct by issuers.”

    He accused the companies of selling their integrity to the highest bidder.

    Steven Weiss, a spokesman for McGraw-Hill, which owns S.& P., said that the lawsuit had no merit and that the company would vigorously defend itself.

    “A recent Securities and Exchange Commission examination of our business practices found no evidence that decisions about rating methodologies or models were based on attracting market share,” he said.

    Michael Adler, a spokesman for Moody’s, also disputed the claims. “It is unfortunate that the state attorney general, rather than engaging in an objective review and constructive dialogue regarding credit ratings, instead appears to be seeking new scapegoats for investment losses incurred during an unprecedented global market disruption,” he said.

    A spokesman for Fitch said the company would not comment because it had not seen the lawsuit.

    The litigation adds to a growing stack of lawsuits against the three largest credit rating agencies, which together command an 85 percent share of the market. Since the credit crisis began last year, dozens of investors have sought to recover billions of dollars from worthless or nearly worthless bonds on which the rating agencies had conferred their highest grades.

    One of those groups is largest pension fund in the country, the California Public Employees Retirement System, which filed a lawsuit in state court in California in July, claiming that “wildly inaccurate ratings” had led to roughly $1 billion in losses.

    And more litigation is likely. As part of a broader financial reform, Congress is considering provisions that make it easier for plaintiffs to sue rating agencies. And the Ohio attorney general’s action raises the possibility of similar filings from other states. California’s attorney general, Jerry Brown, said in September that his office was investigating the rating agencies, with an eye toward determining “how these agencies could get it so wrong and whether they violated California law in the process.”

    As a group, the attorneys general have proved formidable opponents, most notably in the landmark litigation and multibillion-dollar settlement against tobacco makers in 1998.

    To date, however, the rating agencies are undefeated in court, and aside from one modest settlement in a case 10 years ago, no one has forced them to hand over any money. Moody’s, S.& P. and Fitch have successfully argued that their ratings are essentially opinions about the future, and therefore subject to First Amendment protections identical to those of journalists.

    But that was before billions of dollars in triple-A rated bonds went bad in the financial crisis that started last year, and before Congress extracted a number of internal e-mail messages from the companies, suggesting that employees were aware they were giving their blessing to bonds that were all but doomed. In one of those messages, an S.& P. analyst said that a deal “could be structured by cows and we’d rate it.”

    Recent cases, like the suit filed Friday, are founded on the premise that the companies were aware that investments they said were sturdy were dangerously unsafe. And if analysts knew that they were overstating the quality of the products they rated, and did so because it was a path to profits, the ratings could forfeit First Amendment protections, legal experts say.

    “If they hold themselves out to the marketplace as objective when in fact they are influenced by the fees they are receiving, then they are perpetrating a falsehood on the marketplace,” said Rodney A. Smolla, dean of the Washington and Lee University School of Law. “The First Amendment doesn’t extend to the deliberate manipulation of financial markets.”

    The 73-page complaint, filed on behalf of Ohio Police and Fire Pension Fund, the Ohio Public Employees Retirement System and other groups, claims that in recent years the rating agencies abandoned their role as impartial referees as they began binging on fees from deals involving mortgage-backed securities.

    At the root of the problem, according to the complaint, is the business model of rating agencies, which are paid by the issuers of the securities they are paid to appraise. The lawsuit, and many critics of the companies, have described that arrangement as a glaring conflict of interest.

    “Given that the rating agencies did not receive their full fees for a deal unless the deal was completed and the requested rating was provided,” the attorney general’s suit maintains, “they had an acute financial incentive to relax their stated standards of ‘integrity’ and ‘objectivity’ to placate their clients.”

    To complicate problems in the system of incentives, the lawsuit states, the methodologies used by the rating agencies were outdated and flawed. By the time those flaws were obvious, nearly half a billion dollars in pension and retirement funds had evaporated in Ohio, revealing the bonds to be “high-risk securities that both issuers and rating agencies knew to be little more than a house of cards,” the complaint states.

    "Rating agencies lose free-speech claim," by Jonathon Stempel, Reuters, September 3, 2009 ---

    There are two superpowers in the world today in my opinion. There’s the United States and there’s Moody’s Bond Rating Service. The United States can destroy you by dropping bombs, and Moody’s can destroy you by down grading your bonds. And believe me, it’s not clear sometimes who’s more powerful.  The most that we can safely assert about the evolutionary process underlying market equilibrium is that harmful heuristics, like harmful mutations in nature, will die out.
    Martin Miller, Debt and Taxes as quoted by Frank Partnoy, "The Siskel and Ebert of Financial Matters:  Two Thumbs Down for Credit Reporting Agencies," Washington University Law Quarterly, Volume 77, No. 3, 1999 --- 

    Credit rating agencies gave AAA ratings to mortgage-backed securities that didn't deserve them. "These ratings not only gave false comfort to investors, but also skewed the computer risk models and regulatory capital computations," Cox said in written testimony.
    SEC Chairman Christopher Cox as quoted on October 23, 2008 at

    "How Moody's sold its ratings - and sold out investors," by Kevin G. Hall, McClatchy Newspapers, October 18, 2009 ---

    I think Professor Ketz misses the point --- See Exhibit A below.

    "Capping Exec. Comp: Good and Bad Concerns," by J. Edward Ketz, SmartPros, November 2009 --- 

    President Barack Obama recently established a cap on executive pay at those firms which received taxpayer bailout funds -- a cap on one's annual salary of $500,000. It also proposes to curb bonuses to managers. Various individuals have raised concerns about this governmental intervention. As it turns out, some of these concerns are legitimate and need to be addressed, but others seem more self-serving.

    One area of concern pertains to economic issues. Does the government really have the information by which it makes good decisions that regulate labor markets? More importantly, does it have the moral integrity and fortitude to legislate matters and limit executive pay fairly for the good of all? Clearly, there are doubts on both fronts so that it is hard, if not impossible, to answer either of these questions with an unqualified yes.

    A related area of concern pertains to the encroachment on individual liberties, especially property rights. For some time the United States has seen limits imposed on the freedoms of the individual, and these infringements have been speeding up. Even if one believes that the caps imposed on these executives are proper and fair, where will government interventions end? It is by no means clear that this behemoth has the discipline to respect any property rights of the individual. And it puzzles the imagination to figure out what institutions exist to rein in this beast if it continues to malign human freedoms. The United States is clearly on the road to greater socialism.

    And these two concerns lead to the most frightening: the increased power of the central administration. Does the U.S. government really have the authority to intervene in the way it has with respect to banks and other institutions that have received bailout funds? If so, where does the power end and what countervailing forces exist to keep the current and future presidents from abusing their power?

    One small comfort is that more Americans are thinking about such issues. A Gallup Poll in September found that 57% of the respondents felt that the government is “doing too much” while only 38% said that it “should do more.” Of course, these thoughts need to translate into actions before it is too late to restrain Washington politicians and bureaucrats.

    Having said this, I find it amusing to hear the arguments of bank managers and directors. Their major complaint is that the administration’s cap on executive salaries will drive talent away. That is such a self-centered argument! If they cannot live comfortably on $500,000 per year, then I really feel sorry for them.

    But wait—aren’t these the same guys who misunderstood the nature of the derivative instruments that their firms were dealing in? And didn’t these managers make faulty decisions with respect to the housing market and counter-party risk? In short, didn’t these executives bring their own firms to the brink of destruction? Given the foolish and reckless behaviors of these managers, one has to ask what talent they are talking about. If this is talent, let’s given some untalented people the chance the run these companies. They couldn’t do worse.

    Besides, where would these executives go? Before these talented people leave their firms, they would desire other positions with salaries greater than $500,000. I doubt that there are enough open positions that pay that much for so many executives. The labor market is slim for this end of the pay spectrum.

    And there are other people who could easily replace these businessmen and who could do a credible job. For example, competent university presidents must have great managerial skills. With a median salary of $427,400, some of them might be willing to accept the new challenges of running a bank. And take a pay boost.

    There are several legitimate concerns about Obama’s intervention into the pay of bank managers and others who accepted government bailouts. But, concern over the flight of talent is not one of them.

    Jensen Comment
    The hardest part in the executive rip offs of their own companies is the fact that most of them that failed miserably still made millions. They appointed boards of directors who then gave them generous golden parachutes. Pride gave them reasons to bet big on drawing to inside straits since they were not gambling with their own money. They took high financial risks knowing full well that they'd never be anything other than gloriously rich. 

    Exhibit A
    Exhibit A is Stanley O'Neal who resigned is disgrace at Merrill Lynch

    During August and September 2007, as the sub-prime crisis swept through the global financial market, Merrill Lynch announced losses of $8 billion. O'Neal is largely credited with having steered Merrill Lynch into the disastrous sub-prime arena, and responsible for the losses. As the crisis worsened, O'Neal approached Wachovia Bank without the approval of Merrill's Board of Directors, which led to his ouster. O'Neal walked away with a golden parachute compensation package that included Merrill stock and options valued at $161.5 million at the time.

    White Collar Crime Pays Even If You Get Caught
    Protecting outrageous golden parachutes is not protecting capitalism. It's protecting members of the corporate executive club and ensures that no member of the club will ever be less than a multi-millionaire except in the case of spending time in prison (read that Club Fed) in which case the millions lie in wait until being released from prison.

    Bob Jensen's threads on why white collar crime pays are at

    Bob Jensen's threads on outrageous executive compensation are at 

    Lexis Nexis Fraud Prevention Site ---

    Financial Statement Fraud: Prevention and Detection, 2nd Edition Zabihollah Rezaee, Richard Riley ISBN: 978-0-470-45570-8 Hardcover 332 pages September 2009

    Bob Jensen's fraud prevention and reporting site ---

    "Keeping Derivatives in the Dark," Floyd Norris, The New York Times, November 26, 2009 ---

    Opaque markets breed insider profits and abuse of investors. Sunshine can bring competition and lower costs even if regulators do little beyond letting the sunlight shine.

    You might think that as Congress considers just how much regulation is needed for the shadow financial system — the one that largely escaped regulation in the past — letting in such light would be an easy and uncontroversial move.

    But it is not proving to be easy at all, and is one part of the Obama administration’s financial reform package that is most in jeopardy.

    Timothy Geithner, the secretary of the Treasury, will testify before the Senate Agriculture Committee next week in an effort to hold on to important provisions of the proposal that have come under attack by banks fearful of losing one of their most profitable franchises — the selling of customized derivatives to corporate customers. Remarkably, the banks have persuaded customers that keeping the market for those products secret is in their interest.

    Last week, Gary Gensler, the chairman of the Commodities Futures Trading Commission, faced the same panel, and ran into questions that indicated at least some senators were sympathetic to efforts to keep large parts of the derivatives market in the dark.

    Those markets allow companies to bet on — or, if you prefer, hedge themselves against losses from — changing interest rates and commodity prices. They also allow investors to use credit-default swaps to bet on whether a company will go broke. The administration wants to standardize those products when possible, and force the trading of them onto exchanges when possible.

    Banks want to whittle away the reforms if they can, and to minimize the roles of the C.F.T.C. and the Securities and Exchange Commission, experienced market regulators who have been generally kept away from over-the-counter derivatives in the past. Instead, the banks would like to leave it to banking regulators to oversee the dealers, something regulators totally failed to do in the past. Unless Mr. Geithner can persuade legislators otherwise, one of the great bank lobbying campaigns will have succeeded, in large part because some companies that buy derivatives from banks have been persuaded that their costs will rise if needed reforms were made.

    The opposite is probably true. The history of nearly all markets is that customers suffer if dealers are able to keep them ignorant of what is actually going on.

    Until the beginning of this decade, that was true in the corporate bond market, where actual trades were kept confidential. That made it easy for bond dealers to charge big markups when they sold bonds to customers.

    After regulators forced timely disclosures, the bid-ask spreads — the difference between what customers paid when they bought bonds and what they could get when selling them — declined significantly. The result was smaller profits for bond dealers, and better returns for bond investors.

    “It is now time,” Mr. Gensler testified, “to promote similar transparency in the relatively new marketplace” for derivatives traded over the counter.

    “Lack of regulation in these markets,” he added, “has created significant information deficits.”

    He listed “information deficits for market participants who cannot observe transactions as they occur and, thus, cannot benefit from the transparent price discovery function of the marketplace; information deficits for the public who cannot see the aggregate scope and scale of the markets; and information deficits for regulators who cannot see and police the markets.”

    In the listed markets for derivative securities, like futures, there are margins that must be posted every day if markets move against the buyer of the derivative. Corporate customers of over-the-counter derivatives fear that they might face similar margin requirements if their contracts were to be traded on exchanges, and have persuaded some legislators that would be horrible.

    Of course, because prices aren’t made public, we can only hope that the banks currently are pricing the credit at reasonable levels. The banks say they are. Robert Pickel, the chief executive of the International Swaps and Derivatives Association, an industry group, assured me this week that “the cost of credit is taken into account in the collateral relationship and in the bid-ask spread.”

    In layman’s terms, that means that customers with worse credit would face different prices than customers with excellent credit, which Mr. Pickel argued would make price disclosure of limited value.

    Mr. Gensler, the C.F.T.C. chairman, argues that customers would be better off if the two markets — for the derivatives and for the credit — were separated and had clear pricing. “How else,” he asked in an interview, “can customers know if they are getting fair prices?”

    Remarkably, big corporations like Boeing, Caterpillar and many others that use derivatives to hedge risk have been persuaded by bankers that they should not worry about that.

    Continued in article

    Bob Jensen's timeline on derivatives financial instruments frauds are at

    Bob Jensen's free tutorials on accounting for derivative financial instruments are at

    "Is It Possible To Invent An Investment Product (purely fake satire) Too Stupid To Find Buyers?" by Jim Carney, Business Insider, November 19, 2009 --- Click Here
    Jensen Comment
    And as academics we question how Wall Street could get away with gimmicks all these years.

    "There's a sucker born every minute second ."

    Makes you sort of wonder if auditors with their SOX on are just wasting time and money.

    More on the unfunded entitlements that Congress simply added to Social Security and Medicare hemorrhages
    This may well affect payroll tax increases in the future

    "Determining which employees are disabled under the new ADA regulations," AccountingWeb, November 19, 2009 ---

    Wading into the depths of the Americans with Disabilities Act of 1990 to determine who is disabled and who is not has never been a simple task for employers or their employees. On January 1, 2009 amendments to the Act took effect but the new amendments left many unanswered questions. Now, as instructed by Congress, the U.S. Equal Employment Commission has proposed rules designed to bring some clarity to both employers and employees.

    Whether that actually occurs remains to be seen, but it is imperative for companies to become familiar with the proposed rules, which represent some significant departures from the past. Why? Consider several scenarios and try to determine in which cases an employee is considered disabled and must be offered a reasonable accommodation:

    A: An employee with post-traumatic stress disorder; B: An employee with cancer who is currently in remission; C: An employee with asthma that they treat with an inhaler; or D: An employee who wears contact lenses.

    According to the EEOC's proposed rules, the answers are yes, yes, yes, and no. The rules are still being debated, but employers must make sure they understand which impairments may qualify as a disability, which may not and how to determine what falls into either category.

    The Revised ADA Regulations

    When the ADA Amendments Act of 2008 (ADAAA) took effect at the beginning of 2009, it brought some significant changes to the way that disabilities could be interpreted, even though it made few changes to the definition of a disability.

    Under the ADAAA, a disability remains "an impairment that substantially limits one or more major life activities, a record of such an impairment, or being regarded as having such an impairment."

    However, the new law made several important changes, which have spurred the EEOC's proposed rules. Those changes include:

    Expanding the definition of major life activities to include walking, reading, and many major bodily functions, such as the immune system, normal cell growth, digestive, bowel, bladder, neurological, brain, respiratory, circulatory, endocrine, and reproductive functions. Ordering employers to not consider mitigating measures other than regular eyeglasses or contact lenses when determining whether an individual has a disability. Clarifying that an impairment that is episodic or in remission is a disability if it would substantially limit a major life activity when the impairment is active – that is, employees are disabled even if they are not showing symptoms of their disease, if the disease would qualify as a disability when the employee is experiencing symptoms.

    The EEOC Weighs In

    When the law was passed, the EEOC was directed to evaluate how employers should interpret the changes in the ADAAA, employees, and job applicants. In September, the commission did so when it issued its Notice of Proposed Rulemaking. According to the commission, the proposed rules – like the amended ADA – are meant to offer broad coverage to disabled individuals to the maximum extent allowed. The intent of the EEOC seems clear – the issue should be less about whether an employee or job applicant has a disability and more about whether discrimination has occurred.

    The EEOC has also included a specific laundry list of impairments that "consistently meet" the definition of a disability – a list that is far more extensive than in the past. There are several other important aspects of the proposed rules, which are still being debated. Those aspects include:

    Along with the list of impairments that consistently meet the definition of a disability, the proposed rules include examples of impairments that require more analysis to determine whether they are, in fact, disabilities, since these impairments may cause more difficulties for some than others. Impairments that are episodic or in remission, including epilepsy, cancer, and many kinds of psychiatric impairments, are disabilities if they would "substantially limit" major life activities when active. "Major life activities" include caring for oneself, performing manual tasks, seeing, hearing, eating, sleeping, walking, standing, sitting, reaching, lifting, bending, speaking, breathing, learning, reading, concentrating, thinking, communicating, interacting with others, and working.

    Three of these – reaching, interacting with others, and sitting – are seen for the first time in the proposed rules and are not listed in the ADAAA. This is not an exhaustive list, according to the commission.

    The proposed rules also include a specific, non-exhaustive list of major bodily functions that constitute major life activities, including several – special sense organs and skin, genitourinary, cardiovascular, hemic, lymphatic, and musculoskeletal – that are new under the EEOC proposed rules.

    · The proposed rules change the definition of "substantially limits." Under the new regulations, a person is regarded as disabled if an impairment substantially limits his or her ability to perform a major life activity compared to what "most people in the general population" could perform. This is a change from the old regulations, which define a disability as one that substantially limits how a person can perform a major life activity compared to "average person in the general population" can perform an activity.

    According to the EEOC, an impairment doesn't need to prevent or severely restrict an individual from performing a major life activity. Those tests were too demanding, according to the proposed rules. Now, employers should rely on a common-sense assessment, based on how an employee's or applicant's ability to perform a major life function compares with most people in the general population.

    In good news for employers, the proposed rules do say that temporary, non-chronic impairments that do not last long and that leave little or no residual effects are usually not considered disabilities. Prior factors for considering whether an impairment is substantially limiting, such as the nature, severity and duration of the impairment, as well as long-term and permanent effects, have been removed.

    According to the EEOC, at most, an extra one million workers may consider themselves to be disabled under the proposed rules. While that may not seem like many to the commission, businesses must prepare themselves.

    Education and communication are the most important steps employers can take to prevent discriminations lawsuits from those claiming disabilities. Employers must educate themselves about the proposed rules and how those may change when they are ultimately approved.

    Employers must also educate their employees about changes to the ADA and the EEOC's interpretation of the act. Human resources personnel, managers, and supervisors should be trained to respond to employees who seek a reasonable accommodation to their impairment. Employees should receive training, so they know the correct channels to go through if they believe an impairment qualifies as a disability. Formalized training, with employee sign-offs, can help to protect employers from discrimination claims.

    They should be working with legal counsel to update all of their training manuals and employee handbooks, in light of the new regulations and proposed rules.

    With the shift to a broader definition of disability, employers must brace for the possibility of an increasing number of claims. They must also work to ensure that they are not inadvertently discriminating against anyone who now qualifies as disabled.

    Bob Jensen's threads on unfunded entitlements ---

    Consider the wide, wide choices of textbook options at
    Some of the used book prices for slightly older editions are less that $20 and are probably better deals than some of the much older free online textbook options that have been obsolete for many years.

    Have you noticed the price of Ray Garrison's latest Managerial Accounting Edition 13 textbook?

    Used book prices commence at $219.74 for this Edition 13 from Amazon.
    But Edition 11 is available used for $1.85 from Amazon.
    The more popular Garrison, Noreen, and Brewer 2009 edition is $155.80 new
    But the Brewer, Garrison, and Noreen Edition 5 is $239.02 new.
    What a bummer since all these versions feature virtually no accountics research harvests.

    What I find interesting about Amazon is that it accepts paid advertising from outfits that compare prices like that, from a given book on Amazon, automatically searches GetTextbooks for comparison values on that same book you were viewing on the Amazon site.

    I also noticed that GetTextbooks has 222 different managerial accounting textbooks listed, but that list includes some customized editions for certain universities. For example, the University of Central Florida has a customized version of the 11th edition of Garrison at used book prices as low at $21.99.

    The bottom line is that GetTextbooks lists far more choices of managerial accounting textbooks than you will find listed at either the Amazon or the Barnes & Noble online book sites.

    Some of the used book prices for slightly older editions are less that $20 and are probably better deals than some of the much older free online textbook options that have been obsolete for more years.

    An Empirical Study of Practiced-Based Topics in Accounting Textbooks
    AAA Commons ---
    I think you must contact one of the presenters for copies of the study.

    author or authors:

    Roberta J. Cable, Pace University
    Patricia Healy, Pace University
    Emil Mathew, Pace University


    Howard Lawrence, University of Mississippi

    presentation session:

    2C: Teaching Cost Accounting


    May 1, 2009 from 10:30am - 12:00pm


    Researchers have studied practitioners to determine the skills and abilities necessary to prepare management accountants for their roles in business. We believe that the role of the management accountant has changed and the accounting curriculum should reflect this new role. The purpose of our research is to determine the extent of coverage of specific practiced-based management accounting topics in cost accounting courses. Seven popular cost/management accounting textbooks were examined. The results indicated that the authors devoted approximately one quarter of their textbooks to the fifteen highest ranked practice-based management accounting topics. Conversely, approximately seventy-five percent of these textbooks were devoted to other topics that were of less importance to practitioners. It is important that accounting faculty realize that advances in IT, globalization and a shift away from manufacturing have impacted the core accounting knowledge. 

    Jensen Comment
    Even though a topic is not widely popular in managerial accounting practice, it was most likely included in a popular managerial accounting textbook because the topic is covered on the CMA Examination.

    The CPA, CMA, CA, and other certification examinations are probably the most important drivers of accounting textbook content, including basic financial accounting that is the prerequisite for intermediate accounting.

    I really do try to keep politics out of my AAA Commons messages but not necessarily a few of my Web pages where in total I truly cannot be branded as a liberal or a conservative on all matters. I’m probably best viewed as a fiscal conservative and a social liberal --- most certainly a split personality.


    In any case, the purpose below is not to ignite an AAA Commons debate on the pending cap and trade legislation passing through the halls of our Congress. That’s most certainly off topic except on the very fringe where it might affect governmental accountancy or liability/risk reporting in financial statements.


    Instead the purpose below is to possibly ignite a debate on science itself and especially as applied to academic accounting research. On these matters, the AAA Commons does have experts much better than me in terms of grounding in philosophy science and history.

    My colleagues and I accept that some of the published emails do not read well. I regret any upset or confusion caused as a result. Some were clearly written in the heat of the moment, others use colloquialisms frequently used between close colleagues.
    Phil Jones, Head ("scientist") of the Climatic Research Unit, University of East Anglia, November 24, 2009
    Jensen Comment
    "colloquialisms frequently used" = "only publish outcomes consistent with funding and political goals"
    Or in other words "accentuate the positive, eliminate the negative, and don't mess with Mr. Inbetween."

    A new scientific scandal Alert:  Print If a peer review fails in the woods...,
    A scientific scandal is casting a shadow over a number of recent peer-reviewed climate papers. At least eight papers purporting to reconstruct the historical temperature record times may need to be revisited, with significant implications for contemporary climate studies, the basis of the IPCC's assessments. A number of these involve senior climatologists at the British climate research centre CRU at the University East Anglia. In every case, peer review failed to pick up the errors. At issue is the use of tree rings as a temperature proxy, or dendrochronology.
    Andrew Orlowski, "A new scientific scandal Alert:  Print If a peer review fails in the woods...," The Register, September 29, 2009 ---

    Hackers are revealing the moral hazards of climate science
    However, we do now have hundreds of emails that give every appearance of testifying to concerted and coordinated efforts by leading climatologists to fit the data to their conclusions while attempting to silence and discredit their critics. In the department of inconvenient truths, this one surely deserves a closer look by the media, the U.S. Congress and other investigative bodies.

    Scientists have long endured the criticism that many of them cheat in their grant applications, experiments, and in their race to be the first to publish findings that ultimately do not stand the test of more deliberative replications. But the open-minded willingness of journals and editors to publish contradictory findings has always been viewed as saving the credibility of science. In the natural sciences replication or other confirmation is the name of the game. In the social sciences replication and confirmation is more problematic, but increasingly attempts are being made to improve the credibility of social science experimentation ---

    This is why it is very disheartening to see the politics of climate-change scientists destroying the credibility of their journals and their editors who control the gates of publication of climate change research.

    Since science funding in the United States has become largely a game of gaming for grants, there are many other examples in virtually all branches of science where scientists engage in fraud just for the money and the prestige. Politicians have created enormous moral hazards in the world of science and medicine.

    Climate Science Video ---

    Leading British scientists at the University of East Anglia, who were accused of manipulating climate change data - dubbed Climategate - have agreed to publish their figures in full.The U-turn by the university follows a week of controversy after the emergence of hundreds of leaked emails, "stolen" by hackers and published online, triggered claims that the academics had massaged statistics. In a statement welcomed by climate change sceptics, the university said it would make all the data accessible as soon as possible, once its Climatic Research Unit (CRU) had negotiated its release from a range of non-publication agreements.
    Robert Mendick, "Climategate: University of East Anglia U-turn in climate change row Leading British scientists at the University of East Anglia, who were accused of manipulating climate change data - dubbed Climategate - have agreed to publish their figures in full," London Telegraph, November 28, 2009 --- Click Here

    Oops! Scratch the Above Tidbit: 
    This is beginning to sound more like ACORN and the Houston Office of Arther Andersen.

    SCIENTISTS at the University of East Anglia (UEA) have admitted throwing away much of the raw temperature data on which their predictions of global warming are based. It means that other academics are not able to check basic calculations said to show a long-term rise in temperature over the past 150 years....In a statement on its website, the CRU said:
    “We do not hold the original raw data but only the value-added (quality controlled and homogenised) data.”
    Jonathan Leake, "Climate change data dumped," London Times, November 29, 2009 ---
    Jensen Comment
    Phil Jones was not in charge in the 1980s when the raw data were discarded.

    The Economist believes that global warming is a serious threat, and that the world needs to take steps to try to avert it. That is the job of the politicians. But we do not believe that climate change is a certainty. There are no certainties in science. Prevailing theories must be constantly tested against evidence, and refined, and more evidence collected, and the theories tested again. That is the job of the scientists. When they stop questioning orthodoxy, mankind will have given up the search for truth. The sceptics should not be silenced.
    "A Heated Debate," The Economist, November 25, 2009, Page 15 --- Click Here

    A new scientific scandal Alert:  If a peer review fails in the woods...,
    A scientific scandal is casting a shadow over a number of recent peer-reviewed climate papers. At least eight papers purporting to reconstruct the historical temperature record times may need to be revisited, with significant implications for contemporary climate studies, the basis of the IPCC's assessments. A number of these involve senior climatologists at the British climate research centre CRU at the University East Anglia. In every case, peer review failed to pick up the errors. At issue is the use of tree rings as a temperature proxy, or dendrochronology.
    Andrew Orlowski, "A new scientific scandal Alert:  Print If a peer review fails in the woods...," The Register, September 29, 2009 ---

    Noted University of Arizona Scientist Caught Up in the Scandal
    "Global warming fraud uncovered," by Kathy G. Boatman, London Times, November 27, 2009 ---

    The documents released make it clear that this particular situation involved a notable University of Arizona climate change scientist by the name of Jonathan Overpeck.

    The university issued a press release regarding Jonathan Overpeck in 2007 that seems to confirm his involvement, “The Intergovernmental Panel on Climate Change was one of the winners of the 2007 Nobel Peace Prize, and a professor at The University of Arizona was one of only 33 lead authors on an IPCC assessment report released earlier this year.”

    Overpeck, director of the University of Arizona’s Institute for the Study of Planet Earth and professor of geosciences and atmospheric sciences, was a coordinating lead author of a chapter on Paleoclimate, for the IPCC’s fourth assessment report.

    “This is pretty awesome,” Overpeck was quoted as saying in the news release. “So much work went into this on the part of so many scientists. The recognition is a reflection of the impact that climate science is having. It’s also a reflection that society is moving from questioning climate change to realizing that it’s happening and discuss what to do about it.”

    The fourth assessment report, which focused on the science of climate change, presented expert consensus on greenhouse gas levels, global land and ocean temperatures, sea level rising, changes in sea ice and predictions of future change.

    However, it now appears that Overpeck and others have manipulated the science and the consensus they claim to have. Perhaps congressional hearings will help to determine Overpeck’s role in this situation.

    In addition to these problems, the attempts to brainwash the public are evident. CRU apparently utilized a public relations firm to communicate its climate change message. Most notable is the statement, “Changing attitudes toward climate change is not like selling a particular brand of soap, it’s like convincing someone to use soap in the first place.” Another one of the PR rules is, “Everyone must use a clear and consistent explanation of climate change.”

    Before you take start purchasing carbon credits, I suggest you peruse the documents and e-mails that were leaked and are available in a searchable database at 

    Jensen Comment
    Dr. Michael Mann of Penn State’s Earth System Science Center is also caught up in the scandal and under some pressure to resign.

    "Settled Science? Computer hackers reveal corruption behind the global-warming "consensus." by James Taranto, The Wall Street Journal, November 23, 2009, Best of the Web Wall Street Journal Newsletter

    "Officials at the University of East Anglia confirmed in a statement on Friday that files had been stolen from a university server and that the police had been brought in to investigate the breach," the New York Times reports. "They added, however, that they could not confirm that all the material circulating on the Internet was authentic." But some scientists have confirmed that their emails were quoted accurately.

    The files--which can be downloaded here--surely have not been fully plumbed. The ZIP archive weighs in at just under 62 megabytes, or more than 157 MB when uncompressed. But bits that have already been analyzed, as the Washington Post reports, "reveal an intellectual circle that appears to feel very much under attack, and eager to punish its enemies":

    In one e-mail, the center's director, Phil Jones, writes Pennsylvania State University's Michael E. Mann and questions whether the work of academics that question the link between human activities and global warming deserve to make it into the prestigious IPCC report, which represents the global consensus view on climate science.

    "I can't see either of these papers being in the next IPCC report," Jones writes. "Kevin and I will keep them out somehow--even if we have to redefine what the peer-review literature is!"

    In another, Jones and Mann discuss how they can pressure an academic journal not to accept the work of climate skeptics with whom they disagree. "Perhaps we should encourage our colleagues in the climate research community to no longer submit to, or cite papers in, this journal," Mann writes. . . .

    Mann, who directs Penn State's Earth System Science Center, said the e-mails reflected the sort of "vigorous debate" researchers engage in before reaching scientific conclusions. "We shouldn't expect the sort of refined statements that scientists make when they're speaking in public," he said.

    This is downright Orwellian. What the Post describes is not a vigorous debate but an attempt to suppress debate--to politicize the process of scientific inquiry so that it yields a predetermined result. This does not, in itself, prove the global warmists wrong. But it raises a glaring question: If they have the facts on their side, why do they need to resort to tactics of suppression and intimidation?

    Continued in article

    "Global Warming With the Lid Off The emails that reveal an effort to hide the truth about climate science," The Wall Street Journal, November 245, 2009 --- Click Here

    'The two MMs have been after the CRU station data for years. If they ever hear there is a Freedom of Information Act now in the U.K., I think I'll delete the file rather than send to anyone. . . . We also have a data protection act, which I will hide behind."

    So apparently wrote Phil Jones, director of the University of East Anglia's Climate Research Unit (CRU) and one of the world's leading climate scientists, in a 2005 email to "Mike." Judging by the email thread, this refers to Michael Mann, director of the Pennsylvania State University's Earth System Science Center. We found this nugget among the more than 3,000 emails and documents released last week after CRU's servers were hacked and messages among some of the world's most influential climatologists were published on the Internet.

    The "two MMs" are almost certainly Stephen McIntyre and Ross McKitrick, two Canadians who have devoted years to seeking the raw data and codes used in climate graphs and models, then fact-checking the published conclusions—a painstaking task that strikes us as a public and scientific service. Mr. Jones did not return requests for comment and the university said it could not confirm that all the emails were authentic, though it acknowledged its servers were hacked.

    Yet even a partial review of the emails is highly illuminating. In them, scientists appear to urge each other to present a "unified" view on the theory of man-made climate change while discussing the importance of the "common cause"; to advise each other on how to smooth over data so as not to compromise the favored hypothesis; to discuss ways to keep opposing views out of leading journals; and to give tips on how to "hide the decline" of temperature in certain inconvenient data.

    Some of those mentioned in the emails have responded to our requests for comment by saying they must first chat with their lawyers. Others have offered legal threats and personal invective. Still others have said nothing at all. Those who have responded have insisted that the emails reveal nothing more than trivial data discrepancies and procedural debates.

    Yet all of these nonresponses manage to underscore what may be the most revealing truth: That these scientists feel the public doesn't have a right to know the basis for their climate-change predictions, even as their governments prepare staggeringly expensive legislation in response to them.

    Consider the following note that appears to have been sent by Mr. Jones to Mr. Mann in May 2008: "Mike, Can you delete any emails you may have had with Keith re AR4? Keith will do likewise. . . . Can you also email Gene and get him to do the same?" AR4 is shorthand for the U.N.'s Intergovernmental Panel of Climate Change's (IPCC) Fourth Assessment Report, presented in 2007 as the consensus view on how bad man-made climate change has supposedly become.

    In another email that seems to have been sent in September 2007 to Eugene Wahl of the National Oceanic and Atmospheric Administration's Paleoclimatology Program and to Caspar Ammann of the National Center for Atmospheric Research's Climate and Global Dynamics Division, Mr. Jones writes: "[T]ry and change the Received date! Don't give those skeptics something to amuse themselves with."

    When deleting, doctoring or withholding information didn't work, Mr. Jones suggested an alternative in an August 2008 email to Gavin Schmidt of NASA's Goddard Institute for Space Studies, copied to Mr. Mann. "The FOI [Freedom of Information] line we're all using is this," he wrote. "IPCC is exempt from any countries FOI—the skeptics have been told this. Even though we . . . possibly hold relevant info the IPCC is not part of our remit (mission statement, aims etc) therefore we don't have an obligation to pass it on."

    It also seems Mr. Mann and his friends weren't averse to blacklisting scientists who disputed some of their contentions, or journals that published their work. "I think we have to stop considering 'Climate Research' as a legitimate peer-reviewed journal," goes one email, apparently written by Mr. Mann to several recipients in March 2003. "Perhaps we should encourage our colleagues in the climate research community to no longer submit to, or cite papers in, this journal."

    Mr. Mann's main beef was that the journal had published several articles challenging aspects of the anthropogenic theory of global warming.

    For the record, when we've asked Mr. Mann in the past about the charge that he and his colleagues suppress opposing views, he has said he "won't dignify that question with a response." Regarding our most recent queries about the hacked emails, he says he "did not manipulate any data in any conceivable way," but he otherwise refuses to answer specific questions. For the record, too, our purpose isn't to gainsay the probity of Mr. Mann's work, much less his right to remain silent.

    However, we do now have hundreds of emails that give every appearance of testifying to concerted and coordinated efforts by leading climatologists to fit the data to their conclusions while attempting to silence and discredit their critics. In the department of inconvenient truths, this one surely deserves a closer look by the media, the U.S. Congress and other investigative bodies.

    How did academic accounting research become a pseudo science?

    "Why Accounting Matters," by Edith Orenstein, FEI Blog, November 27, 2009 ---

    Last week, we reported that two amendments relating to the Financial Accounting Standards Board were approved by the House Financial Services Committee (HFSC) during markup of its systemic risk bill. The bill, more formally called the Financial Stability Improvement Act (FSIA), is part of a broader set of bills being introduced as part of financial regulatory reform, aimed at preventing another credit crisis.

    The first of the FASB-related amendments, the Perlmutter/Lucas amendment, would require the systemic risk council created under the FSIA "to review and submit comments to the Securities and Exchange Commission and any standards setting body with respect to an existing or proposed accounting principle, standard or procedure."

    The second accounting-related amendment, the Garrett amendment, would require the FASB to study the impact of the minimum credit risk retention rules in the FSIA in combination with the new securitization accounting rules under FAS 166 and FAS 167 (which eliminate off-balance sheet treatment previously available under FAS 140 and FIN 46R), and that FASB "make statutory and regulatory recommendations for eliminating any negative impacts on the continued viability of the asset-backed securitization markets and on the availability of credit for new lending," and report the results within 90 days to the banking regulators and the SEC.

    The ultimate fate of the FASB-related amendments approved by the HFSC is not yet known, since the full House still has to consider the entire financial regulatory reform package, as does the Senat
    (See Sen. Chris Dodd's (D-CT) earlier comments on the initial version of the Perlmutter/Lucae.s amendment, which would have transferred oversight of FASB from the SEC to the systemic risk council. The amendment that eventually passed the HFSC was significantly softened, to require review and comment of accounting standards, but did not change the current oversight structure of FASB.) Continued focus on the financial regulatory reform legislation will take place in December.

    A Civil War Over Accounting?
    The battle over the Perlmutter/Lucas amendment in particular -which, as approved by the HFSC last week was significantly softened ('watered down'
    per's Sarah Johnson; 'gutted' per the Denver Post's Michael Riley) from its initial version proposed in March - rose to the level of Civil War in Corporate America (Ryan Grim, Huffington Post).

    Some may have wondered how this level of agitation could occur in a profession that still harbors, in the eyes of some, a "milquetoast" image (Michael Riley, Denver Post).

    This post attempts to provide some insight into why emotions can run so high in debates about accounting, by exploring the question of "why accounting matters." I remind you of the disclaimer which appears on the right side of this blog, which applies to the entire content of the blog, including (but not limited to) when posts have sections marked off as 'my observations' or 'my two cents.'

    Cent 1 : What Accounting Is Not About: Undue Influence (Undue Pressure)
    In a letter dated Nov. 5, 2009 (during the heat of the debate over the original Perlmutter/Lucas amendment, which as originally proposed in March, would have removed the SEC's oversight power over FASB, and transferred that oversight power to a Federal Accounting Oversight Board consisting of banking regulators and the SEC), SEC Chairman Mary L. Schapiro told Rep. Barney Frank (D-MA), chair of the HFSC:


    I am deeply concerned about the possible consequences of changing [the current] system to one that would subject accounting standard setters to the supervision of entities with other regulatory missions. It is not that those missions are any less vital to the public interest than the mission entrusted to the SEC. It is just that they are different -- and I fear the potential consequences for our capital markets if investors come to believe that accounting standards serve any purpose other than to report the unvarnished truth. [Note: the reference to 'unvarnished truth is discussed separately later in this post.]

    In closing her letter, Schapiro said: "Accounting should be about accounting, and nothing else." When I first read that closing statement, I thought it was a very powerful statement, or sound bite, if you will, but just as sound bites often convey a deeper meaning, I found myself thinking there are other interpretations about what accounting is about, and what it is not about.

    Given the subject of the letter, I thought to myself, the sentence could be read to imply, "Accounting should be about accounting, and not about politics." Or, more precisely, substituting in language from the
    IASCF Monitoring Board's Sept. 22 statement on accounting standards and accounting standard-setting (the SEC is a member of the Monitoring Board), one could end the sentence this way: "Accounting should be about accounting, and not about undue pressures from political and corporate interests."

    The word "undue" (as in "undue pressures") as used by the Monitoring Board is very significant: the group did not call for the total exclusion of dialogue with political and corporate interests; on the contrary, the Monitoring Board stated: "Interested parties must be afforded the opportunity to provide input to inform the standard setter’s evaluation of pertinent issues."

    In fact, specific to the topic of fair value accounting (which some view as the driving force behind the Perlmutter/Lucas amendment) the Monitoring Board stated:

    The IASB and FASB have benefitted from informative input into their financial instruments and fair value measurement standard setting initiatives from a broad range of stakeholders. The recommendations of some constituencies often contradict the strongly held views of others, reflecting the diversity of uses for and desired outcomes of financial reporting... robust participation of interested parties is an essential element of a standard setter’s transparent due process. Equipped with this input, it is the responsibility of the standard setters to evaluate the knowledge they have gained against the overarching objectives of financial reporting and the principles that reinforce those objectives, in a manner engendering independent decision-making.

    Understanding the Role of Neutrality and Due Process
    While we're on the subject of soundbites, some journalists over the past six months have characterized comments made by FASB and IASB board members and related advisory groups (such as the FASB-IASB Financial Crisis Advisory Group) as calling for no "meddling" by politicians (see, e.g.
    Politicians Accused of Meddling in Bank Rules (Floyd Norris, NYT, 7.28.09), and Europe Must Stop Its Meddling, Says FASB Chief (Mario Christodoulou, Accountancy Age 10.15.09). More recently, I've seen the word 'tinkering' used by some, in place of where 'meddling' was previously the term du jour.

    Although 'meddling' or 'tinkering' are not defined in FASB's Conceptual Framework (which serves as the foundation for standard-setting), the term 'neutrality' is the operative term specified in Concepts Statement No. 2; i.e., the FASB is to exercise 'neutrality' in setting accounting standards. The IASCF Monitoring Board's Sept. 22 statement repeats the importance of neutrality.

    In understanding the role of 'neutrality' and independence, of particular note is that it does not require FASB to be walled off from dialogue with outside parties, just that it act in a neutral fashion. See, e.g. Volcker Heartened by Regulators Reaction to Crisis Warns Against Isolation (Steven Burkholder, BNA Daily Report for Executives. Reproduced with permission from Daily Report for Executives, 208 DER I-4 (Oct. 30, 2009). Copyright 2009 by The Bureau of National Affairs, Inc. (800-372-1033)

    More recently, BNA's Burkholder reported in, FASB Members Warm to Revised Perlmutter Amendment; SEC Supportive, that FAF spokesman Neal McGarity stated after the revised Perlmutter/Lucas amendment was approved by the HFSC:

    The FAF recognizes and is respectful of the need for Congress to maintain and advance the safety and soundness of this country's financial system... The FAF does not oppose the recently adopted Perlmutter amendment because it acknowledges the due process [of accounting standard-setting] which is the backbone of the FAF mission.


    The reference to 'due process' in the FAF spokesman's statement above is key, as is transparency of that due process, in engendering confidence in the process. The role of due process was also noted in the IASCF Monitoring Board's Sept. 22 statement, and in the IASB-FASB Nov. 5 joint statement, as follows:

    IASCF Monitoring Board statement Sept. 22, 2009: "Visibility into the standard setting process should be sufficient to enable users to trace the evolution of the standard from thoughtful consideration of alternatives to final positions".

    IASB -FASB Joint statement
    Nov. 5, 2009: "We aim to provide a high degree of accountability through appropriate due process, including wide engagement with
    stakeholders, and oversight conducted in the public interest. We are consulting widely and will continue to draw on expertise from investors, preparers, auditors, standard-setters, regulators, and others around the world. ... We will set standards following our robust due process procedures that provide visibility into the standard-setting process and require proactive consultation to ensure communication of all points of view and the expressions of opinion at all stages of the process".


    If we all were to agree on what accounting should "not" be about (i.e., that it should not be about undue influence or undue pressure), then what would we say accounting "is" about?

    Cent 2: What Accounting Is About: Decision-Useful Information
    Consistent with
    FASB's mission statement, the IASCF Monitoring Board's Sept. 22 statement defined what accounting (more generally, financial reporting) is about as follows:

    We view the primary objective of financial reporting as being to provide information on an entity’s financial performance in a way that is useful for decision-making for present and potential investors. To be considered decision-useful, information provided through the application of the accounting standards must, at a minimum, be relevant, reliable, understandable and comparable.

    The operative words are that financial reporting information aims at being decision-useful, by providing information that is relevant, reliable, understandable and comparable. All of these terms are longstanding fundamental concepts in FASB's Conceptual Framework (specifically, in Concepts Statement No. 2). (Note: an amendment to CON 2 was previously proposed and is set to be issued in final form 4Q2009 according to FASB's current technical plan.)

    In considering the concepts noted above, people do not always agree on what 'decision-useful' means in particular contexts, and reasonable people may not always agree on how an accounting standard should be constructed to produce the most "relevant" and "reliable" information (and how to balance those two sometimes opposing forces).

    For example, some people may say that fair value information is always the most relevant information ("measurement attribute"), period. Others, however, may question if fair value information in an illiquid, inactive or disorderly market, is any more relevant than information measured by some other means, such as discounted cash flow, or how much emphasis to place on 'market' quotes (e.g. broker quotes) vs. internal cash flow models, in such a market.

    Thus, an 'inconvenient truth' in accounting is that, even if there were agreement among reasonable people as to which measurement attribute (e.g. 'fair value' vs. 'historic cost') is more relevant, there is not necessarily going to be universal agreement on which valuation method is most reliable to arrive at 'fair value' for all financial instruments, or how to balance relevance and reliability, in producing 'decision useful' information. You will see such debates if you review the comment letter file on the original proposal for FAS 157, and on current proposals out for comment by FASB and the IASB. It is and always has been a natural and healthy debate across all of standard-setting, as to how to develop standards that result in the most relevant and reliable information.

    Since relevance and reliability, as well as understandability and comparability lead to decision usefulness, real world investing and financing decisions take place based on accounting information provided. And that is "why accounting matters."

    Accounting Has Economic Consequences
    Further on this topic of why accounting matters, Prof. David Albrecht was the first person to write publicly during the heated debate over the Perlmutter/Lucas amendment on the issue of why politics has historically had some role (indirect if not direct) in accounting standard-setting.


    Continued in article

    "Going Concern Audit Opinions: Why So Few Warning Flares?" by Francine McKenna, re: The Auditors, September 18, 2009 ---

    Lehman Brothers. Bear Stearns. Washington Mutual. AIG. Countrywide. New Century. American Home Mortgage. Citigroup. Merrill Lynch. GE Capital. Fannie Mae. Freddie Mac. Fortis. Royal Bank of Scotland. Lloyds TSB. HBOS. Northern Rock.

    When each of the notorious “financial crisis” institutions collapsed, were bailed out/nationalized by their governments or were acquired/rescued by “healthier” institutions, they were all carrying in their wallets non-qualified, clean opinions on their financial statements from their auditors. In none of the cases had the auditors warned shareholders and the markets that there was “ a substantial doubt about the company’s ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited.”

    Continued in a very good article by Francine (she talks with some major players)

    Francine maintains an outstanding auditing blog at

    Bob Jensen's threads on "Where Were the Auditors?" ---

    Some auditing firms are now being hauled into court in bank shareholder and pension fund lawsuits ---

    "Lab Experiments Are a Major Source of Knowledge in the Social Sciences," by Armin Falk and James J. Heckman, IZA Discussion Paper No. 4540,  October 2009 ---

    Laboratory experiments are a widely used methodology for advancing causal knowledge in the physical and life sciences. With the exception of psychology, the adoption of laboratory experiments has been much slower in the social sciences, although during the last two decades, the use of lab experiments has accelerated. Nonetheless, there remains considerable resistance among social scientists who argue that lab experiments lack “realism” and “generalizability”. In this article we discuss the advantages and limitations of laboratory social science experiments by comparing them to research based on nonexperimental data and to field experiments. We argue that many recent objections against lab experiments are misguided and that even more lab experiments should be conducted.

    Jensen Comment
    It disappointed me that Falk and Heckman did not really discuss the issue of replication and verifiability while claiming that "lab experiments are a major source of knowledge in the social sciences." The might've given more examples where studies were independently replicated, and there are such studies --- especially lab experiments in psychology.

    They do mention in passing that lab experiments might support or run counter to empirical studies, but here again it would've helped to provide some examples. I did a bit of searching and found one example that they might've used for such purposes ---
    I suspect there are hundreds of similar examples.

    The trade-offs between lab experiments versus field studies are discussed in the following paper:
    "Internal and External Validity in Economics Research: Tradeoffs between Experiments, Field Experiments, Natural Experiments and Field Data," by Brian E. Roe and David R. Just
    , 2009 Proceedings Issue, American Journal of Agricultural Economics ---

    Abstract: In the realm of empirical research, investigators are first and foremost concerned with the validity of their results, but validity is a multi-dimensional ideal. In this article we discuss two key dimensions of validity – internal and external validity – and underscore the natural tension that arises in choosing a research approach to maximize both types of validity. We propose that the most common approaches to empirical research – the use of naturally-occurring field/market data and the use of laboratory experiments – fall on the ends of a spectrum of research approaches, and that the interior of this spectrum includes intermediary approaches such as field experiments and natural experiments. Furthermore, we argue that choosing between lab experiments and field data usually requires a tradeoff between the pursuit of internal and external validity. Movements toward the interior of the spectrum can often ease the tension between internal and external validity but are also accompanied by other important limitations, such as less control over subject matter or topic areas and a reduced ability for others to replicate research. Finally, we highlight recent attempts to modify and mix research approaches in a way that eases the natural conflict between internal and external validity and discuss if employing multiple methods leads to economies of scope in research costs.

    Lab experiments, but not field studies, are quite popular in some of the leading accounting research journals and are most commonly conducted on student volunteers. The problem is the behavioral lab experiments findings are apparently not important enough to verify and replicate, although the hypotheses may have been generated from anecdotal observations in the real world or even, on occasion, by related empirical studies.

    I've always contended that more experiments might be replicated if journal editors encouraged replications by adopting policies of sending replication submissions out for review with at least a chance of publication for studies that corroborate findings as well as negate findings. The fact that behavioral experiments published in TAR, JAR, and JAE are virtually never replicated sends out signals that the findings are either too obvious or too unimportant or too superficial to be of interest in and of themselves.

    Unlike some leading social science journals, the leading accounting journals tend not to publish case and field research studies even if these sometimes indirectly support the lab experimental outcomes.

    Experimental Economics: Rethinking the Rules by Nicholas Bardsley and others (Princeton University Press; 2009, 375 pages; $55). Discusses the use of experimental methods in economic research and examines controversies over the growing field.

    November 24, 2009 reply from Paul Williams [Paul_Williams@NCSU.EDU]

    Jagdish, Bob, et al.
    Relevant to this thread is an article by Jon Elster. Titled "Excessive Ambitions" it was recently publishe in Capitalism and Society, Vol. 4, Issue 2, 2009 Article 1. In it he takes the whole social science enterprise to task. A quote from page 9 gives a sense of what he is on about: "My claim is that much work in economics and political science is devoid of empirical, aesthetic or mathematical interest, which means that it has no value at all (emphasis in original).

    I cannot make any quantitative assessment of the proportion of work in leading journals that fall in this category. I am firmly convinced, however, that the proportion is non-negligible and important enough to constitute something of a scandal. I also believe, more tentatively, that the proportion may be higher in the leading journals than in the non-leading ones."

    The issue is not just replication (accounting is so derivative we would merely be replicating other disciplines' experiments), but whether the original experiments are at all meaningful.


    Why the bruha now since FSP 157-4 cleared up doubts that FAS 157 Level 3 leaves everything up to how banks want to define broken markets?

    Even if banks carry toxic assets at historical costs well above current market values under FSP 157-4 leniency, both FASB domestic and IASB international standards require realistic estimates of loan loss bad debt reserves. However, CPA auditors have traditionally allowed banks to underestimate bad debt losses, which of course why shareholders of many failed banks are now suing large auditing firms with the Washington Mutual (WaMu) lawsuit against Deloitte being Exhibit A ---

    The current wave of audit firm lawsuits is tending to make auditing firms more conservative about loan loss bad debt reserves. What banks really want is to carry toxic assets at or near cost well above current values and to continue to greatly underestimate loan loss bad debt reserves. They want their cake and sweeteners too.


    Three Former Directors of the SEC Weigh In Banker Requests to Get Out from Under Accounting Standards
    "Don't Let Banks Hide Bad Assets:  In times of distress, there's always pressure to change accounting standards," by Roderick M. Hills, Harvey L. Pitt, and David S. Ruder," The Wall Street Journal, November 19, 2009 ---

    Independent accounting standards have helped make American capital markets the best in the world. In making financial decisions, investors rely heavily upon the integrity of corporate financial reports prepared in accordance with accounting standards established by the independent Financial Accounting Standards Board (FASB). That board is supervised by the Securities and Exchange Commission (SEC).

    Now, the Obama administration is on the verge of transferring accounting standards responsibility from the SEC to a systemic risk regulator. Such a radical move would have extremely negative consequences for our capital markets.

    Although there may be good reasons for establishing different regulatory capital standards for financial services firms, those reasons cannot justify dispensing with the FASB's accounting standards. Acting in accord with powers given to it by the Sarbanes-Oxley Act, the SEC has formally recognized the FASB as the definitive standard-setting body, capable of "improving the accuracy and effectiveness of financial reporting and the protection of investors."

    The SEC treats accounting standards adopted by the board as authoritative. If the SEC has concerns about, or disagrees with, accounting standards promulgated by the FASB, it can refuse to give them deference.

    Today, the American Bankers Association, on behalf of many commercial banks, is seeking to prevent disclosure of the fair value of the financial instruments they own. It is attempting to persuade Congress that the safety and soundness of the banking system will be protected if a systemic risk regulator can prescribe accounting disclosures for financial companies.

    The government shouldn't follow their advice. This change might well interfere with efforts by financial firms to raise capital. Investors will assume that the accounting standards they employ are designed to mask risks.

    As former chairmen of the Securities and Exchange Commission, we are well aware of the long-held desire of commercial interests to avoid fully disclosing their finances. In the 1990s, business interests opposed publicly disclosing their post-employment pension and health obligations. Similarly, in 2000, efforts were made to prevent the FASB from eliminating distortions that inflated the balance sheet values of newly merged companies, because its elimination might make balance sheets look less favorable to potential investors.

    In 1994, the FASB considered requiring companies to reflect the current value of their outstanding stock options. After intense lobbying from certain business interests and pressure from Congress, the FASB decided not to require use of the fair value method. In 2004, when the FASB finally mandated it for valuing stock options, certain U.S. business opponents continued to lobby Congress to overturn that decision.

    During times of financial distress, there is always pressure to change accounting standards in order to inflate the value of assets. Under certain circumstances, there may be a legitimate need to recognize that stresses on large financial institutions may threaten the stability of the U.S. financial system. Banking regulators can ease such stresses by reducing regulatory capital requirements. But it would be a mistake to adopt legislation that would allow financial-services firms to hide their true financial positions from investors.

    If changes in accounting standards are used to bury significant risks for one purpose, it will not be long before other purposes are asserted to permit further deviations. This is a dangerous path that will only hurt investors and our capital markets.

    Messrs. Hills, Pitt and Ruder are former chairmen of the Securities and Exchange Commission.


    Fiction Writer Rosie Scenario Heads Up the Accounting Division of Wells Fargo
    (with the FASB's FSP 157-4 blessing)
    Before reading this note that Wells Fargo took over the toxic-asset laden Wachovia on December 31, 2008.  It was a government-forced sale of Wachovia to prevent the total implosion of the poisoned Wachovia ---
    However, Wells Fargo stood to profit from the poison in the sweet deal offered by Paulson.

    The Motley Fool is a very popular commercial Website about stocks, investing, and personal finance ---  
    Did you ever wonder about the “Fool” part of the company’s name?
    The Gardner brothers considered themselves “fools” that were smarter than some foxes. Although at many times the Gardners have shown that fools can fool wannabe foxes, the Gardners brothers have at times also been out foxed.

    My point here, Pat, is that people who buy Wells Fargo Bank shares just because the price went up following an accounting change (accounting change from Level 1 to Level 3 covered up the smell of Wells Fargo’s enormous toxic loan portfolio) may not be ignorant that accounting changes don’t really offset pending toxic deaths in the long run.

    Some “fools” buying Wells Fargo Bank shares just think there are many fools more foolish than themselves.

    Either way you look at it, investing is a bit of a fools game with fools trying to out fool one another. The premise is, however, that sophisticated fools ultimately win. That's most certainly the case with casinos.

    "Time to Call Out Wells Fargo's Balance Sheet," by Michael Shulman, Seeking Alpha, September 22, 2009 ---

    AIG Worships at the Alter of new FSP 157-4 rulings
    Selling Hot Air to Investors While Still Begging for Hard TARP Cash

    When should auditors insist on FAS 157 Level 1 (fair value adjustments of poisonous loan portfolios) or allow Level 3 (essentially historical cost in the name of a discounted cash flow model) on the grounds that the Level 1 and Level 2 requisite markets are broken? In FSP 157-4 the FASB essentially opened to floodgates to Level 3 by simply stating to auditing firms that:  “Hey, Level 3 is O.K. with us as long as you think the markets are broken.” The issue thus reduces to auditor judgment regarding if and when markets are seriously broken.

    "Asset Write-Ups Put AIG in Black," by Lavonne Kuykendall and Joan E. Solsman, The Wall Street Journal, November 6, 2009 ---

    American International GroupInc. posted its second consecutive profit in the third quarter, driven largely by asset write-ups, while its core insurance operations continued to struggle with a weak economy and lingering negative perceptions in the marketplace.

    Despite beating analyst estimates, AIG shares were down Friday. The stock, which has risen nearly sixfold from an all-time low in March, was up 25% for 2009 through Thursday.

    In a news release, AIG Chief Executive Robert H. Benmosche said that AIG's results "reflect continued stabilization in performance and market trends," but said the company expects "continued volatility in reported results in the coming quarters, due in part to charges related to ongoing restructuring activities."

    One coming expense will be an approximately $5 billion charge in the fourth quarter as it closes on the special-purpose vehicles (read that SPEs) connected to its foreign life- insurance businesses AIA and ALICO, to pay off $25 billion of its New York Fed credit line.

    The outstanding balance of AIG's government bailout, including government support of all types, was $120.6 billion at the beginning of September, out of total authorized assistance of $182 billion.

    Financial markets have improved significantly in the year since AIG's bailout and changes in how financial firms can value assets (read that FSP 157-4) have helped AIG recover from the write-downs and charges that brought it near collapse. But analysts say the company, while healthier, remains weak.

    AIG posted a profit of $455 million, or 68 cents a share, compared with a year-earlier loss of $24.47 billion, or $181.02 a share. The latest results included $1.8 billion in capital losses, while the previous year's results included billions in write-downs from credit-default swaps and $15.06 billion in capital losses.

    Excluding capital losses and hedging activities that don't qualify for hedge-accounting treatment, the profit was $2.85 in the latest quarter. A survey of analysts by Thomson Reuters predicted $1.98.

    Operating income at AIG's general-insurance business before capital gains rose more than sixfold, as net premiums written fell 13%. The portion of premiums paid out on claims and expenses climbed to 105.2% from 104.5%.

    Profit at the life-insurance division more than doubled as assets under management rose in an improving market. Premiums, deposits and other considerations dropped 38.6% from last year, to $13.7 billion on lingering negative perceptions of AIG events and lower industry sales generally.

    AIG, which has become more patient in selling off units as it attempts to repay federal aid, last month sold investment company Primus Financial Holdings Ltd. for $2.15 billion, its biggest sale globally so far. The company will book a $1.4 billion fourth-quarter loss on the sale.

    Bob Jensen's threads on fair value accounting are at

    November 19, 2009 message from Linda A Kidwell, University of Wyoming [lkidwell@UWYO.EDU]

    A very interesting filing from includes their reason for filing an unreviewed 10-Q.  It is a great illustration of the judgment involved in auditing. --- Click Here     [www_sec_gov] 


    Where’s Mary Mary Quite Contrary?
    An SEC investigation of and Byrne seeking information as to the company's accounting policies, targets, projections, and estimates relating to its financial performance, continued but was dropped in June 2008.

    Here's the message from that overstocked "humble servant:"

    What does “we agree with PwC mean?”
    Would PwC have handled this differently? Files Unreviewed Form 10-Q for Q3 2009


    SALT LAKE CITY —, Inc. (NASDAQ: OSTK) today filed an unreviewed Form 10-Q for the period ending September 30, 2009.  Below is a letter from Patrick Byrne, the company’s Chairman and CEO.


    “All things are subject to interpretation; whichever interpretation prevails at a given time is a function of power and not truth.” — Friedrich Nietzsche


    Dear Owner:


    We have elected to file an unreviewed Form 10-Q for the period ending September 30, 2009.  Here is why:



    In February 2009, we were notified by a partner that we had overpaid it approximately $700,000, but that the partner wanted to reach a mutual solution to this overpayment and another open issue (the partner has asserted that we might owe it in excess of $400,000 regarding this other issue).  At that time, we doubted our ability to recover this overpayment and we could not reasonably estimate what we might recover.




    Thus, we had to decide between either immediately recognizing as income a sum whose magnitude, collection, and collectability was in doubt (which we felt was an incorrect and aggressive position, especially in light of the economic and retail environment of the time), or whether we should take a more conservative position of negotiating with this vendor who owed whom, how much, and on what terms, including timing of payment, and recognizing those sums only if and when we received the payments.




    The accounting for this transaction required significant judgment and interpretation of the facts and circumstances — which others with 20/20 hindsight might later question.  Weighing all the facts and circumstances at the time, we decided it would be a mistake to book this overpayment as an asset as of December 31, 2008, deciding instead to recognize the sums as we recovered the money (that is, we thought the conservative position was the correct position). Our auditors at the time, PricewaterhouseCoopers (“PwC”), agreed with this course of action, and we prepared our 2008 Form 10-K on the basis of this decision.




    Although PwC had given us eight years of fine service, after we filed our 2008 Form 10-K, we ran a formal RFP process for selecting our 2009 auditors as a reflection of my belief that changing auditors every decade or so might be healthy. Grant Thornton won that RFP, and the Audit Committee selected Grant Thornton as our 2009 auditor.




    Before Grant Thornton took our audit engagement in Q1 2009, it reviewed our filed 2008 Form 10-K and told us it was comfortable with our past accounting practices.




    In late Q1 2009, we received $785,000 relating to the partner overpayment discussed in point 1 above (even though the other issue with that partner remained unresolved).  Thus, we recognized $785,000 in our 2009 Q1 Form 10-Q financials, which Grant Thornton reviewed as our auditors.  In addition we highlighted $1.9 million (of which the $785,000 was a part) attributable to the collected overpayment, certain partner under-billing collections, and a freight carrier’s refund of overcharges in one-time, non-recurring income in that quarter’s earnings release, earnings conference call and Form 10-Q.




    As our auditors, Grant Thornton reviewed our financial statements in Q1 and Q2 2009 before we filed Form 10-Q’s for those quarters.  Throughout 2009, our Audit Committee has repeatedly asked Grant Thornton if there was any accounting that it would do differently, and repeatedly received the answer, “No.” In fact, as recently as late-October 2009, Grant Thornton confirmed to us that it supported our accounting method for recognizing the $785,000.




    In early October and again in early November, the SEC sent us comment letters asking us, among other things, to advise it on and justify the accounting treatment we used regarding the $785,000.




    Last week, Grant Thornton advised us that, on further consultation and review within the firm, it had revised its position and that it now believes that we should have recorded the $785,000 as an asset in 2008.  As a result of its accounting position, Grant Thornton said it would be unable to complete its review of the financial statements in our Q3 Form 10-Q unless we amended our previous 2009 quarterly filings and restated our 2008 financial results.  On November 13, Grant Thornton also advised us that it believes that we should make disclosure or take action to prevent future reliance on our March 31, 2009 financial statements and June 30, 2009 financial statements filed in our Q1 and Q2 Form 10-Q’s, as a result of this issue.




    We disagree with Grant Thornton.  We, along with PwC, continue to believe that we have accounted for the $785,000 correctly and thus our Q1 and Q2 financial statements are correct.  Both we and PwC believe that it is not proper to reopen our 2008 Form 10-K, subject to resolution with the SEC of its comment letters.




    Thus, we are in a quandary: one auditing firm won’t sign-off on our Q3 Form 10-Q unless we restate our 2008 Form 10-K, while our previous auditing firm believes that it is not proper to restate our 2008 Form 10-K.  Unfortunately, Grant Thornton’s decision-making could not have been more ill-timed as we ran into SEC filing deadlines.


    As a result, we have elected to dismiss Grant Thornton, file an unreviewed Q3 Form 10-Q (as we have no current auditor), continue to work with the SEC on the issues addressed in its comment letters, and engage another independent audit firm.  Once we have completed these last two items, we will file a reviewed Q3 Form 10-Q/A.


    In the meantime, I will continue to focus on the business during this busiest part of the year.


    I will hold a conference call to further explain and answer questions regarding this matter on Wednesday afternoon at 5:00 p.m. EST (details below).  Until then, I remain,


    Your humble servant,


    Patrick M. Byrne


    The WebCPA blurb on this is at


    "S&P Removes "One Click" P/E," The Market Ticker, November 23, 2009 ---

    Even though the neutrality-believing FASB is in a state of denial about the impact of FSP 115-4 on decision making in the real world, financial analysts and the Director of Corporate Governance at the Harvard Law School are in no such state of denial,
    "The Fall of the Toxic-Assets Plan," The Wall Street Journal, July 9, 2009 ---

    The government announced plans to move forward with its Public-Private Investment Program yesterday. Lucian Bebchuk, professor of law, economics, and finance and director of the corporate governance program at Harvard Law School, says that the program, which has been curtailed significantly, hasn’t made the problem go away.

    The plan for buying troubled assets — which was earlier announced as the central element of the administration’s financial stability plan — has been recently curtailed drastically. The Treasury and the FDIC have attributed this development to banks’ new ability to raise capital through stock sales without having to sell toxic assets. But the program’s inability to take off is in large part due to decisions by banking regulators and accounting officials to allow banks to pretend that toxic assets haven’t declined in value as long as they avoid selling them.

    The toxic assets clogging banks’ balance sheets have long been viewed — by both the Bush and the Obama administrations — as being at the heart of the financial crisis. Secretary Geithner put forward in March a “public-private investment program” (PPIP) to provide up to $1 trillion to investment funds run by private managers and dedicated to purchasing troubled assets. The plan aimed at “cleansing” banks’ books of toxic assets and producing prices that would enable valuing toxic assets still remaining on these books.

    The program naturally attracted much attention, and the Treasury and the FDIC have begun implementing it. Recently, however, one half of the program, focused on buying toxic loans from banks, was shelved. The other half, focused on buying toxic securities from both banks and other financial institutions, is expected to begin operating shortly but on a much more modest scale than initially planned.

    What happened? Banks’ balance sheets do remain clogged with toxic assets, which are still difficult to value. But the willingness of banks to sell toxic assets to investment funds has been killed by decisions of accounting authorities and banking regulators.

    Earlier in the crisis, banks’ reluctance to sell toxic assets could have been attributed to inability to get prices reflecting fair value due to the drying up of liquidity. If the PIPP program began operating on a large scale, however, that would no longer been the case.

    Armed with ample government funding, the private managers running funds set under the program would be expected to offer fair value for banks’ assets. Indeed, because the government’s funding would come in the form of non-recourse financing, many have expressed worries that such fund managers would have incentives to pay even more than fair value for banks’ assets. The problem, however, is that banks now have strong incentives to avoid selling toxic assets at any price below face value even when the price fully reflects fair value.

    A month after the PPIP program was announced, under pressure from banks and Congress, the U.S. Financial Accounting Standards Board watered down accounting rules and made it easier for banks not to mark down the value of toxic assets. For many toxic assets whose fundamental value fell below face value, banks may avoid recognizing the loss as long as they don’t sell the assets.

    Even if banks can avoid recognizing economic losses on many toxic assets, it remained possible that bank regulators will take such losses into account (as they should) in assessing whether banks are adequately capitalized. In another blow to banks’ potential willingness to sell toxic assets, however, bank supervisors conducting stress tests decided to avoid assessing banks’ economic losses on toxic assets that mature after 2010.

    The stress tests focused on whether, by the end of 2010, the accounting losses that a bank will have to recognize will leave it with sufficient capital on its financial statements. The bank supervisors explicitly didn’t take into account the decline in the economic value of toxic loans and securities that mature after 2010 and that the banks won’t have to recognize in financial statements until then.

    Together, the policies adopted by accounting and banking authorities strongly discourage banks from selling any toxic assets maturing after 2010 at prices that fairly reflect their lowered value. As long as banks don’t sell, the policies enable them to pretend, and operate as if, their toxic assets maturing after 2010 haven’t fallen in value at all.

    By contrast, selling would require recognizing losses and might result in the regulators’ requiring the bank to raise additional capital; such raising of additional capital would provide depositors (and the government as their guarantor) with an extra cushion but would dilute the value of shareholders’ and executives’ equity. Thus, as long as the above policies are in place, we can expect banks having any choice in the matter to hold on to toxic assets that mature after 2010 and avoid selling them at any price, however fair, that falls below face value.

    While the market for banks’ toxic assets will remain largely shut down, we are going to get a sense of their value when the FDIC auctions off later this summer the toxic assets held by failed banks taken over by the FDIC. If these auctions produce substantial discounts to face value, they should ring the alarm bells. In such a case, authorities should reconsider the policies that allow banks to pretend that toxic assets haven’t fallen in value. In the meantime, it must be recognized that the curtailing of the PIPP program doesn’t imply that the toxic assets problem has largely gone away; it has been merely swept under the carpet.


    Bob Jensen's threads on fair value accounting are at


    Top Accounting and Education Twitter Tweets

    "Checkout Our “The Best Of “Twitter Lists – Love Your DM or RT," The Big Four Blog, November 9, 2009 ---

    Twitter just released its latest exciting functionality - Twitter Lists, and we think it’s awesome and very timely.

    It allows us to curate who we think are the most appropriate Tweeters to follow in our niche space of The Big Four Firms, accounting, finance, tax, jobs and related topics.

    We have already created some list, which we are calling “The Best Of”. We rather like this name, but we’ll evolve as lists get more ingrained, and may change.

    For example after our search, all the Twitterers we think are most relevant to follow for Deloitte happenings in the Twitter universe, we have added to our “The Best of Deloitte” list.

    This is our subjective selection, and we think it's a pretty good one. That’s not to say that we have completely covered all the bases, so if there is someone that just needs to be on or off any of these lists, please DM or shout out to us @big4alum. Thanks in advance.

    Also, we’ll continue to refine and add/subtract to this list over time, but our intent is to keep them highly relevant and focused. We see that some of our list already have some followers and no doubt this will pick up as Twitter Lists get more ingrained and Twitter itself allows tweets and Twitter Lists to be retweeted.

    So, here are our lists – follow us or follow the lists, and keep that feedback going!!

    All The Lists ---

    Best of Accenture ---

    Best of Capgemini *** 

    Best of Deloitte ---

    Best of Ernst & Young ---

    Best of KPMG

    Best of PricewaterhouseCoopers --- 

    Best of Accounting --- 

    Best of Finance --- 

    Best of Tax --- 

    Bob Jensen's threads on Twitter ---

    Stocktwits ---

    Roger Debreceny Tweets --- a

    "CPAs are Aflutter About Twitter," by Kristin Gentry, SmartPros, August 10, 2009 ---

    "CPAs Embrace Twitter Brief messages leave powerful impressions," by Megan Pinkston, The Journal of Accountancy, August 2009 --- 

    "50 Ways to Use Twitter in the College Classroom" Online Colleges, June 6, 2009

    Top Ten Tweets to Date in Academe
    Keep in mind that none of these hold a candle to such globally popular twitterers such as Britney Spears
    "10 High Fliers on Twitter:  On the microblogging service, professors and administrators find work tips and new ways to monitor the world ," by Jeff Young, Chronicle of Higher Education, April 10, 2009 ---

    "How Twitter Could Bring Search Up to Speed:  Some say that Twitter may be as important to real-time search as YouTube is to video," by Kate Greene, MIT's Technology Review, March 11, 2009 --- 

  • Bob Jensen's threads on blogs and listservs ---

    Daily News Sites for Accountancy, Tax, Fraud, IFRS, XBRL, Accounting History, and More ---

    New and enhanced features in QuickBooks 2010 ---

    Harvard Law Professor Elizabeth Warren discusses her effort to change the consumer protecting (including credit card company abuses), Video from The New Yorker, November 16, 2009 ---
    This video will only be online for a short while.

    Hollywood Movies Featuring Accountants

    From Jim Mahar's Blog on November 20, 2009 ---

    YouTube - Other People's Money speech by Danny DeVito:
    "Other People's Money speech by Danny DeVito"

    If you want to feel old, mention this movie in class, virtually no one has heard of it. Fortunately some of it is still online. Here is Jorgy's speech, and here is Danny Devito's ---

    "Is It Possible To Invent An Investment Product (purely fake satire) Too Stupid To Find Buyers?" by Jim Carney, Business Insider, November 19, 2009 --- Click Here
    Jensen Comment
    And as academics we question how Wall Street could get away with gimmicks all these years.

    "There's a sucker born every minute second ."

    Makes you sort of wonder if auditors with their SOX on are just wasting time and money.

    November 21, 2009 reply from David Albrecht [albrecht@PROFALBRECHT.COM]

    Other People's Money is my favorite business movie. I've viewed it a dozen times or more. I think it is the best movie for showing students what is involved with a proxy fight.

    The Deal, starring Christian Slater, is my recommendation for a movie focused on due diligence investigations.

    The Devil Wears Prada is my recommendation for a movie dealing with an ethical dilemma. Although The Contender (Joan Allen), Dave, Working Girl (Melanie Griffith) aren't bad.

    Only Devil will be familiar to today's students. Doesn't mean they can't learn from an old movie.

    Stranger Than Fiction might be the best movie about an accountant. The Harold Crick character evolves through three of the stereotypes discussed in Dimnik and Feldon.

    Dave Albrecht

    November 21, 2009 reply from Bob Jensen

    Of course let's not forget Hollywood's Enron fraud documentary Enron:  The Smartest Guys in the Room.
    And there's the best Enron movie in a sense that it's a home movie featuring the real Enron bad guys ---
    Jeff Skilling plays himself when introducing HFA --- Hypothetical Future Accounting

    In Carnal Knowledge Jack Nicholson plays a deeply dysfunctional CPA in this racy and depressing movie having zero accounting or business education but some education about Ann Margaret's body.

    And there's Suze Orman's video The Laws of Money, The Lessons of Life (also a 2003 book)

    Click on the category "Movies and TV" at and feed in the search word "accounting."
    It was at the above site that I stumbled on many non-Hollywood movies, including

    And of course there are Bob Jensen's exciting free accounting tutorials on Excel, MS Access, Swap Valuations, XBRL. Camtasia, etc. ---

    Free Online Textbooks, Videos, and Tutorials ---
    Free Tutorials in Various Disciplines ---
    Edutainment and Learning Games ---
    Open Sharing Courses ---

    Coach Bill Belichick's Lessons on Probability and Innovation
    He took Robert Frost's path least taken near the end of a game on November 16, 2009
    Interestingly, a rookie coach cannot get away with gambles like a veteran Super Bowl coach can try

    "What Innovators Can Learn from Bill Belichick," by Scott Anthony, Harvard Business School, November 20, 2009 ---
    Click Here

    Even non-football fans probably heard about Bill Belichick's "blunder" of a call on Sunday night. Believe it or not, the call — and the firestorm that followed — has important lessons for innovation managers.

    A quick recap. The New England Patriots led the Indianapolis Colts by six points with two minutes to go. It was fourth down, the ball was on the New England 28 yard line, and the Patriots needed just two yards for a first down that would almost certainly have sealed a victory. Conventional wisdom called for a punt, but Coach Belichick decided to go for it. After the Patriots fell just short of the first down, the Colts marched into the end zone and won the game.

    Reaction was swift and almost universally negative.

    But there's statistical evidence that Belichick followed the right approach, that his move marginally increased the odds that the Patriots would win the game. Of course, the Patriots didn't win the game, but had the situation played out hundreds of times, a coach using Belichick's tactics would win more frequently than one who didn't.

    What does this have to do with innovation?

    First, the "Belichick incident" highlights the challenges facing a leader who makes the hard, right choices.

    If Belichick had punted and the Patriots lost, no one would have complained. Following a seemingly non-conventional approach opened Belichick up to criticism. Successful innovation requires similar bravery. It isn't easy to go after non-existent markets or follow non-obvious approaches when analysts and investors are grilling you over minute-by-minute results. After all, naysayers tend not to criticize risks you don't take.

    The other important implication relates to rewards. People moaned about Belichick's decision because the result was negative. Just like companies reward people who hit their numbers and penalize those who don't.

    Getting world-class at innovation requires moving beyond rewarding results to rewarding behaviors.
    Remember, the odds that an initial strategy is right are very low. If a team learns quickly and cheaply that initial assumptions won't pan out, they should be celebrated, not castigated. In the long run, those behaviors will lead to more successes than failures.

    No one said leading innovation was easy. Getting uncommon results, however, sometimes requires following uncommon approaches.

    Jensen Comment
    I read somewhere that virtually all football teams punt way too often on fourth down with less than two yards to go. Unfortunately I cannot recall the recent reference to this. But often it's a bit like betting the farm --- our beloved Bill Belichick with zero PR skills is Exhibit A.


    Investment Clubs, Hedge Funds, and Tax Implications

    Investment clubs commenced with friends in communities and/or work places that sometimes made social events out of studying investments and pooling small amounts of money in a fund that in turn was managed by the group as a whole ---

    I also think of an hedge fund as a much larger investment club where a professional investor generally manages the investments for a group of individuals who join that index fund. Hedge funds, like lower end investment clubs, do not sell shares in the club to the public in general. An advantage and a disadvantage of not going public is that such funds, until recently, are not subject to state and Federal securities laws and SEC oversight, although since the adverse publicity (read that Madoff Hedge Fund) of the failed attempts are being made by lawmakers to rein in on hedge funds ---
    The Madoff Hedge Fund turned out to be the largest Ponzi Scheme in the World (aside from the Social Security Fund of the U.S. which is a Ponzi scheme not yet shut down).

    Investment Club Software ---

    An Investment Club Helper Site ---
    Note that investment clubs should understand state and local tax laws regarding investment club returns and liquidations.

    IRS Publication 550 (2008), Investment Income and Expenses

    Abusive Tax Scheme Investigations - Fiscal Year 2009 ---,,id=187267,00.html

    Bob Jensen's investment helpers are at

    Bob Jensen's taxation helpers are at

    RIP:  The End of Microsoft Office Accounting
    Microsoft is formally backing away from the small business accounting market after announcing that the Office Accounting program will no longer be distributed after November 16, 2009. In addition, the Microsoft Professional Accountant's Network (MPAN) will no longer accept new members as of that date.
    AccountingWeb, November 4, 2009 ---

    Bob Jensen's accounting software threads are at

    "Business-School Professors Learn a Hard Lesson in Competition, Study Finds," by Peter Schmidt, Chronicle of Higher Education, November 5, 2009 ---

    Among faculty members at business schools in the United States, the rich tend to be getting richer while others fall farther behind, according to a paper being presented here Thursday at the annual conference of the Association for the Study of Higher Education.

    In recent years, business schools that were already in the top fifth in terms of what they pay tenured and tenure-track faculty members have been giving professors substantially larger pay raises than those being offered by competing institutions, the paper says. The wealth is not being shared equally, however. The faculties of the highest-paying institutions are themselves becoming more stratified in terms of earnings, with professors at the top of the heap enjoying much faster proportional growth in their salaries than those on the bottom.

    The authors of the paper are John J. Cheslock, an associate professor of higher education at Pennsylvania State University at University Park and senior research associate at its Center for the Study of Higher Education, and Trina Callie, assistant dean of the University of Arizona's Eller College of Management.

    They based their analysis on salary data from nearly every business school in the nation collected as part of an annual survey by AACSB International-the Association to Advance Collegiate Schools of Business. They restricted their analysis to the academic years from 1997-98 to 2004-5, and to full-time faculty members with the rank of assistant, associate, or full professor at research/doctoral or master's universities with at least 10 such faculty members on the business school's payroll.

    Contributing to the pay gaps between business-school faculty members was a marked difference in how the institutions approached disparities in what their professors earned, the paper says. In contrast to the most generous business schools, those that had been paying their faculty members the least tended to compress wages, giving their highest-paid professors smaller raises than those who earned less. As a result, the highest-paid faculty members at low-paying business schools lost even more ground to their best-compensated counterparts at business schools where salaries were the most generous.

    The paper also describes a widening in the pay gap between faculty members at private and public business schools. Full professors, for example, earned an average annual salary of about $107,900 at private schools and $95,300 at public schools in 1997-98. By 2004-5, those figures had risen to $120,900 and $105,400, respectively, meaning th